You go short when you sell crypto with borrowed money to buy the crypto back cheaper later. You go long when you buy crypto to sell it later at a profit. Going long is by far the most common, because going short is fairly complicated and you need to have special functions turned on at the place you are trading. Long and short are terms that came over from the stock market.

In this article, we'll tell you more about going short and long so you know what your options are.

• Going long is buying cryptocurrency with or without leverage to sell it later when the price has risen, using the simple principle buy low, sell high
• Long positions should be opened when market sentiment is bullish, or when you see after technical analysis that there is a high probability that the price will soon rise
• If you expect long-term positive market sentiment (bull market) you can further increase your earnings with stakers
• Going short is using borrowed cryptocurrency to sell a coin in order to buy it back later when the price has fallen, using the opposite principle to sell high, buy low
• Short positions open if market sentiment is bearish, or if you see after technical analysis that there is a high probability that the price will fall soon
• Through the long short ratio, you can easily recognize market sentiment
• With options, you can go long and short, taking on the ability, but not the obligation, to buy or sell a crypto on a certain date
• With options, the premium you pay for it is your maximum loss, which makes it an interesting option to limit your risk
• Hedging is reffering to offsetting the risk of another trade , where you protect your long with a short, for example, so that you are always right, although of course this costs money
• A future is an obligation to buy or sell a crypto on a certain date at the then-current price, with the winner paying the loser
• Derivatives like futures cover about 50% of the crypto market
• Perpetuals are revolving contracts with no expiration date, but with minimum and maximum funding rates, limiting losses
• Arbitrage is taking advantage of small or larger differences in prices on exchanges, where you have to use an arbitrage trading bot for the essential speed and deploy a lot of funds to get something out of it
• Arbitrage offers many opportunities, but the traders with the fastest arbitrage bots will earn the most from it by far
• Those who want to go short and long must know Bitcoin's market cycle
• Regulation and taxes can get in your way considerably when you go short and long
• Before going short or long, it's a good idea to think through all the consequences carefully

Inhoudsopgave

1. What is going long?
2. What is going short?
3. How do options work?
4. What is hedging?
5. What are futures?
6. What is arbitrage?
7. Market cycle cryptocurrency
8. Volatility in the crypto market
9. Regulation
10. Taxes
11. Conclusion

What is going long?

If you buy a cryptocurrency with the goal of selling it later for a higher price then you are going long . This is called a call . Most ordinary traders will not think of buying a cryptocurrency only to sell it later when the price goes up as going long, because that sounds complicated. But going long is simply trying, with or without leverage or borrowed money, to sell the coins later for a profit. They then say buy low, sell high. Never switch these two, because it can cost you a lot of money!

Bullish sentiment

In a long position, you are bullish about a cryptocurrency and suspect, after possible technical analysis before the entry point, that this coin is going to rise in value. You can then do a so-called call and buy with borrowed money or just buy the coin with your own money. It is best to do this on an exchange or at a broker with a good reputation.

If you go long you decide at what price you want to sell the coin, freeing up your funds to make the next trade. If you buy a cryptocurrency with your own money you can simply wait until you make a profit (e.g. HODL). The downside is that your capital will basically be sidelined until you close the position.

Long position with borrowed money

With borrowed money you can be liquidated (your collateral is then forfeited or taken) if the crypto falls too much in price. You can also get a margin call, warning you that you must put in more collateral, otherwise your position will be liquidated. It's a good idea to bet most of your money on coins that don't make too big jumps, so you don't get liquidated more often or have to deal with violent emotions when a sharp drop occurs.

Long stakers, ETF, trading bot

A perk of going long is that you can get compensation for staking. That way you double your benefit from the increase in value you had in mind. If you don't like all that buying and selling and the technology behind blockchain and cryptocurrency, you can also invest in an ETF (Exchange Traded Fund), where you invest in a cryptocurrency without owning it yourself. There are also index funds for crypto, where you invest in a basket of different cryptocurrencies to spread the risk.

Some exchanges still have the option of a trading bot to use to make purchases and sales at a certain range. For example, you can buy Ethereum at 1700 and sell it at 2500 every time this happens. So if the price swings from 1700 to 2500 and back to 1700 and so on, you keep Buy ETH and sell without having to do anything more.

In a long squeeze, many long positions are liquidated when there is a sudden large drop in the price of a cryptocurrency.

What is going short?

