Understanding crypto trading: Market dynamics, key positions and influencing factors
A trading position in cryptocurrency is an investment or speculative approach taken by a crypto trader.
Going long or short represents whether a crypto trader believes the price of a particular cryptocurrency will rise or fall. Before discussing these two primary trading positions, it’s useful to understand what drives the crypto market.
Imagine you are a crypto trader buying and selling Bitcoin (BTC) and Ether (ETH) to profit from price swings. Unlike the traditional stock market, the crypto market never sleeps — it’s open 24/7. This constant activity offers many opportunities but also brings challenges because of volatility. Factors like regulatory news, global events, technological advancements and overall market sentiment can all influence the prices.
For example, the collapse of a major crypto exchange like FTX, the launch of spot crypto exchange-traded funds, United States presidential candidates discussing Bitcoin, the memecoin craze and other occurrences can shake up the market, affecting trading and investor sentiment.
Understanding supply and demand is very helpful for potential traders. For example, the scarcity of a particular cryptocurrency can drive its price up, while an oversupply might push prices down.
To be successful, you need more than knowledge of market trends; you also need technical knowledge and the ability to analyze the value proposition of different cryptocurrencies.
Long vs. short positions in the cryptocurrency market
Long and short positions are strategies used by traders and investors to profit from cryptocurrency price movements.
A long position involves buying a cryptocurrency with the expectation that its value will rise over time. This is a common strategy among investors who believe in the long-term potential of a particular cryptocurrency. It is also the most basic reason for trading stocks, commodities or cryptocurrencies: you buy it at a certain price and want to sell it at a higher one, thereby making a profit.
For example, if you buy Bitcoin at $60,000 and expect it to rise to $65,000, you are taking a long position. If the price does go up to $65,000, you can sell and make a profit.
On the other hand, a short position involves “borrowing” cryptocurrency from a broker, selling it at the current price, and then repurchasing it once the price falls to give back to the broker — all while pocketing the profit. Traders who expect the price to decline use this strategy.
For example, if you short Bitcoin at $60,000 and the price drops to $55,000, you can buy it back at the lower price, return the borrowed Bitcoin and take the difference as a profit.
A long position offers more opportunities, as the profit potential is theoretically unlimited since the asset’s price can rise indefinitely. In short positions, profit is capped, as the price can only fall to zero.
For example, if you take a long position on BTC, your profit potential is practically unlimited because Bitcoin’s price could technically keep rising forever. However, if you take a short position on a memecoin, your profit is limited to the point where the memecoin’s price drops to zero.
Both strategies have risks. Long positions risk losses if the cryptocurrency’s price falls, while short positions risk losses if the price rises unexpectedly.
How to long and short crypto
Before investing, traders must carefully analyze their chosen cryptocurrency, including its underlying technology, market trends and historical data.
Steps to going long in crypto
Here are the basics on how to go long in crypto:
Select a crypto exchange: You should pick a trustworthy cryptocurrency exchange or trading platform that provides the required cryptocurrency. Set up an account, carry out the required Know Your Customer checks and use two-factor authentication to protect your account.
Fund the account: To make a transaction, you need to deposit fiat currency or another cryptocurrency. The crypto wallet can be funded via bank transfers or from different wallets, among other methods.
Place a buy order: Choose the cryptocurrency to purchase and place a buy order at the current market price or set a limit order.
Hold the position: Monitor the market and hold your position until a profitable gain and make a trading judgment on whether to sell or hold for longer.
Steps to going short in crypto
Here are the basics on how to go short in crypto:
Select a cryptocurrency exchange: Use platforms that support short-selling and margin trading. Ensure your account is eligible for margin trading.
Borrow the cryptocurrency: Borrow the cryptocurrency to short.
Sell the cryptocurrency: Sell the borrowed cryptocurrency at the current market price.
Buy back the cryptocurrency: Once the price drops, buy back the cryptocurrency at a lower price.
Return the borrowed cryptocurrency: Return the borrowed amount and keep the difference as profit.
Margin trading involves borrowing funds to increase the size of a trading position. This strategy allows traders to improve their potential gains but also raises the risk of significant losses.
For example, if you use $2,000 of your own money to short BTC and borrow an additional $5,000, you can short $7,000 worth of BTC. If 1 BTC drops from $10,000 to $8,000, you can buy back 0.7 BTC for $5,600, making a profit of $1,400. But, if BTC rises to $12,000, you will need $8,400 to buy back 0.7 BTC, resulting in a loss of $1,400. This strategy increases both potential gains and losses, raising overall risk.
Long and short-position crypto trading strategies
Crypto traders use long and short positions and strategies to profit from memecoins, altcoins, BTC and other trades.
Market sentiment affects investors’ feelings about cryptocurrencies. Positive feelings can drive prices up, while negative ones can push prices down.
Let’s look at some common strategies employed by seasoned crypto investors for trading major cryptocurrencies like BTC and ETH:
Leveraged positions use borrowed money to increase the size of an investment. This can boost gains but also losses, making it risky.
Futures trading involves contracts to buy or sell a cryptocurrency at a set price on a future date. It can be used to speculate or to protect against price changes.
Hedging involves taking positions that protect against potential losses in the investment. For example, a long-term investor in Ether might short Ether futures to protect against short-term price declines.
Options are derivative contracts that give the holder the right, but not the obligation, to buy or sell a cryptocurrency at a predetermined price before a specified expiration date. Options can be used to hedge against price movements or to speculate on future price changes.
Taking long or short positions in memecoins or altcoins follows the same principles as major cryptocurrencies like Bitcoin but requires careful consideration of each asset’s characteristics and market dynamics.
Some common strategies used in memecoin trading include:
Trend following: Going long in an uptrend and short in a downtrend.
Offset: Betting that the price will revert to its mean after a significant move.
Arbitrage: Exploiting price differences across different decentralized and centralized exchanges.
Understanding these concepts and strategies allows you to make smarter decisions in the cryptocurrency market, balancing potential rewards with inherent risks.
Risks of long and short trading in crypto
Both long and short trading involve several risks, and it’s important to understand them before trading.
Long trading risks:
Price drops: Cryptocurrencies can be very unpredictable, and you could lose money if the price falls after you buy.
Liquidation: If you borrow money to buy more crypto (using leverage) and the price drops too much, you could lose your entire investment.
Tied-up capital: When you invest in a cryptocurrency, your money is tied up, similar to any other form of trading. If the price of an underlying asset doesn’t increase as you hoped, you might miss other investment opportunities.
Short trading risks:
Unlimited losses: In trading, there is no limit to how high the price can rise. This means your losses can grow if the underlying cryptocurrency’s price goes up instead of down.
Margin calls: If the price increases and you owe more than you have, you may need to make more payments to maintain your position.
Extra costs: Shorting can involve additional fees and interest charges, reducing your profits or increasing your losses.
Surprise market moves: Prices may rise in response to unanticipated positive news or changes in the market, making it more difficult to exit a position profitably.
Considering the above risks and the overall nature of the crypto market, always do thorough research, understand the market dynamics, and protect your investments by only investing what you can afford to lose.
