The rumour is that cryptocurrencies are by far one of the best investments of a decade. And it is actually not far from the truth. The bulls really took over in 2017 and at the beginning of 2018 causing a mass growth of most cryptocurrencies, the market as a whole rose by millions of dollars and is now seen as especially lucrative.
The mainstream idea of buying cryptocurrencies crossed many minds, but what about investing in their downfall? Is such an idea sane? By now you probably know that the cryptocurrency market is well known for its instability and when cryptocurrency prices drop, they drop hard. In order to explain how to short any cryptocurrency on the market, we have created the following guide with instructions that need to be executed.
How to short any cryptocurrency by using CFDs
The easiest and most accessible way how one can go around shorting cryptocurrencies is by using CFDs. This instrument is created for day traders who operate with it whenever they want to be in a position for a time period of minutes or hours. When using CFDs and trading with a CFD broker, there are usually two fees. The first one is a so-called spread which is basically the difference between the price you pay for a crypto coin and the price you receive when you sell it back to the company.
The second one is a swap fee which is chargeable to any account that has an open position overnight. Most CFD brokers have really tight spread fees (in comparison to crypto exchanges) and since shorting cryptocurrencies is not a long-term thing (in my opinion), you will in most cases avoid the overnight fee. That being said, CFDs are one of the best options for how one can invest in the decline of cryptocurrency prices.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
Between 74-89% of retail investor accounts lose money when trading CFDs.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Cryptoasset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.
All trading involves risk. Only risk capital you're prepared to lose.
OANDA CORPORATION IS A MEMBER OF NFA AND IS SUBJECT TO NFA'S REGULATORY OVERSIGHT AND EXAMINATIONS. HOWEVER, YOU SHOULD BE AWARE THAT NFA DOES NOT HAVE REGULATORY OVERSIGHT AUTHORITY OVER UNDERLYING OR SPOT VIRTUAL CURRENCY PRODUCTS OR TRANSACTIONS OR VIRTUAL CURRENCY EXCHANGES, CUSTODIANS OR MARKETS
Risks associated with shorting cryptocurrencies
Going against the cryptocurrency bulls is very risky and in my opinion, should be done only in a short-term perspective. You do not want to put your money on the line, thinking that the cryptocurrency market will collapse, which is very unlikely to happen. Long-term shorting cryptocurrencies is, therefore, from my personal standpoint out of the question. Here is the deal. Timing is crucial when shorting cryptocurrencies as you want to stay in a position for a couple of minutes or hours. Remember that while the bulls take time to build and develop, the bearish moves tend to be relatively short and sharp.
Timing is everything
“The longer you stay in a short position the riskier it becomes”. This statement is, of course, genuine only if the cryptocurrency market remains bullish (which so far did for most of the time). The key to shorting cryptocurrencies is obviously in the perfect entry and exit points. In order to evaluate when such occasions occur on the market, we have created the following list of negative impacts which can result in a downfall of the cryptocurrency market.
- Government ban of cryptocurrencies in any important country
- Collapse of a big crypto exchange
- New hard fork
- Negative coverage in media
- Top influencers throwing a bad shadow on cryptocurrencies
- Renowned companies previously associated with a cryptocurrency end a cooperation
- Breaching security protocols
The biggest downfalls of cryptocurrencies
The cryptocurrency prices go up and down all day long, but usually, unless there is some news impacting the market, they hover around similar values. Some of the biggest news in crypto history that made the market shake were e.g. China’s ICO Ban, Jamie Dimon stating that Bitcoin is a fraud, the threat of regulation in South Korea and a possible shutdown of virtual currency exchanges etc.
If we take Bitcoin, as an example, one of the biggest downfall of this cryptocurrency can be considered a one-month time period from December 17, 2017, to January 17, 2018, when Bitcoin lost around 40% of its value ($19,870 to 10,681$). There were two main effects causing this state. Firstly, the ban on currency exchanges in S. Korea was up in the air. Secondly, the crypto market is also full of ordinary people who celebrate Christmas, Hanukkah, Kwanzaa, and New Year. That means when vast amounts of them withdraw yearly gains, they caused a massive decrease in the cryptocurrency supply.
These are some of the biggest news when it would be really smart to short cryptocurrencies. While similar occasions do not appear that frequently, there is still numerous crypto news that sends the crypto market down.
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