How to Short Ethereum – Characteristics of Short Positions with ETH
AAlthough cryptocurrencies as a new form of money and highly volatile digital assets are relatively new, they are already firmly entrenched in the daily lives of many of us. And attitudes towards cryptocurrencies like Bitcoin or Ethereum and their role in the near future may differ, as the challenges of high price volatility, scalability and high power consumption remain pressing. However, when comparing buy BTC and ETH, the latter looks like an option with much more growth potential as it has intrinsic value driven by smart contracts, dApps and NFT. With that in mind, Ethereum might look like a great long-term investment. However, how about using the token’s short-term volatility to your advantage? We’re here to tell you what a short position is and how to short Ethereum to capitalize on short-term fluctuations in the price of the digital asset.
What exactly is a short position?
When we think of investing in assets – whether traditional stocks, precious metals or digital – the first thing that comes to mind is to buy at the bottom of the market and then sell at a higher price. This is a good investment strategy for assets that increase in value over time. However, cryptocurrencies such as Ethereum differ from traditional cryptocurrencies in that their price can change drastically in the blink of an eye. But if the price goes down, there is no need to worry because you can make money from it. Here is a simple diagram that explains what short and buy Ethereum.
- The first step is to borrow an asset from a broker. To do this, you need to decide when the asset is at its maximum price and its value is likely to drop in the near future.
- The second step is to sell the borrowed asset at its current price.
- The third step is to repurchase the assets you sold when their value has fallen.
Modern brokerage platforms supporting ETH tokens have fully automated many trading operations, including how to short Ethereum. However, the task of analyzing the market still rests on the shoulders of the trader. This means that you have to choose when the cryptocurrency is going up so that you can open a short position. The brokerage firm will do the rest of the work for you.
How to Short Ethereum – Effective Ways
Above, we described a scheme for shorting ETH using margin funds from a brokerage firm. You simply borrow tokens from an exchange or broker, sell them at the current market price, and then buy them back when their value has dropped. This way, you can close many short trades for a good profit, as brokers can lend out more tokens than you initially had in your trading account. However, some traders use a more advanced scheme, looking for markets with an inverse correlation. Let’s say you believe that a certain asset – be it a cryptocurrency or a precious metal – will go up in value in the long run, while the price of Ethereum will go down. You can buy this asset on the rise (open a long position) and then trade it for ETH tokens when their price drops. Thus, you will benefit from a declining Ethereum price without having to directly open a short position with ETH.
Shorting ETH – Risks involved
Before we dive in and start learning how to short Ethereum, you should understand that almost all cryptocurrencies are highly volatile digital assets. This means that all transactions (whether short or long) using ETH are very risky. Be aware of your risk tolerance and be prepared to do extensive market research before you start shorting Ethereum. So, J2TX will point out some issues you may encounter:
- Extreme volatility of value. ETH’s all-time high of around $5,000 per coin was recorded about a year ago, but the current (at the time of writing) price of ETH is around $2 $000. Sharp swings in the value of Ethereum can both open up great trading opportunities and lead to serious losses.
- The risk of exceeding your budget. This is relevant for traders using leverage to be able to sell/buy more tokens. Against the background of various events, news and market movements, the value of ETH can increase dramatically. As a result, you will have to spend a much larger sum to buy coins in order to return them to your broker.
- The profit is limited to a zero price for the asset. While the upper limit of the price can theoretically be infinitely high, the minimum price of the coin is $0 (the price cannot be negative). This means that if you borrow a coin at $2,000, you cannot earn more in the short position than that current value.
For short positions with Ethereum to be profitable, you need to know the market well and actively manage your trades to avoid losses.
Choosing the best time to open a short position
The most important thing about shorting ETH is knowing when to borrow the tokens and when to sell them. Many factors affect the price of the coin, including financial news, market sentiment, behavior of major players, and more. When deciding when to open a short position, you can rely on the results of technical analysis. For example, when the chart shows bearish momentum, it might be time to short Ethereum. Additionally, changes in market regulations, as well as economic shocks, can create good short selling opportunities. Here are some tips to help you find shorting opportunities:
- Use ETH price charts to find uptrends and downtrends. Based on the chart data, you will open short positions at times when the chart shows consecutive highs and lows in the price of the token.
- To find the best time to sell ETH, look for – and account for – short-term price corrections.
- When opening short-term short positions, rely more on technical analysis to find the best time to sell ETH.
Recently, as the liquidity of ETH has increased, it has become very rare for a token to rise in value overnight. And in most cases, the rise is followed by a price decline (market correction). Surprisingly, the market is still experiencing sharp spikes, which opens up great opportunities to short Ethereum ethereal blockchain networkTechnology Followers: 0 See profile . By learning to spot these moments, you can make very good profits. However, keep in mind that today – given the current state of the crypto market – ETH is a suitable option for short-term shorts.
1. What is a short position?
Opening a short position is one of the types of trading operations where a trader borrows an asset of decreasing value, immediately sells it and then buys it at a lower price to take the difference in value as profit. .
2. Where can I short Ethereum?
There are many crypto exchanges and brokerage platforms offering handy tools for shorting ETH. Their advantage is that most of the processes and tasks have been automated, and you just need to pick a good time to open a short position based on market analysis.
3. What is leverage?
A broker can lend money to its user. Simply put, leverage is the ratio of a trader’s personal funds to the total amount of money (including borrowed money) that he can use for trading operations.
4. Do brokers provide leverage for short selling?
Yes, many brokerages give leverage to those who short sell ETH. Keep in mind that if the price of ETH goes up (instead of down), you run the risk of losing both your own and borrowed funds.
5. Can I remain anonymous when opening short positions?
There are several decentralized platforms that support short circuits. However, many brokers have taken the centralized route and now adhere to KYC practices towards their users. This means that you will need to provide personal and payment information and confirm it.
6. How to choose the best time to short ETH?
Finding the perfect moment is a difficult task. However, we recommend using price charts to spot downtrends and use them to your advantage.
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