Cryptocurrency trading is very similar to forex trading, and most of the trading strategies and terminologies of forex applies to crypto trading. The basic and most primary strategy is to buy low and sell high; after all, we all want to make profits. This article is going to explore one of those hedge fund strategies, that quite a number of crypto traders are employing to diversify their portfolio and increase profit – long/short investment strategy.
In order to understand what long/short investment strategy means, it is expedient to first define both terms. Going long means buying a cryptocurrency with the expectation that the price will increase in the future and you will realize a profit. A short trade on the other hand is initiating a sell off, with the intent of buying back at a lower price, because you believe prices will drop.
As already stated, when a trader is in a long trade, they buy an asset now, with the hope that the price will increase. Day traders use the terms “buy”, “long”, “going long”, and “go long” interchangeably. For example, “I am long on BTC”, meaning the trader currently has some BTC and expect prices to go up, or “I am going long on BTC” (indicating an interest to buy BTC).
When a trader goes long, the profit potential is quite significant, since nobody can really predict how much an asset may increase in value. On the contrary, there is also the risk that the value of this asset drops, and you lose. A typical example of this will be Bitcoin and most cryptocurrencies late 2017. I saw the price of Bitcoin move from $1800 around April to $2000, $4000, and eventually $19,000 by December. If I had taken a position at $1800 (which I did), in anticipation that the price goes up, I would have been going long.
On the contrary, although some experts predicted that Bitcoin would hit $50,000 by the end of December, and even $100,000 later in 2018, 2018 came with a steep decline in prices. If I had taken a position at $19,000, I would be swimming in losses by now. And this is why is it always recommended that you invest only what you can afford to lose.
Traders involved in shorting, sell assets first before buying them later. They expect the price to go down now, and increase later. Profit is made only if this happens. While this may seem quite confusing to a lot of new traders, since most people buy assets now at a lower price, to sell later at a higher price (going long). However, this is very logical.
To explain this better, let’s say I kept my Bitcoin which I bought at $4000 in October, 2017 until December, when the price had hit $19,000. From experience, I know that the holidays are coming, followed by the Chinese holiday, and people are bound to sell off. An action that will force prices down. I sell at $19,000 at buy back at $6500. I would have made a whopping $15,000 if I had 1 BTC. And like most crypto enthusiasts I will be sitting docks waiting for Bitcoin to increase in value again. After all, we all believe that we’ll be mooning soon.
In conclusion, cryptocurrency trading is risky and a combination of these strategies, following the market trends, and taking profits when you can, will help keep your investments safe.