Can you profit from falling Crypto prices?
This year has been something of a false dawn for Cryptocurrencies with the market overall dropping sharply by more than 70%. Bitcoin, the clear market leader which still accounts for more than half of the roughly $150B market cap in this asset class, reached its lowest level in over a year yesterday (Tuesday 21st November) and is down by almost 80% from the peak seen last December. In the past week Bitcoin has accelerated its speed of descent, with the market heading into a tailspin after breaking below key support in the 5770-6000 region which saw a swift $1500 or 25% plunge to 4290.
Bitcoin has dropped by almost 80% from last December’s peak of $19578 to recent lows of $4290. Source: xStation
Short-sellers in control
The obvious way to have made money in this market is to have taken a short Bitcoin position which can be easily done through a Contract For Difference (CFD). CFDs allow traders to sell a market and profit from a fall in price in the same way that one can buy the market and make money from prices rising. However, if a short is initiated and prices rise then a trader would find themselves in a losing position.
Taking a 1 contract short position in Bitcoin when the price is 4614.80 will see a profit of £1264 if the market drops to 3000. If the market rises to 5200 the position will lose £457.04. Source: xStation
How you can profit from buying
While shorting the market is the most simplistic way to make money as price falls there are other options. Some traders are less comfortable going short and prefer to buy first rather than sell. Money can be made (or lost in the interest of being balanced) in buying a falling market outright but it requires a higher level of skill to go against the prevailing trend. This is where Crypto crosses come in. While XTB offer 9 cryptocurrency CFDs against the US dollar (EG Bitcoin/US dollar is BTCUSD) the majority of their markets (16) are against other Cryptocurrencies themselves (EG Ripple/Bitcoin is XRPBTC).
When you take a long position in BTCUSD you are simultaneously buying Bitcoin and selling the US dollar. You will profit if Bitcoin rises or the US dollar falls and lose money if the opposite occurs. If you take a long position in XRPBTC, you are buying Ripple while at the same time selling Bitcoin. You will profit if Ripple rise or Bitcoin fall and vice versa.
While crypto markets having been falling against the US dollar, there’s been a strong move higher in XRP/BTC (Ripple/Bitcoin). This market has respected levels nicely with a break above 0.7230 presenting a nice buying opportunity as well as the retest around 1 week later. This market is up over 50% in the last month. Source: xStation
One of the main reasons why traders and investors prefer buying over selling can be explained using simple arithmetic. The biggest problem with a short position is that you’re maximum payoff is limited to 100% while the downside is uncapped – IE if you short Bitcoin with 1 lot at $4614 the most you can make is $4614 while your potential losses are, in theory at least, unlimited. The opposite is true for long positions where your downside is limited to 100%, whereas the upside is unlimited – IE if you buy Bitcoin at $4614 with 1 lot the most you can lose on the position is $4614 (not counting swaps) whereas the upside potential is unlimited.
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David Cheetham is the Chief Market Analyst at XTB UK who began his career trading Brent futures on a prop desk. David took the job after completing an MSc in Banking and Finance at Newcastle University. After initially trading Brent futures, he quickly expanded to cover WTI and some fixed income markets. After two years he branched out and started trading for himself, covering a wider range of assets including indices and FX whilst maintaining his core focus on Oil. David actively trades most asset classes. Whilst his approach is predominantly technical, he is well aware of fundamental drivers impacting markets and uses a combination of both when selecting his trades.