Volatility stands out as the intrinsic feature of buying and selling bitcoin. This currency might be on a hike now, but it might encounter a plunge that you could not have expected the next day.
Bitcoin volatility combined with regulatory issues can result in fear-steemed flash crashes and minor retracements following big rallies.
To avoid losing money when these issues happen, you can consider shorting bitcoin – a strategy that allows you to generate profits every time bitcoin prices fall.
However, this strategy also comes with risks. So, which are these risks, and how can you avoid them? Let’s see!
Bitcoin Short-Selling Risks
Bitcoin short selling is an excellent technique that allows you to generate profits when the crypto market is down. However, you need to note the market’s risks too. Below are a few of the evident bitcoin short-selling risks:
Whenever purchasing and holding bitcoin, hoping to sell it at higher prices in the upcoming days, you only expose yourself to the risk of remaining with a coin that never reached your expected price.
In the end, you still own the coin and can keep holding it for as extensive as you want. On the contrary, your probable losses are boundless with bitcoin short selling because they exceed your original investment.
If the bitcoin value continues increasing, you may have to rent it at a massive amount to reduce your average expense if you’re determined to cover the price without experiencing losses.
Note that short-selling bitcoin does not mean that you own the coin. Instead, you’re renting from a crypto broker, for whom you pay a specific interest for the period you hold the crypto.
Suppose the coin’s value does not decline as per your assumptions. You’ll be forced to hold that currency for long. As the rise occurs, the interests also increase, eating most of your profits.
Strategies To Help You Avoid Bitcoin Short-Selling Risks
Since shorting bitcoin relies on a vast range of considerations, you’ll have to check that you’re following the appropriate path. Above all, the final stuff you’ll aim for is short-selling bitcoin during the false retracements. Here are indispensable strategies to help you:
Rely On Technical Analysis
Technical analysis entails using true-world information to foretell how the bitcoin market will be in the upcoming days. This analysis needs you to check bitcoin’s past performance, like its movement.
For example, if you’re looking at bitcoin short-selling strategies, you’d check today’s bitcoin volume and compare the results with the last few months.
Technical analysis focuses partially on the Dow Theory. This theory asserts that market pricing depends on current demands, regulations, and previous demands to the investor’s coin knowledge, future bitcoin demand, and expectations.
Remain Updated With Daily News
News does not mean only crypto news because even political and economic news can significantly impact the bitcoin market. Government suppressions and controls can force the bitcoin market into flash crashes.
If you expect these issues to occur, capitalize on them by shorting bitcoin in that bear market. However, ensure that you don’t go against the government rules because that will force you into significant trouble.
Short Bitcoin During Rallies
Yes, you’re allowed to short bitcoin during rallies. Rallies stand out as the best moments for shorting cryptos. During these situations, most investors buy bitcoin from the panic of the mission, identified as FOMO.
The currency returns to its initial price or declines when the hype shrinks, giving you a perfect chance to generate huge profits.
Apply Fundamental Analysis
Fundamental analysis allows you to scrutinize bitcoin’s intrinsic value. Here you analyze the internal and external considerations to identify if the coin is overpriced or underpriced.
This revealing guide is enough to get you started on short-selling bitcoin. Start out with PrimeXBT, a top-rated crypto exchange that offers high bitcoin trading volume for optimal liquidity.
Generally, shorting bitcoin entails selling this coin at a massive value since you anticipate its value to reduce because of the market fear. This step allows you to back it again in the upcoming days at a reduced price.