Take advantage of Shorting! - What really is Shorting and how Investors can use this tool

in Project HOPElast month

Shorting

You probably already heard of the term Shorting and maybe even have some idea of how it works, but how does it function in practice? How can you use it?

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The inner workings

A Short position is the opposite of having an asset (called a Long Position).

If you think the price of BTC was going to fall, for example, you could Short Bitcoin:

  • Borrow BTC from someone

  • Sell the borrowed BTC

  • Wait until the price drops

  • Buy the BTC for cheaper than you sold it for

  • Give it back to the original owner

This way, you make money from the drop in price you predicted!

How to think about it

If you hold a Short position on an asset, you can think of it as having a negative quantity of that asset.

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Main Risks

Shorting is usually considered riskier than holding the asset for a couple of reasons:

Infinite Losses

As there is no maximum price for an asset, there is the possibility of having infinite losses.

Interest

The interest you pay on your loan, while you wait for the price to drop, might wipe out your winnings

Price Rise

Finally, there is also the possibility that the price rises and you have to buy it back at a higher price than what you sold it for.

How to use Shorting

Beyond just making money off your predictions, as we all do with our investments, you can also use it to protect yourself from a market recession:

Insurance

If you have a lot of crypto in your wallet, you can protect yourself from prices falling by having a short position on a coin you think is weaker and would fall more in case of a general market recession.

If the price keeps rising, you can think of your losses as an Insurance Premium!

Conclusion

Shorting is one of the most useful tools for investors. That said, knowing the risks it carries is essential to correctly use it!

Have you ever made money from a Short position? Leave your example in the comments!


Thanks for reading!
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Take a look at my last post, about Diversification!

Images from: Unsplash and Pixabay


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Quite thoughtful of you. Thanks

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