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This article will provide traders with a guide to trading cryptocurrency CFDs. It will explore: significant cryptocurrencies (and not just Bitcoin), reasons why you should consider trading CFDs on cryptocurrencies, an explanation of how to purchase Bitcoin, Litecoin trading, Ethereum investing, and much more!
What is Cryptocurrency? – A Brief History
Cryptocurrency is a type of ”digital asset” or ”digital currency”. It does not exist in the physical sense (as is the case with regular fiat currencies such as the Dollar and the Euro). Cryptocurrency not regulated or managed by any financial authorities or banks in the same way as traditional currency, but is mostly self-regulated, through the use of various encryption techniques. Furthermore, this process is powered via the internet, with users within associated networks providing the verification that enables the transactions to occur.
The genesis of what we now know as cryptocurrencies transpired back in 2009, and it all began with the launch of Bitcoin, the proto-cryptocurrency. Bitcoin was originally proposed as an electronic payment system based on cryptographic proof. The cryptographic proof came from the emerging technology of the blockchain — a kind of list of digital signatures that provide computational evidence describing the entire transaction history of each Bitcoin.
This public chain of ownership allows peer-to-peer transactions, without any need to entrust a third-party with the task of processing the payment. This lack of any kind of third party operating in a single, supervisory role means that Bitcoin is a decentralised digital currency. Back in 2009, some market commentators dismissed this new, virtual currency as a mere fad, a transitory reaction to the subprime crisis that had racked the global economy back in 2008.
But as Bitcoin has grown in value and credibility over the years, interest in this new type of currency – and the technology framework that underpins it – has blossomed. As more investors have embraced Bitcoin over the years, its value has been driven higher, which in turn has driven greater interest in this asset class. This has led to a breathtaking increase in value and volatility.
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As a consequence of all of this, a large number of alternative digital currencies have arrived on the scene (and on some occasions have departed just as quickly), based on the innovation of the blockchain or such similar concepts. In early 2020, the combined value of all cryptocurrencies was estimated to be around $8 billion; by March 2020 this had ballooned to around $25 billion.
2020 proved to be a remarkable year for Bitcoin, and the cryptocurrency market in general. Having never been above $1,000 before 2020, Bitcoin broke above $6,000 in October of 2020 and by early December had rocketed above $10,000. By the end of that month, it set a record level of $19,783, climbing rapidly ahead of the launch of CME and CBOE futures contracts in the cryptocurrency.
The launch of these Bitcoin contracts on mainstream exchanges ushered in a new era, offering the first chance to trade cryptocurrencies on regulated platforms in the US — but it also generally coincided with a marked decline in the fortunes of Bitcoin.
Though volumes of the Bitcoin futures contracts grew steadily in the months after their launch — offering greater and greater and liquidity to traders — the price of Bitcoin fell into a persistent downtrend. By February of 2020, Bitcoin had plunged to below $6,500. By December 2020, that value had shrunk to below $3,500.
Also in December, the crypto market’s market cap plummeted from just under $180 to $152 billion within a 24 hour period, with many spectators comparing the major crash to the infamous dot com crash of the early 2000s.
What Are the Other Significant Cryptocurrencies?
Bitcoin was by far the earliest cryptocurrency, arriving more than two years ahead of the second cryptocurrency, Namecoin. The success of Bitcoin has led to a massive proliferation in digital currencies in recent years, and today there are literally hundreds of cryptocurrencies in existence. One of the most interesting aspects of these new currencies is the lack of control by any single body. Traditional fiat currencies are governed by central banks that may operate independently of a national government, or at the behest of the government.
The FED (Federal Reserve) has the power to increase the supply of US Dollars, for example. The degree of decentralisation can vary from one cryptocurrency to another – as we shall see – but, in general, there is no central authority that plays an analogous role to a central bank with regards to cryptocurrencies. We’re now going to take a look at four of the other major cryptocurrencies available.
Ethereum (or Ether), is the largest rival to Bitcoin, based on percentage share of total cryptocurrency market capitalisation. Other significant players in the field include Bitcoin Cash, Litecoin, and Ripple, to name a few. Cryptocurrencies are quoted against the US Dollar (USD) and the Euro (EUR) – two of the world’s most widely-used currencies.
