Short
âShortâ is a term used widely across financial sectors, which also extends into the realm of cryptocurrency. This refers to a financial strategy in which the person or entity believes the price of a specific asset will decline in the future.
What Does it Mean to Short Cryptocurrency?
In simple terms, 'shorting' a cryptocurrency means that you're betting the price of the cryptocurrency will go down. If you believe the price of a cryptocurrency, for example Bitcoin, is about to fall, you might decide to take a short position. This way, if the price does indeed drop, you stand to gain from the decreased value.
How to 'Short' a Cryptocurrency
- Loan: The process starts by borrowing the cryptocurrency you want to short. This can be done through a broker, who will lend you the cryptocurrency with an understanding that it will be returned at a later date.
- Sell: After borrowing, the next step is to sell the cryptocurrency at its current price.
- Re-purchase: The idea is then to wait until the price decreases, and then repurchase the same cryptocurrency.
- Return: Once the price has gone down and you've bought back the cryptocurrency, you return what you borrowed to the broker.
- Profit: The difference in the price at which you originally sold and later re-bought becomes your profit.
Short Selling Risks
While 'shorting' a cryptocurrency can turn out to be profitable if accurately predicted, it can also carry significant risk. This is because, unlike buying a cryptocurrency where your potential losses are limited to the amount you invested, your losses can potentially be infinite when shorting if the price of the cryptocurrency increases instead of decreasing.
Conclusion
Shorting can be an effective way to profit from falling cryptocurrency prices, but it's important to be aware of the high level of risk involved. Therefore, those who choose to engage in this strategy should possess a deep understanding of the crypto market and be willing to accept the potential losses.