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The crypto market is incredibly unpredictable, and the price of crypto coins fluctuates numerous times throughout the day. It is vital to keep a constant eye on the movements throughout the time you are active in the market since cryptocurrencies trade 24/7. To profit from a cryptocurrency crash, one should buy the dip and sell it expensive. This means the investors should either carry out a long or short their positions in the exchanges depending on the market conditions.
How to Profit from a Cryptocurrency Crash?
Top 3 Ways You Can Profit From A Cryptocurrency Crash In 2022
Here are a few techniques that can work:
Long and Short Investment Strategy
Traditionally, a long position indicates the purchase of shares, while a short position indicates the sale of shares. Short positions are taken by investors when they believe the price of a share will fall, and long positions are taken when it is believed the price will rise. In the event of a market crash, selling pressure increases.
Opening a short position in cryptocurrency involves borrowing cryptocurrencies and selling them on cryptocurrency exchanges at the current price. When the price of the cryptocurrencies falls further, the trader buys them back at a lower price and repays the borrowed amount.
Similarly, long positions involve purchase at a low cost when the trader believes the minimum price has been reached and then is sold at a higher price as the market grows. The difference in the buying and selling prices becomes the profit of the trader. Furthermore, the loan is provided on the exchanges themselves by other market participants. Major crypto platforms like Bitfinex and Kraken also provide margin trading services.
Going Long on Cryptocurrencies
Going long is one of the most basic investment strategies that incorporate technical aspects into the traditional low-buy and high-sell approach. Traders typically invest in a currency when its value is expected to rise in the future. It entails trading coins while ensuring that the trader owns the money, with the trader’s income being determined by the market value of the cryptocurrencies traded.
Shorting of Cryptos
To short cryptos, one must be skilled and prepared in analytics and prediction. Experienced traders typically wait for the timeline when new traders short their currencies and use that opportunity to begin the process of “compression,” which allows them to generate maximum income from market order pressure. To avoid losses, it is not advisable to enter the market during the shorting process.
Because the cryptocurrency market is full of surprises, one should be cautious when lowering the game because even if the value of a currency falls by half, traders will only earn 50%, whereas if the price rises by two factors, traders will lose 100%.
This is a risky strategy to deploy but one of the best when it comes to profit from a cryptocurrency crash.
Different Short-Selling Techniques
- Margin Trading
Margin trading is one of the most basic types of short trading in which traders borrow money from a broker, exchange the coins, and then wait for the wager to pay off. Margin trades are available on crypto exchanges such as Binance, Bitmex, Etoro, and many others.
- Contracts for Difference (CFDs)
A contract for difference (CFSs) is made in financial subsidiaries exchanges through which differences in the settlement between the open and closing exchange costs are settled in cash and do not include the conveyance of physical products or securities. This method, however, isn’t permitted in the US.
A Bitcoin futures contract allows the trader to purchase Bitcoin at a predetermined price and at a specific point in the future. For example, say Bitcoin is currently priced at $5,000 per BTC, and the trader expects it to reach $8,000 per BTC in a month. So, if he enters into a future contract to buy it for, say, $7,000 per BTC after a month, he can book a gain of $1,000 per BTC.
- Betting and Predicting Market moves
Prediction research is a way through which the participants can create an event based on the results. Say, if the Bitcoin is expected to decline by a certain percentage of margin and anyone takes the trader on a bet, the trader can profit. Some popular Bitcoin prediction markets are Bet Moose, Weathbet, Fairlay, and so on.
Analyzing Shorting Opportunities
Shorting opportunities, if realized early, can be a smart way to profit from a cryptocurrency crash. To identify opportunities, it becomes essential to understand the market dynamics. Some situations that can influence bitcoin prices are mentioned under:
|Based on Past Occasions||Anticipated Events||Events having a small impact on the cost|
|Failure of major exchanges. Increased hard fork danger levels||Hostile activities by the government against cryptos||Hostile proclamations from different financial analysts, lawmakers, writers, etc. Disappointments across darknet markets like Silk Street or Alpha Bay|
Short Trading Strategies
For Bitcoins (BTC)
- Tax management
Short Trading can lower Tax bills. In case of capital misfortunes shorting can help to cancel out the taxable pick up. This becomes more valuable in the case of short-term capital gains.
By taking long and short positions across diversified cryptocurrencies say long on Bitcoin and short on Ethereum a trader can secure his investments against specific market forces that affect the crypto ecosystems.
- Continuous Trading
The shorting approach allows traders to continue trading in all conditions. As opposed to the hold strategy, even if the rates are expected to fall, the traders can increase their income through shorting. While this sounds like an easy way to profit from a cryptocurrency crash, it requires high levels of concentration and stamina.
|Altcoins||Ethereum (ETH)||Litecoins (LTC)|
|Shorting of Altcoins indicates a decline in price. In this approach first the base asset I.e., Altcoin is sold and then repurchased.||ETH forms currency pairs with other cryptocurrencies as well as national currencies like dollars or euros. If a trader feels ETH will fall compared to BTC, they can buy BTC and swap it for ETH after the price drop.||A trader with LTC can pass it off to exchange for CBP and then sell it with a 0.3% charge or else set a cap on purchase and pay 0% exchange fees.|
Short Selling of BTC
In short-selling, the lender markets BTC to investors who are interested in buying them at the market price and expects the market to continue to decline till repayment and repurchasing them at a reduced cost are made.
However, if the trader fails to predict the market movements properly and the market doesn’t fall, then he shall have no profit and will have to repay the money with interest. Similarly, if the fall in price is not as per plan, then also his profit will be much lower as a majority of it will have to be paid as commission.
Shorting for Beginners
Due to various complications, shorting is not a beginner-friendly crypto strategy. However, if anyone wants to then they can start off with the “calm” coins that have a more predictable rate.
A draft scheme for the beginners shall look like this:
- Choose a well-established coin with proper historical information that the trader can take as a base to study the market dynamics.
- Analyze the change in the value of that coin over the period and the factors that have affected it during times of deep correction.
- Wait for its price to drop on the basis of past factors.
- Use margin trading or buy before the price falls down by properly analyzing the dynamics of the crypto market
- Sell the coins as the price jumps up.
The strategies listed above should help you profit from a cryptocurrency crash if used well. To conclude, the shorting technique is one of the best approaches to profit from a cryptocurrency crash in 2022. However, it is indeed a riskier approach for making money through cryptocurrencies rather than investing for the long term. In favorable market conditions even for the experienced traders, the gain is between 7-10% of the invested amount after paying off all the expenses. Like if someone is confident about the market dynamics, they should enter the market when there is a strong downtrend to book a gain of 7-10%. Moreover, the amount of capital invested also influences the amount of gain.
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