When you go short you buy the cryptocurrency with borrowed money. You then do a put . You sell this crypto and hopefully buy it back later for a lower price, pocketing the difference minus the cost. This is also called short selling or margin trading, where you can take a larger position than you have in assets.

Short position bearish sentiment

When you go short you expect a bearish market. You open a short position on an exchange or broker where you can go long and short. You then borrow a cryptocurrency and sell it. When it has fallen enough to your liking you buy it back and have made a nice profit. For example, you borrow 10 ETH for 2500 euros each and sell them. You plan to buy them again for 2000 euros, after which you will be 5000 euros richer, minus the cost of borrowing and trading.

Short positions without a liquidation price are very risky because the price of a cryptocurrency can theoretically rise endlessly, causing you to lose more and more via any leverage, even to the point of bankruptcy. Therefore, liquidating your collateral is a good way to close your position.

Taking short positions and liquidity

Both when going long and short, the liquidity of your cryptocurrency play a significant role. Once you reach your target, you should also be able to buy or sell. With crypto with low liquidity, you may not be able to get rid of the coins at the current market price.

One disadvantage of going short is that you are speculating on a price drop, but you still have to buy the coin back when you expect sentiment to be bearish. You will then have to time the coin pretty precisely when to buy it back and give the borrower their coins back, otherwise you will buy the coin back and it will continue to fall even further.

In a short squeeze , many short positions are liquidated when there is a sudden large increase in the price of a particular cryptocurrency, whereby different SL-Levels are reached.

Long short ratio

The long short ratio of a cryptocurrency on an exchange or a broker allows you to recognize market sentiment. If there are more longs relative to shorts there is a predominantly bullish sentiment and vice versa. If it is somewhere in the middle, market sentiment is unclear or neutral, also called consolidating .

How do options work?

With an option, you have the right, but not the obligation, to buy (call option) or sell (put option) a cryptocurrency at a specified date and specified price (strike price). There could be two different options with the strike price of 50.000 , depending on the current price of the Asset, e.g. Bitcoin.

• Call : Current Price 40.000 (current price lower than the strike price)
• Put : Current Price 60.000 (current price higher than the strike price)

Premium in options

With an option, you pay a premium. This is the maximum amount you can lose. If this premium is 1,500 euros and you have taken the call option, you have earned 50,000 - 40,000 when you take the call. So you then have a profit of 10,000 euros minus the 1500 premium, i.e. 8,500 euros. Suppose you took the put option and the price was at 60,000 and it dropped to 50,000 on the agreed date, then your profit is exactly the same amount. You now know the calculation.

An option gives you the option, but not the obligation to sell on the option's expiration date. You may wonder why work with options? Options are mostly about effectively betting your money. In the examples above, you put in 1,500 euros and make a profit of 8,500 euros. So you can win a lot, but lose little.

Effectively bet your money for the least possible risk

If you had gone long or short on Bitcoin you would often have had to bet much higher amounts to arrive at the same result, even though you would have had $1,500 more. So you can make more money with fewer funds and less risk. Moreover, without the option you can lose the whole amount if Bitcoin goes to 0. Not that this happens quickly, but still.

Who takes the risk in options?

The biggest risk actually lies with the provider, such as a broker or exchange, who has to pay out significant amounts to investors. This is called the writer, or writer of the option. In certain situations, such as a bull or bear market , this can cost them a lot of money. Therefore, the premium will also rise during those periods, with the call option becoming more expensive in a bull market and the put option in a bear market. As a result, there will be more puts in a bull market and more calls in a bear market because the premiums have risen.

Another possibility is to balance call and put and let the traders arrange this among themselves, so that the exchange or broker cannot burn its fingers on this. The latter is common so that the continuity of the exchange cannot be jeopardized.

What is hedging?

A hedge is a protection or fence. With hedging, you protect investments. For example, if you have gone long on Bitcoin, you can hedge risks by also taking a short position, so that if your long goes the wrong way, you short the right way. Those who play this very cleverly can make money this way in almost any position, although the results will be less than if you choose 1 direction and it goes well.

Costs when hedging

Hedging your investments also costs money, of course. You have to make purchases with borrowed money and pay back this loan plus the additional costs. If things go badly, hedging can also cost a lot of money. Suppose you go short on Bitcoin with a leverage of 10 and the price of Bitcoin rises by 10%. Then your short is liquidated and you have lost this bet. However, you still have your long Bitcoin left and it has risen by 10%.

