It is a physical war against yourself to invest or to trade in cryptocurrency. Investing in traditional markets requires extreme mental discipline as stock traders often say. When the market is volatile how they behave is important. How they keep on track with their strategy and stop from making stupid decisions is important.
Crypto requires mental efforts as the trading requires extreme discipline. The crypto market is extremely volatile as compared to any market in the world. You should be very sharp while monitoring the market trends if you have decided to invest in Bitcoin. Now, you can buy bitcoin with cash without getting into much trouble.
This market is almost completely sentiment driven by knowledge. It does not always make sense than any other market in the world, Crypto has more retail investors. Right next to Google search trends this can be viewed, if you look at the Bitcoin price chart. Depending on how many people Google “Bitcoin” the price will rise. As the search volume graph looks more smooth less data points were used to plot the graph.
Investors do not necessarily lose money if Bitcoin goes down instead they can make money by “Short-selling” bitcoins when the prices fall.
What is Short-Selling
It is significant to understand the basic concept of short-selling, before we begin to learn how to short-sell bitcoins. Let’s understand it by an example:
Suppose you have borrowed a mobile phone from your friend which is worth $500. The price of the mobile phone is bound to fall as the competition has increased among the mobile manufacturing companies. For $500 you sell the phone to another party and put that money in your account.
The price of the mobile phone drops to $350 shortly after as you have predicted. Keeping the extra $150 as profit, you buy a new mobile phone at $350 and give that go your friend.
Using the short-selling strategy, you just made $150 as profit.
Basically, with the responsibility to return it sometime later you are borrowing an asset. At the current market price you sell it. You buy back if the price of the asset declines and return it to the lender, this process is called “Covering.” Your gross profit or loss will be represented as the price at which you have bought it back and the total difference between the price at which you sold the asset.
When you believe the price of the asset is bound to fall, a short-selling technique is applied. So, it is very much possible to make money when bitcoin drops which is a highly volatile asset. Bitcoin is extremely volatile implying daily moves up or down of greater than 6 %. More than 100 % is its annualized volatility.
Bitcoin future follows regular Globex hours as exchanges are open 24/7.
Futures have 20 % collars as the exchanges have integrity risk.
Why most profitable traders Short-Sell Bitcoins
Because of its highly volatile nature, it tends to be the case with Bitcoin. When the borrowed asset’s price falls the short-selling technique makes a profit.
Here is a proof: The price of Bitcoin collapsed 61%, in 2018, – from an 8,300 high to $3,200 low in just six months.
Investors holding short positions on Bitcoin made huge profits which was a drastic fall. It was a disaster for others as they lost enormous amounts of money.
A former IMF economist, Mark Dow made huge profits with his shorting technique. He said in Bloomberg, in one of his interviews that: “Many people didn’t understand the currency or its underlying technology that is blockchain as the run-up in Bitcoin’s price can partly be attributed to it.”
The reasons told by Mark Dow two years earlier still hold true even in 2019. You should be prepared for when the price falls as there is a high chance that the history might repeat itself.
Short-selling is profitable because you can buy back the borrowed bitcoins at a lower price and you need to be sure that the price of BTC will fall.
The most exciting thing about Mark Dow’s shorting strategy was that in 2017, he shorted Bitcoin. Bitcoin reached $19,783 in mid December of that year. He found a trigger to short it and did a thorough analysis of BTC’s price.