The Art of the Short: Trading Depreciating Digital Assets

Trading digital assets derivative contracts such as Bitcoin against traditional instruments like stocks, or cross-crypto contracts, has grown immensely among novice and seasoned online traders over the last decade.

It’s always exciting when a digital asset rises in price, but what about when it declines? Is there an opportunity to profit when a digital asset depreciates? 

The short answer is, yes, a trader can certainly profit when the price of a digital asset goes down. If you’re not yet familiar with the concept, in simplest terms it’s called ‘going short’.

When trading with derivatives, more specifically NDCs (non-deliverable contracts) or non-deliverable forwards (NDFs), one advantage to these types of contracts is the ability to trade on both price directions – whether it rises or falls, going long or going short.

In this article, we will overview how to trade digital assets via NDCs when the price of the given asset is depreciating. Yes, traders can still make profits in a bear market! Let’s dig into how you can play both sides of the court.

Explained: Going Short on Digital Assets

Trading NDCs on digital assets is similar to buying an options or futures contract on the given asset; it is ultimately a derivative contract that allows you to bet on a price direction (going long, predicting the price will rise, or going short, predicting the price will decrease). 

One difference that is notable to mention is when one is going short on a digital asset (for example Bitcoin), NDCs offer more flexibility than futures contracts. Futures contracts involve settlement dates which basically mark the trade as final on a predetermined date. With NDCs, although they are typically used for short-term trading, there is no final date for when the trade must be closed; this allows the trader to take advantage of the element of time. 

When shorting digital assets via NDCs, another interesting factor is that the trader can enter the contract against a variety of instruments, whether that be fiat currency, an instrument price or another cryptocurrency. 

Traders traditionally are used to tying their trades to fiat currency, typically USD, however with the use of NDCs a whole new world of opportunity is available. This certainly makes for many hidden opportunities, given the trader is willing to constantly learn and discover such options, regardless of the market fluctuations.

To simply sum up the basics, trading with NDCs allows a trader to take a bearish approach and hence execute a trade amidst an asset’s decline in value. When we say there’s always a bull market somewhere, we mean it! Even when in the red, there is a sea of opportunity.

Factors to Consider When Going Short 

One of the most important factors when considering trading against the market is volatility; this is most prominent when trading crypto derivative products. Given that derivative pricing is always reliant on the pricing of the digital asset or cryptocurrency, the fluctuations can have a domino effect on either the profits or losses of the given trade.

In addition, shorting any cryptocurrency or instrument always comes with risks (as does any trading activity). More specifically, given the volatility and immaturity of the cryptocurrency market, there is simply not enough data in the last decade or so to conduct a thorough technical analysis of price swings. 

That being said, given the nature of NDCs, a trader can wait out a volatile market until it is the right time to sell the order. Again, compared to a futures contract, there are no settlement dates, offering more flexibility to the trading strategy and lifetime of the trade.

Regulation and security are also important factors to consider when going short on digital asset NDCs. Platforms such as Binance may offer high-leverage options when going short on a given crypto asset, however, with the lack of regulation, this can pose a lot of risk to the trader. In addition, given that many of the proprietary wallet breaches with platforms like Binance and FTX, it has proven that funds in these wallets are not exactly secure. In comparison, at Cerus Markets the client’s funds are secured via fiat currency (USD) in established USA bank accounts.

Another notable factor to consider when shorting a cryptocurrency or digital asset is leverage. Leverage can either magnify gains or losses, depending on how the trade is executed and timed overall. Of course, the use of leverage has to be considered amongst traders in their given trading strategy. Leverage allows for a trader to essentially borrow a number of funds based on their deposit in order to maximize their position size. Naturally, this should not be considered ‘free money’ and must be paid back to the broker once the trade is closed, regardless of the profit or loss.

Final Thoughts

As with any form of trading activity, there are always pros and cons involved and an educated trader will always consider both sides before taking action.

From the pro’s perspective, the option to trade NDCs in digital assets against the market, or when the given market is in decline, will provide the trader with an additional advantage that is not available when trading the direct underlying asset. Shorting a digital asset is also a viable option for hedging a portfolio against downside risk. Fundamentally it can help to offset losses in other parts of a trading or investment portfolio.

On the flip side, there is always an element of risk. If you choose to go short and the price rises, you may have to close at a loss or extend the duration of the trade until it fits your closing strategy. In theory, all is possible; it simply comes down to an individual’s knowledge, strategy, and risk tolerance.

Success in trading will always revolve around education – If you can take the time to learn on an ongoing basis, you will likely find success in the financial world. At Cerus Markets we are dedicated to taking you on this educational journey to reach your goals, proving that regardless of market conditions, there is always a bull market somewhere. 

If you’ve yet to register an account with us, you can do so today and take advantage of our 100% welcome bonus offer. With cheers to your success, we welcome you to join us in your trading journey.

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