Market sentiment and hedging

So logically you will do this when you are not sure in which direction the market is going to move. For example, the market could just as easily move sharply upwards, but there could also be a turning point and the bear market emerges. Hedging is therefore particularly interesting when the direction of the market is not very clear. In clear bull or bear markets this is not a preferable way to hedge your risk. It is then better to hedge with a stop loss or in other ways.

Hedge Funds

Hedge funds increasingly have a portfolio of long but also short bets in a ratio of about 130% long and 30% short because longs are much easier to find than shorts.

Hedging is often used by funds to protect investments, for example taking a long position in ETH and short ETH futures to secure against short-term declines. Large funds are very experienced in this, so they know exactly how to use this tool. With retail traders, this remains to be seen.

What are futures?

A future is a speculation on a cryptocurrency, where you are obliged to buy or sell this crypto on a specific date. You can go short or long, but when the expiration date arrives you will have to take the loss or profit.

With most futures providers, intermediaries such as exchanges and brokers will try to match the short sellers and the long buyers so that they themselves are not at risk on contracts that can cost a lot of money. The winner of the "gamble" will be paid out by the loser on the agreed date.

Popularity of derivatives

Crypto derivatives as futures have become increasingly popular and already cover more than 50% of global cryptocurrency trading and billions are traded every day. It is called a zero-sum game because there must be a winner and a loser and the winner wins what the loser loses. The main reason for their popularity is that you can make more money with fewer funds and you can build in your own risk tolerance, allowing you to get ahead faster when things go well.

Perpetuals

So-called perpetuals are also offered, which are continuous or "perpetual" contracts entered into without a specific end date. This is usually done with borrowed money and with leverage. By calculating a funding rate you can see how the perpetual is doing. A funding rate shows how far above or below water your investment is, given the interest you have to pay and the additional costs.

Usually there is a rate at which you are expected to close the perpetual, because it gets close to the minimum closing rate which indicates that you are too much in the red. There is also a maximum rate, because here the counterparty logically gets close to the minimum rate and one party's losses become too high. To hold a contract a trader must always hold a margin. If your margin gets too low your short or long position will be closed and your collateral liquidated or forfeited.

What is arbitrage?

Arbitrage is trading coins that show a usually small price difference on different or the same exchanges.

If you want to profit from price differences on different exchanges you will have to buy special trading software made for arbitrage. Speed is of the utmost importance, because a small price difference can disappear in no time.

If you want to profit from price differences within an exchange, you can, for example, look at the differences in spot and futures trading, as well as act as a market maker, where you simply pocket the small difference between bid and ask of the order book .

The art of arbitrage

Arbitrage is really something for professionals because the price differences are usually so small, you have to deal with transaction costs and sometimes shipping costs. Because extremely short times are necessary, a trading bot is used for this form, because manual entry takes too much time. Even then it regularly happens that an arbitrage bet is loss-making.

The great advantage of arbitrage is that you don't have to do any analysis. The price difference is there or not and whoever trades the fastest will probably win the arbitrage. With the most liquid coins like Bitcoin and Ethereum, you won't win an "arbitrage case" very quickly, because the prices hardly differ at large exchanges with a lot of liquidity. With the advent of meme coins we see with these cryptocurrencies that more often than not there can be considerable differences in price and thus arbitrage opportunities.

Arbitration for larger price differences

Arbitrage obviously works best for large price differences. For example, once there was a difference between the price of Curve DAO and that of another exchange of 600:55! So you could get about 11x as much for the same coin on another exchange. This was in Asia though, where you are often only allowed to trade if you are a resident. In Asia, they sure know how to get rich!

You can also try to exploit the somewhat larger differences between prices on a DEX (decentralized exchange) and a regular exchange, but on a DEX you often pay much more for a transaction, so it should be different enough. A bot should be able to calculate this instantaneously, if set up properly. It can require a lot of technical ingenuity from a bot to exchange through a DEX to an exchange and vice versa.

A common "trick" can be found with the less liquid coins. If you see that there is a lot of difference between the supply and demand for a cryptocurrency you can start buying as well as selling. You can then buy at a lower price and sell at a higher price by filling the gaps in the order book with profitable trades and meanwhile help improve liquidity.