The following list shows you the codes used to represent these major cryptocurrencies against the US Dollar:
- Bitcoin against the Dollar – Code: BTC/USD
- Ether against the Dollar – Code: ETH/USD
- Bitcoin Cash against the Dollar – Code: BCH/USD
- Litecoin against the Dollar – Code: LTC/USD
- Ripple against the Dollar – Code: XRP/USD
Similarly, the list below shows the codes for the major cryptocurrencies against the euro:
- Bitcoin against the Euro – Code: BTC/EUR
- Ether against the Euro – Code: ETH/EUR
- Bitcoin Cash against the Euro – Code: BCH/EUR
- Litecoin against the Euro – Code: LTC/EUR
- Ripple against the Euro – Code: XRP/EUR
Why Trade CFDs on Cryptocurrencies?
Cryptocurrencies are made possible via the emerging technology of the blockchain – the public ledger that keeps a record of all transactions (or similar consensus ledger systems). Since the outset, the potential of both this new type of asset and the technology in general, has engendered interest in specialist quarters.
In recent years, cryptocurrencies have begun to attract attention from a much wider audience, as Bitcoin has been accepted as a means of payment in increasingly more places. Cryptocurrencies have also begun to generate a lot of interest as an alternative investment. A large part of this is down to headlines generated by the huge leaps in Bitcoin’s value. The price of Bitcoin began in 2020 with a worth of around $1,000, rocketing to more than $19,000 by December of that same year.
This new asset space gained further credibility when established exchanges like the CBOE and CME launched futures contracts in Bitcoin. Many people gain an exposure to cryptocurrencies by simply putting money into them – that is, buying the actual digital currency. There are downsides to this, however. Processing times for buying a cryptocurrency are slower than the instant fills that typify a regular Forex (FX) trade; they are unregulated; and there have been some scare stories of compromised Bitcoin and Ethereum wallets.
You can easily sidestep all these concerns by trading cryptocurrencies via CFDs. Using CFDs allows very fast transaction times, which is useful for such a volatile market. For instance, Admiral Markets UK Ltd is authorised and regulated by the Financial Conduct Authority (FCA), so that Bitcoin CFD trading with this broker is regulated in the same manner as normal FX trading.
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How to trade Bitcoin CFDs
Bitcoin is the eldest child in the cryptocurrency family. Dating back to 2009, this makes it substantially older and more established than its nearest cryptocurrency rival in terms of capitalisation. Because it is the most mature cryptocurrency, it shouldn’t come as much of a surprise that it generates the most headlines. In 2020, those headlines were plentiful, on account of Bitcoin’s remarkable growth in value. You can track Bitcoin’s 2020 gains in the chart below:
Source: MetaTrader 4 platform – BTC/USD daily chart – Data Range: 11 Apr, 2020 – 7 Dec, 2020
One way to profit from such increases in value is to actually purchase Bitcoin and store it in a Bitcoin wallet, with the aim being to sell it later at a higher price. A much simpler way to speculate on the value of Bitcoin is to trade BTC/USD using CFDs. All that’s required then is to open a live trading account, and you can then readily trade BTC/USD from a chart using a trading platform such as MetaTrader 4 (MT4) or MetaTrader 5 (MT5)
It’s worth stressing how volatile Bitcoin can be. Valuations in early 2020 pulled back substantially from the highs seen at the end of 2020, and this correction has been accompanied by some wild swings in price. Some traders might approach such volatility with caution, while others might interpret it as a trading opportunity, and others might see potential in shorting the price and looking for further falls. The choice, of course, is yours.
Learn to Become a Bitcoin Cash CFD Trader
Bitcoin Cash is what is known as an altcoin — a virtual currency that works fundamentally in the same manner as Bitcoin. In fact, Bitcoin Cash is simply an offshoot of Bitcoin, resulting from a hard fork in the blockchain. A hard fork is effectively a divergence in the transaction record into two separate and incompatible chains, each governed by a different set of rules. The hard fork in Bitcoin that created Bitcoin Cash arose from a bottleneck within the Bitcoin network, caused by the size of the blocks.
This constraint on capacity created a problem of higher fees and delays in transactions, and led to a section of the Bitcoin community seeking to increase the size of each block in order to ameliorate this scalability problem. Another section of the community wanted to keep things as they were, and in August 2020, the blockchain split. Bitcoin Cash adopted larger blocks in a new branch of the blockchain, and mainline Bitcoin continued with the original chain.
The clash is as much an ideological one as it is a technical one, with issues of decentralisation and security at the core of the argument. To keep tabs on how the price of Bitcoin Cash has changed over time, people trading with Admiral Markets simply need to follow these easy steps:
- Login to their MT4 or MT5 trading platform with their Admiral Markets trading account
- Right-click on the ‘Symbols’ window
- Select ‘Show All’
- Search for BCH/USD in the list
- Right-click on this and select ‘Chart Window’
Source: MetaTrader 4 – BCH/USD Daily Chart – Data Range: 26 Dec, 2020 – 7 Feb, 2020
Now that you understand the process of purchasing crypto CFDs, you might want to know the history of some leading coins. Litecoin began in 2020, when it was created by Charles Lee, whilst he was still an a employee at Google. Litecoin was, for a while, the second-largest cryptocurrency, gaining a reputation as being the silver to Bitcoin’s gold. It has in recent years been eclipsed by other newer cryptocurrencies though. Litecoin’s core aim was to provide an alternative to fiat currency for payment.
Though Litecoin is technically very similar to Bitcoin, it does offer faster transaction times and lower transaction fees, meaning that it is more suitable for smaller transactions. At the time of writing, Litecoin is the sixth-largest cryptocurrency in terms of market capitalisation. Aliant Payment Systems, a US-based payment services merchant, announced in February 2020 that they were adding Litecoin to their range of services, alongside Ethereum and Bitcoin.
What is Ethereum? Ethereum (also interchangeably referred to as Ethereum and ETH) is a decentralised, blockchain-based computing platform. Which is to say, where Bitcoin is a currency pure and simple, Ethereum is a whole lot more. It takes the technology at the heart of Bitcoin – the tamper-proof public ledger known as a blockchain, and run by a network of nodes – and uses it as the infrastructure for a system that proposes to turn the way the cloud works on its head.
Rather than apps, payment services, and cloud storage being operated by single parties, Ethereum proposes a network wherein no single entity governs these processes. To use this network, you need Ether. Ether is a cryptocurrency that allows you to pay for transactions and services within the Ethereum network. You can therefore think of Ether as being the fuel that powers the platform.
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Ethereum vs Bitcoin
Ethereum offers substantially faster transaction times compared to Bitcoin, owing to its shorter block time – which is the mean amount of time for the network to generate another block within the blockchain. This also means lower transaction fees compared with Bitcoin.
Perhaps most interesting of all is that Ethereum offers smart contract functionality – a new technology that has been opened up by blockchains. Basically, a smart contract enforces the terms of a relationship with cryptographic code. Ethereum has quickly grown in popularity, and is currently the second-largest cryptocurrency by market capitalisation ($17 billion at the time of writing).
Ripple and XRP
What is Ripple? Ripple (sometimes also called Ripples or XRP) is a payment protocol that enables peer-to-peer money transfer. Like Bitcoin, it uses a public ledger for security that is constantly validated by a network of independent servers. Ripple is also the name of the company that runs the protocol, headquartered in San Francisco. Ripple is also used interchangeably for the native digital currency of the protocol.
The Ripple system was conceived as having a wider scope than Bitcoin, purporting to allow fast, secure financial transactions of pretty much any type. It doesn’t just support XRP, but all currencies in fact. Ripples are the tokens that support the payment system, and they are the third-largest cryptocurrency by market capitalisation (at the time of writing).
Users need to have a small reserve amount of XRP on their account to act as an obstacle for hackers attempting to flood the network with fake accounts. For similar reasons, each transaction incurs a tiny XRP charge to preclude a flood of fake transactions. Ripple does not use mining like Bitcoin to create new tokens (see the mining section below for more information).
Instead, the founders created 100 billion XRP at the beginning and stated that no more would be created, based on the rules of the protocol. Somewhat controversially, a large chunk of that XRP remains in the hands of the founders. There are questions of how decentralised the protocol actually is, but at the same time, this cryptocurrency and payment system has garnered attention from mainstream financial institutions in a way that has eluded other rival virtual currencies.
How Does Mining Fit into All of This?
If you have a passing familiarity with either Bitcoin or cryptocurrencies in general, you have likely come across the concept of ‘mining a digital currency’. In this context, what is mining exactly? To answer that question, we need to examine the creation of cryptocurrency. The terminology originated from Bitcoin and stems from the fixed number of Bitcoins that will ultimately exist (21 million) according to the Bitcoin protocol. Only a certain number of these have been ‘unearthed’ so to speak. Mining involves unearthing new cryptocurrencies, and this actually happens as a reward.
This ‘reward’ is an economic incentive given to a miner for the work completed in terms of creating new blocks of validated transactions, and therefore contributing to the upkeep of the network. It was also designed as an initial mechanism for distributing coins in the intentional absence of a central authority.
Cryptocurrencies rely on nodes. These are computers or servers that work together to exchange transactional information around the network. A mining node is effectively trying to win a race to solve a computational puzzle — an exhaustive search of possible inputs that when combined with data in the current block and passed through a cryptographic hash function, will give an acceptable solution.
The first node to do this ‘wins’ the race and adds a new block to the blockchain. This provides a new hash for the next block that defines the upcoming puzzle to be solved. The reward is a certain number of the cryptocurrency in question. For Bitcoin, this is currently 12.5 Bitcoin (at the time of writing). Solving the puzzle is made intentionally difficult to prevent someone going back to alter information in older blocks.
Modifying a past block in this way would also require you to redo the puzzle solving for all the newer blocks chained after it. The difficulty involved makes it extremely unlikely that such an attacker could keep up with the addition of new blocks by honest nodes. Boiling it all down to the nuts and bolts, the process was designed to issue a steady stream of Bitcoin, while also maintaining the credibility and security of the transactional history – without relying on oversight from some central authority.
The original Bitcoin proposal by Satoshi Nakamoto actually introduced the mining term, stating that: ”the steady addition of a constant amount of new coins is analogous to gold miners expending resources to add gold to circulation”.
Trading CFDs on Cryptocurrencies
Is the mining of Bitcoin profitable? Or should you instead mine Ripple or another cryptocurrency?
The short answer is: it’s not profitable for most people anymore. The Bitcoin protocol aims to yield a steady flow of tokens (one every ten minutes). It follows that the more people mining, the greater the difficulty of success. So back in the early days of Bitcoin, it would have been possible for an individual to profitably mine Bitcoin.
The competition now is so fierce though that extremely powerful, dedicated computer hardware is a necessity, running 24 hours a day. As you can imagine, this comes with an attendant cost in electricity that is substantial. Rather than mining as individuals, people pool their resources to set up ‘mining farms’. These are data centres running thousand of machines, located in areas with low electricity costs.
As an individual, it is actually much more convenient to trade the valuation of a cryptocurrency by using CFDs. Trading CFDs offers a quick, simple, and versatile way to speculate on the price of a variety of major cryptocurrencies. Now that you’re up to speed with the big names, let’s move on to actually getting started with trading cryptocurrencies.
How to Connect to a Cryptocurrency CFD Trading Account in MT4 or MT5
- Open a Live Trading Account
- Download MT4 or MT5 to use as your cryptocurrency trading platform
- Open the platform and click on the ‘File’ tab at the top left of the screen
- Select ‘Login to Trade Account’ and enter your trading account details
- Open the cryptocurrency CFD chart of your choice
- Click ‘New Order’ when you want to buy or sell
You can read more about opening an account and logging in to MetaTrader with article on How to Open a MetaTrader 4 Account.
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Where Do I Find Cryptocurrency CFDs in the MetaTrader 4 Trading Platform?
If you can’t see the cryptocurrencies you want immediately in MetaTrader, just go to the MarketWatch window on the left-hand side of the platform. In that window, you should see a list of market symbols. This may not be an exhaustive list of all the markets that are available for you to trade with Admiral Markets, however. To see this list, just right-click in the ‘MarketWatch’ window and select ‘Show All’. You should now see cryptocurrency CFDs in the list of prices, as shown in the image below:
Source: MetaTrader 4 – BTC/USD hourly chart – Market Watch – Date Accessed: 8 February 2020
To launch a cryptocurrency chart, just click on the symbol and drag into the chart window on the right. Alternatively, right-click on the cryptocurrency of your choice and select ‘Chart Window’.
How to Open and Close a Position in the Ethereum Cryptocurrency CFDs
Placing an order on a cryptocurrency is very easy with MetaTrader 4. Let’s run through an example of how to open a cryptocurrency position using Ethereum. For this example, we used an enhanced version of MT4 by downloading and installing the MetaTrader 4 Supreme Edition (MT4SE) plugin. The MT4SE plugin is free to download, and gives your platform a big boost in terms of the available number of indicators and expert advisors.
Cryptocurrency Invest Example: Opening an ETH/USD Position
For this we used the Mini Terminal EA. Once you have installed MT4SE, you should see this listed as ‘Admiral – Mini Terminal’ in the list of expert advisors within your ‘Navigator’, as shown in the image below:
Source: MetaTrader 4 platform with the Supreme Edition plugin installed – A Mini-Terminal order ticket for ETH/USD – Date Accessed: 8 February 2020
First we opened a chart for the ETH/USD, and then double clicked on Admiral – Mini Terminal to launch the EA. As you can see, this gives you a small order ticket. We then chose ‘1 lot’ as the order size, and then by pressing ‘CTRL’ and then clicking in the S/L field (that is, the stop-loss field), we then opened up the S/L calculation dialogue box that you can see below the mini terminal in the image above.
This function allows you to specify the amount of risk you want to take on board with this this crypto position. You can define this as either as a flat amount in your account’s base currency, or as a percentage of your account’s free equity. The mini-terminal will then calculate the stop level for you that best matches your specified amount of risk.
Then, it’s as simple as clicking ‘Sell or Buy’ to take a position in your chosen cryptocurrency CFD. Optionally, you can also set a take profit level and/or a trailing stop. So, once you have taken a position in the cryptocurrency of your choice, how do you then go about closing the position? There’s more than one way to go about this. Let’s first look at closing just part of the position:
Example: Partial Closing of a ETH/USD Position
Sometimes, it can be beneficial to reduce your exposure by closing off a portion of your open position. You might, for example, want to realise some profit on a winning position, or perhaps lighten your size on a losing trade. Either way, by partially closing, you retain some exposure to future price moves. When you have opened a position you will see lines marked on the relevant cryptocurrency chart that represent your trade, and any associated stop-loss or take profit orders.
Source: MetaTrader 4 – Price data from Admiral Markets – ETH/USD hourly chart – Date Accessed: 9 February 2020.
In this example, a ‘Buy’ trade was placed, and our position is shown with a green box. Had we chosen to sell, this would be a red box instead. Clicking in this box opens a web dialogue window which offers you a variety of options, such as to amend any stop-loss or take profit orders you may have. We clicked on ‘Partial Close’, and you can see in the image above the dialogue that this option presents. We entered 0.5 into the Volume field, which would allow you to close off half of the 1 lot open position.
Example: Total Closure of ETH/USD Position
Closing your whole position is no more complicated than making a partial closure. All you have to do is make sure that your trading size is the same as the open position, and then deal in the opposite direction. We originally bought 1 lot of the ETH/USD to open the position. To close this, we would need to sell 1 lot of the ETH/USD. Just as in the example above, traders could click on the green box that represents their open position and this time, just click on the red ‘Close Order’ button, without first clicking ‘Partial Close’.
Source: MetaTrader 4 – Price data from Admiral Markets – ETH/USD hourly chart – Date Accessed: 9 February 2020.
An Easy Way to Get Started
So, now you’ve read about the different cryptocurrencies available to traders and how to trade them with CFDs, how do you take your first steps into the world of cryptocurrency trading? One smart way is to do so via a risk-free demo trading account. This allows you to explore the functionality of your chosen trading platform, and place orders on live cryptocurrency CFD prices, but without risking any money, until you feel confident enough to open a real position with a live trading account.
Trade Cryptocurrency CFDs With Admiral Markets
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
How to Long/Short Cryptocurrencies
A long/short investment strategy is usually associated with hedge funds, but a growing number of cryptocurrency owners are using the same approach to diversify their portfolio and increase their profits.
If you like the idea of making money when cryptocurrency prices go up and down, then this is a strategy you want to pay attention to.
In this guide, we’ll be showing you how to long/short cryptocurrencies and what this can bring to your investment strategy.
By the time you’ve finished reading this, you’ll know the following:
First, let’s start by explaining what a long/short strategy is in simple terms.
What Is a Long/Short Investment Strategy?
The easiest way to explain a long/short investment strategy is to define what we mean by “long” and “short”.
When you take a long position on an asset, you’re buying it outright, which means you own the stock itself and your profit relies on it increasing in value.
As a crypto investor, this is the equivalent of buying Bitcoin or other digital currencies on an open market when you expect prices to increase over a reasonable period.
In the case of a short position, you’re essentially borrowing an asset with the expectation that its value will decline.
The aim is to sell at a high price and then pay back your lender at a lower rate when values drop, by which time you’ve pocketed the difference for yourself.
So, let’s say you bought a bunch of Bitcoin at around $19,000 per coin in November last year.
You could have sold those coins for $19k at the time and then paid back your lender roughly $6k per coin when prices were at their lowest in February 2020 – making a tidy $13,000 profit on every coin.
A long/short strategy is when you combine these two investment methods to take long positions on assets you expect to increase in value and short positions on those expected to drop while making a profit on both outcomes.
Why Should I Long/Short Cryptocurrencies?
The cryptocurrency market is one of the most volatile investment arenas we’ve ever seen, and a long/short strategy means you can make a profit as prices rise and fall, both of which inevitably happen throughout the year.
The key is being able to identify when assets are undervalued and when they’re overvalued.
As we explained in the last section, there was a lot of money to be made in short selling Bitcoin over the past 12 months.
Shrewd investors knew prices couldn’t remain at the $20k for long; they knew Bitcoin prices were overvalued and its value would have to drop sooner or later.
Taking a short position on Bitcoin when its prices were at their highest and then paying back at the peak of the “crash” was the most prominent Bitcoin opportunity we’ve seen so far – by a long margin.
In the space of two months, roughly $13,000 per coin was up for grabs as prices plummeted from almost $20k to under $6k.
Better yet, if you took long positions on Bitcoin back when prices were under $1,000 and took short positions while they were approaching $20k, you would have pocketed on the long-term value increase and made a serious profit on top of the early-2020 crash.
With a cunning long/short cryptocurrency strategy, you can protect your investment from market volatility and profit from prices as they move both ways.
Now, let’s look at how you can long/short cryptocurrencies.
How To Long Cryptocurrencies?
Taking a long position on cryptocurrencies is the most straightforward investment strategy. In this case, you’re buying into currency on the basis that its value is going to increase over time.
This involves buying coins outright, which means you own the assets yourself and the market value of your cryptocurrencies determines your profit.
In other words, this is the classic buy low and sell high approach to investing in the technology.
#1 To do this, you’ll need to open an account with a cryptocurrency exchange platform like Coinbase or eToro.
#2 First, you’ll need to create an account with one of these exchanges and then buy your cryptocurrencies. In some cases, you’ll need to buy Bitcoin using fiat currencies (USD, GBP, EUR, etc.) and then exchange them for other currencies if you want to invest in altcoins like Ripple or Monero.
#3 Make sure you can actually buy Bitcoin directly from your exchange platform, though. Many only allow you to buy through contracts for difference (CFDs) which means you won’t actually own the coins you “buy”.
This is one of the reasons we recommend eToro as a crypto exchange platform – you can buy Bitcoin directly from the platform or invest via CFDs and other options.
#4 The key part is identifying which cryptocurrencies you think will increase in value over time and this is where it’s important to look at the technology behind the coins you invest in.
For example, Ripple works with major banks and financial institutions to make money transfers faster and cheaper while Ethereum allows businesses to create smart contracts using blockchain.
These are technological solutions that hold real-world value beyond the price of the coins offered by these crypto providers – so keep this in mind when you’re taking a long position on any cryptocurrency.
You want to invest in the ones that will be around long after the ups and downs of this volatile market have settled and the world is using cryptocurrencies as a standard payment option.
#5 Once you’ve decided which coins to invest in, the crucial factor is deciding when to buy.
You’d be kicking yourself now if you went long on Bitcoin last December when prices were pushing $20k. Of course, Bitcoin prices are projected to far exceed $20k over the next few years but you would have an anxious wait on your hands if you bought when prices were at their highest.
More to the point, anyone with any investment experience could tell those prices had to come down before they could start a more sustainable rise.
At the opposite end of the spectrum, buying in February, when prices dropped below $6,000, was the best time to invest in Bitcoin this year and this shows how critical timing can be over the space of just two months.
How To Short Cryptocurrencies
Short selling cryptocurrencies is a little more complex in principle than going long but it’s easy enough to get your head around.
Instead of buying Bitcoin or altcoins when you expect them to increase in value, the plan is to borrow them when you anticipate a drop in value.
When Bitcoin prices are set at $12,000, you borrow and sell them at the current market value with the aim of paying back your lender when rates are lower, which means you get to keep the difference.
You borrow and sell coins at $12k a piece and then pay back your lender when the market price is lower – for example, $9k, which would result in a $3,000 mark up on each coin.
There are some ways you can short cryptocurrencies so let’s run through these now.
Margin trading is where you borrow Bitcoin or other coins from a broker, which you can then trade with and repay later.
As you’ve guessed by now, the aim is to borrow coins while the price is high, sell them at inflated market value and then pay pack your broker when prices are significantly lower.
Of course, there are fees involved and things could go the other way if you have to pay back your coins when prices are higher than the time of lending.
Contracts For Difference
This is the most common way of investing in cryptocurrencies without actually buying coins yourself.
Essentially, what you’re doing with a CFD is betting that prices for a given cryptocurrency will either increase or decrease.
Unlike margin trading, your not borrowing any coins through a CFD; you just place your stake on the whether the value is going to increase or decrease.
This allows you to simulate short selling by betting on price drops and the key benefit is you don’t have to worry about actually buying or selling anything.
You just sign your contract and let the market determine things for itself.
When you sign a futures contract, you agree to buy Bitcoin or another cryptocurrency on a specific date for a fixed fee.
The aim is to agree on a fee that’s lower than the market price on the date you have to buy so that you can essentially buy your coins at a price lower than the market value when your contract expires.
Futures trading isn’t as widely available as CFDs, but they are growing in popularity.
Direct Short Selling
Direct short selling doesn’t involve any borrowing or contracts at all. Instead, you buy your coins as normal and then sell them when you feel the market price is overvalued.
Next, you use your profit to buy more coins when prices become undervalued and grow your investment by market fluctuations – an ongoing process of buying low and selling high.
There are other ways you can short cryptocurrencies, including binary options trading, but they tend to be high-risk and expensive.
We recommend sticking to the options above, especially if you’re still new to investing outside of cryptocurrencies or long/short strategies.
What Makes a Good Long/Short Strategy?
The best long/short strategies combine both methods to create a more diverse and profitable investment portfolio.
By going long, you’re investing in the long-term profitability of your cryptocurrencies, but you can also profit from price drops with some smart short selling.
The key thing to remember with your overall long/short strategy is that prices always come down faster than they go up, but they also go up the majority of the time.
As David Gardner puts it:
“Stocks always go down faster than they go up, but they always go up more than they go down.”
In fact, the guys over at eToro suggest cryptocurrency prices increase two-thirds of the time and spend the final third the year in decline. Which describes Bitcoin prices for the past 12 months fairly accurately:
A great long/short strategy for Bitcoin investors over the last year would have been to go long on the cryptocurrency once prices started to climb after dipping below $1,000 and then watching their value increase.
At this stage, you’d be looking at $8 profit per coin on your long positions, which is a pretty impressive return in itself.
However, going short on Bitcoin when prices were climbing towards that $20k barrier, using one of the short selling strategies we mentioned earlier, means you could have made huge profits from the Bitcoin crash that started in December last year.
Prices plummeted from almost $20k to under $6k, and you can guarantee short sellers made insane amounts of money in those early months of 2020.
There are risks with short selling, of course, but you can use it to offset the risks of going long in the opposite direction, which is vital in volatile marketing like cryptocurrencies.
A long/short strategy won’t protect you from all risks, but it will put you in a strong position to profit from prices as the rise and fall.
How Do I Get Started?
The first thing you need to do is make sure you use a cryptocurrency exchange platform that allows you to go long and short on your investments.
As we said before, many exchanges don’t allow you to buy cryptocurrencies outright, which means you can’t manage a long/short strategy – at least not from a single platform.
We’ve mentioned eToro a few times in this article, and we recommend this as the place to start if you want to implement a long/short strategy with your crypto investment.
The main reason is that eToro allows you to trade Bitcoin, Ethereum and Litecoin directly so you don’t have to buy into cryptocurrency – something many exchanges don’t approve.
Crucially, you can also use short selling tactics like CFDs on eToro, which means you can manage your entire long/short strategy from a single platform. This is important when you have to react quickly, as tends to be the case with short selling.
The main downside with eToro is that fees are higher than many exchange platforms, but you get a lot of flexibility in return.
By all means, look at other options and decide which exchange platform suits your needs but eToro gets our vote for managing long/short cryptocurrency strategies.
eToro also offers a free demo account if you feel like you’re ready to give it a go! You can sign up to eToro here.
Got any questions about long/short cryptocurrency investment? Or, perhaps you’ve already got experience that other investors could learn from. Let us know your thoughts on this strategy in the comments below!
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