Speed at arbitration

With arbitrage, you can make some quick money if you trade fast. It is reminiscent of flash trading in stocks, where the trader with the fastest computer is microseconds ahead of the next, who then misses out partially or completely. As more and more exchanges are added, now around 1500, there are also more and more opportunities for arbitrage. Without an arbitrage trading bot, however, you won't see results. Humans cannot trade as fast as bots.

Problems in arbitration

If you want to make a decent amount of money with arbitrage you will have to bet large sums of money. Of course, you have to have that. If you have to deal with a withdrawal limit on an exchange arbitrage becomes very difficult, because then you cannot send the coins from one exchange to another for arbitrage.

A not often noticed risk of arbitrage is liquidity and availability. If you perform an arbitrage, there must also be enough liquidity in the cryptocurrency to get rid of your coins. Otherwise, you benefit from only a small portion and are left with the rest, which you cannot sell for the arbitrage price.

Another aspect is competition. When you see an arbitrage deal, you are usually not the only one. Even if you have a super-fast bot, if another bot is even faster, the deal may have been hijacked because that other bot has already made its arbitrage. In that case, the opportunity is gone before it came. As with stocks, you will see that the fastest arbitrage bot always wins and gets richer and richer, while the slower bots always fall behind the net and lose a lot of bets.

So in arbitrage, you go super-short, but that has more to do with the price differential than with market sentiment.

Market cycle cryptocurrency

An important factor in taking a short or long position is the momentum in a Bitcoin market cycle. In a bull market you are more likely to go long and in a bear market you are more likely to go short.

Bitcoin Halving

Anyone who looks at the history of Bitcoin in CoinGecko will find certain patterns. If you look back at Bitcoin's maximum time chart you will see a recurring cycle about every four years. Not very coincidentally, that is after the halving of Bitcoin . If miners want to continue their Proof-of-Work they will have to get higher prices for their Bitcoins, otherwise mining will no longer be profitable because they will only get half as much BTC when they finally get to make a block.

Altcoin season

In the wake of Bitcoin, other cryptocurrencies will also continue to rise. In altcoin season, you can see Bitcoin dominance going down as altcoins rise more than Bitcoin. If you know these historical patterns, you can take them into account. However, it is not said that this will always be the case. Therefore, going short and long always remains to be careful, because volatility is very high and past patterns do not guarantee to repeat in the future.

The crypto market has three options: up, down and sideways. If the market is moving up, going long makes sense. If the market is down you can go short. If the market is moving sideways, placing day trades or swing trades is a good option.

Volatility in the crypto market

Because crypto is moving up and down with higher margins, it is a more interesting market for shorts and longs than stocks, but also more risky. Those who take too much risk could end up exiting the market prematurely without it being on their menu. So it is not a luxury to consider these risks carefully if you want to continue investing in crypto.

News, such as interest rate changes , economic developments, the FTX collapse, innovations or an ETF of large funds can temporarily give high volatility that is countercyclical. In other words, trading with leverage can leave you with quick and nasty surprises.

Regulation

Regulation can significantly affect certain cryptocurrencies and the overall market. For example, privacy coins can be banned or the SEC can make things difficult for a cryptocurrency like XRP. With laws as MiCA can also make trading more expensive, because executing costs money and the exchanges and brokers have to pass it on.

Over time, a variety of taxes be invented or the costs may start to rise due to laws that are expensive to implement. One could also simply start banning leveraged trading in crypto "to protect consumers from volatility."

Taxes

When going long with leverage, you may have to deal with capital gains in some countries, just like when selling stocks at a profit. When going short also, but you can then book losses as well.

So pay close attention to these types of trades if you become a taxpayer if you trade in such a way. Taxes are different in every country, and you don't want any nasty surprises.

Taxes also change frequently and so you need to stay up to date if you don't want to have the IRS on your doorstep or you are at their doorstep because you are getting money back because of a losing trade.

Conclusion

Going short and long are very popular investment strategies, given their 50% market share. Patience is apparently not the cleanest thing.

There are plenty of options for those who want to take a gamble. You can also control your risk. You can win a lot quickly, but you can also lose a lot quickly. Those who handle this smartly may be able to do a risk analysis and be on the right side often enough to still capture substantial sums. Whether this is a good idea all depends on the investor's character and preferences.

So by trading with leverage, you can make faster profits, but you can also lose a lot of your total holdings within a short time. This is why you have to be very careful when going short and long. It is, as you have seen in this article, quite possible to trade with leverage with a maximum loss.

Heed the warning of the oracle of Wall Street, Warren Buffett: