Understanding the opportunities in a bearish Bitcoin market
It is possible to use short market positions to make money on an anticipated bear movement in the market. A short position is a special type of a trade where you sell a borrowed amount of assets to rebuy it at a later point when the price goes down. It allows you to make a huge profit, return loaned assets, and pocket the difference.
Short market positions have been used successfully by many experts with the most popular example being the one of Michael James Burry who famously entered a massive short position against the housing and mortgage market to earn a staggering $800 million in total after liquidating short positions following the 2008 global financial crisis.
The same approach can be used to make money from a Bitcoin plunge. Any centralized cryptocurrency exchange with margin trading products offers its clients an opportunity to open a short market position, but it must be supported by a collateral that you have to transfer to a margin account. If your position goes into negative for a long time, the exchange will margin call your position and forcefully close it to prevent any losses from harming lenders.
To profit during a cryptocurrency crash, one must have a sufficiently strong portfolio to sustain potential volatility and lengthy periods during which an interest on a loan must be paid daily. Some people with aggressive risk styles liquidate their $BTC long positions when they expect a strong bear movement and use the assets to short against it. If they are correct in their guess, they can capitalize on Bitcoin downturn.
The earning potential during a market decline is massive thanks to leveraging market positions, but it also carries an innate risk of being margin called. Having an open short position is also an expensive endeavor that can dramatically affect the final result of a trade if it was initiated too early and existed for a long time during which an investor had to pay interest.
Shorting Bitcoin: A Comprehensive Guide to Making Profits from Falling Prices
A short market position is a very simple type of trade that involves leverage and loaned assets. Let’s talk about how to short sell Bitcoin. To enter a short position, you need to have the following:
- An account at an exchange that provides margin trading products (Binance, Kraken, and others).
- A sufficient amount of funds in your margin trading account for collateral.
- A good technical analysis Bitcoin short selling strategy to work with.
You simply have to sell assets at the current moment and buy them when the price goes down to produce profit after the whole order is executed. There are two conditions that must be met for the order to end up profitable:
- The price must reach a certain threshold within a period within which interest payments do not exceed the profit.
- The price should not go up or move sideways. It must go down and hit a certain level that allows you to secure a sizeable difference.
Short selling is the only way of profiting from downward price movement. The profits can be amplified by using large leverage or entering the market right before a huge plunge. It is essential for any retail trader to understand some concepts of fundamental analysis and use the most reliable technical analysis tricks to identify good moments to enter the market.
Here are some bearish trading techniques that you can use:
- RSI swing strategy. This approach uses the sole indicator Relative Strength Index (RSI). It is a smooth moving average representing values between 0 and 100. At 0, an asset is considered oversold and should start going up in price. At 100, an asset is considered overbought and should start going in the downward direction. Usually, retail traders enter short positions when the indicator gets closer to 75 — 80.
- MACD reversal. This is one of the best ways to identify potential trend reversals. An exponential moving average with the period of 9 is used as a signal line while MACD lines with 15 — 18 period are used to determine when to buy or sell. If the MACD line crosses the signal from up to down, you should consider taking a short position.
- Stochastic. This particular indicator is hugely popular among scalpers and day traders who want to have a good way to quickly check the market situation. It shows when the market is oversold or overbought. Usually, if it falls below 20, it is a good moment to consider buying. When the indicator goes above 80, you should look for opportunities to enter a short position. Stochastic is frequently used in conjunction with MACD and RSI to confirm signals.
- Parabolic SAR is a good indicator that will work well for newcomers who simply want to see recommendations from their trading systems. The indicator simply says “SELL” when you should open a short selling order. Parabolic is a good indicator when paired with some trend indicators like Bollinger Bands or 3 Moving Averages.
We strongly recommend practicing before starting to use any of the indicators in the real market. Use either demo accounts with centralized exchanges (Binance has Mock Trading accounts and Kraken offers demos) to test indicators and tinker with settings. You should also start small and limit yourself to smaller position sizes when learning how to look for good entries for a short position.
Hedging Strategies: Protecting Your Investments and Capitalizing on Price Declines
Short market positions are often used to protect more valuable long positions. For example, an investor holding a large quantity of $BTC may also want to have a short position against $BTC just to make sure that a bear price action won’t affect their portfolio too much. It is possible to use shorting as a way to protect any kind of investment and the diversity of shorted positions can also be quite impressive.
Let’s talk about various ways you can use advanced methods of risk management in crypto trading.
- Hedging against Bitcoin decline. If you have a long market position on Bitcoin, it is a good idea to have some short market positions to protect yourself from potential bear trends. One of the best ways to do so is to either have a short market position on $BTC or have multiple short positions against tokens closely associated with Bitcoin.
- Using options and futures contracts for protection. It is a good defensive strategy to include some derivatives in your portfolio to ensure that market volatility does not affect it as hard as it could if you only had massive amounts of tokens locked in long market positions. Derivatives can be traded with leverage allowing you to negate larger risks by paying premium on risk yet investing less as collateral against your main long positions.
- Diversifying your investments across multiple tokens. Some crypto enthusiasts believe that “hodling” $BTC is the only valid strategy in a purely speculative market that has a strong potential to become even bigger in years to come. However, spreading your capital across multiple different tokens that all enjoy popularity yet aim at different end games sounds like a much better idea.
These hedging techniques for cryptocurrency investors are valid and can be used in many variations. Let’s talk about each of them in a little bit more detail.
Shorting Bitcoin during a period of uncertainty
Think of how you make money with Bitcoins. It is usually done either by holding $BTC until it appreciates and selling or day trading derivatives based on Bitcoin (i.e. perpetual futures offered by some centralized crypto exchanges). Other strategies are long-term and do not really count as “making money” in the context of earning it right here and right now.
When it comes to working with volatile assets within relatively short periods (like a year or two), using short positions to counter some temporary bearish movements is a good defensive strategy. You need to use to borrow some tokens and sell them to rebuy in the future when the price goes down. It is usually done to minimize losses without liquidating your long positions during unfavorable moments which can be harmful to your portfolio.
Shorting is a good tool that does not require you to move tokens from hard wallets to exchanges during bearish markets. You can simply borrow some for a short period to make some money when the price goes down.
Using derivatives in your portfolio
Futures and options are based on other financial assets. In our case, we have Bitcoin or Ethereum, or any other popular token. You may buy a large amount of these tokens on the spot market or on a decentralized exchange to create a lasting long position. The smartest thing to do next is to move your tokens from the exchange to a secure hard wallet.
This long position is vulnerable to volatility due to many reasons including the inability to quickly liquidate your assets and the risk of losing more on commissions and fees if the price retraces after an initial dip.
Derivatives are great because you can buy a bunch of them using borrowed funds with a margin account. If you only trade derivatives, it can be a dangerous strategy, but using them to cover risks associated with having an unprotected long position is a sound plan. Remember that you need to calculate the profitability and feasibility of each leveraged position before committing to one.
The power of diversification
One of the best tools a contemporary retail trader can use is diversification. The crypto industry offers an incredible flexibility with over 5 thousand different assets traded on DEX and CEX platforms. While many of these digital assets should not be considered safe or appropriate for buying, many popular tokens are on par with Bitcoin in terms of their potential, liquidity, and accessibility.
Let’s discuss some of crypto tokens that may be included in your portfolio alongside Bitcoin:
- Ethereum is the number one candidate. It has the second-biggest market cap and serves as the mainnet for a plethora of decentralized finance projects. Ethereum is a massive development environment that won’t go down as over 30% of all DeFi platforms depend on it. The collapse of Ethereum will mean the end of the crypto industry as a whole.
- Litecoin is still one of the most popular PoW tokens that copy the architecture of Bitcoin. It’s been adopted by thousands of different online businesses and e-Commerce websites. $LTC may not have the same impressive price as Bitcoin, but it has many applications and offers some flexibility to crypto investors who want to diversify their investments.
- Monero has a gray reputation as it is often used by criminals to conduct their financial operations and launder money. However, it is also the most anonymous decentralized financial network that appeals to crypto enthusiasts. Whether $XMR can sort out its issues with transparency without compromising privacy of its users is something that will define the fate of the network.
Crypto Arbitrage: Capitalizing on Price Differences Across Multiple Exchanges
Crypto arbitrage is a great conservative strategy that can be close to risk-free when automated. Without automation, many retail traders struggle to secure profits as prices may change dramatically over the time you spend on setting up simultaneous market positions. Nevertheless, even manual arbitrage can be profitable when done correctly.
There are three main ways to arbitrage in the crypto market:
- Spatial or geographical arbitrage. It was the strategy that FTX initially used to amass huge capital to build its ultimately failed platform. While the finale of this story still haunts the crypto industry, the initial approach was valid and can be used to this day. Geographical arbitrage refers to the process of buying assets in one market (for example, the US) while simultaneously selling them in another (like Japan) to when prices diverge between two geographical zones. It can be also done between different exchanges (intermarket arbitrage). Profiting from price disparities between exchanges is a popular trading method used by thousands of crypto enthusiasts.
- Triangular arbitrage is a relatively simple way to make small amounts of money on each trade reliably. As the name suggests, you need to track three pairs of interconnected assets. For example, ETH/USDT, BTC/USDT, and BTC/ETH. When prices diverge between two assets against the third one, you can profit by simultaneously placing orders for all three pairs and making profit on pocketing the difference. Bitcoin arbitrage opportunities appear frequently allowing thousands of traders to benefit from the triangular approach without ever leaving their exchanges of choice.
- Statistical arbitrage is one of more sophisticated cryptocurrency arbitrage strategies usually employed by large financial institutions or retail traders capable of analyzing hundreds of different correlated assets to build massive portfolios which are usually controlled by an automated trading system. A very rudimentary example would be using PoW tokens (ZCash, Litecoin, Bitcoin) and having a variety of PoS tokens (Ethereum, Cardano) in very specific quantities to account for different risks associated with the development of the crypto industry. Depending on your risk style and investment size, you may lean toward one side of the portfolio or another.
All forms of arbitrage are prone to very specific risks:
- Executing profitable arbitrage trades naturally leads to price corrections across all markets where arbitrage traders work. Price convergence (when prices across these markets equalize under the pressure from retail traders) is the biggest risk associated with this strategy. Unfortunately, using it inadvertently causes prices to converge.
- Market makers also pose significant risks to arbitrage traders since they place myriads of sell and buy orders skewing the view of the market and preventing many arbitrage opportunities to ever appear. As more and more CEX platforms engage in market making, the risk of price convergence becomes apparent even to newcomers.
- Manual arbitrage is often an unreliable strategy since the time it takes humans working with user interfaces to place simultaneous orders is often enough for prices to converge leading to financial losses on each placed order. Using a crypto investment bot capable of instantly placing and executing orders is highly recommended.
Earning Passive Income with Staking and Lending Platforms During a Bear Market
While many portfolio protection approaches discussed above are valid and can be incredibly effective when applied correctly, many experts believe that bear markets are too dangerous for investors holding long positions. They encourage retail traders to liquidate their assets locked in long positions and move their money to safer types of investments in the DeFi sector.
Here are some interesting ways to allocate your capital in the crypto industry:
- Earning interest with cryptocurrencies during price downturns. Some DeFi platforms act as banks for users who are willing to provide their tokens for various purposes like procurement of liquidity or financing new startups. Investors usually receive a fixed income on their investments.
- Staking coins for rewards and income generation is another great approach popularized by Ethereum during the last year. While the idea of staking has been around for a while with multiple blockchain networks implementing it, the arrival of the second-biggest token in the market to the staking party pushed this method of investing to the mainstream. Staking can be expensive, but it is a relatively safe investment.
- Using lending platforms for generating passive income in bearish markets. Borrowing reaches it peaks during times of economic downturn. If you have a sizeable portfolio, you can use it to become a lender on one of DeFi platforms that provide such services to their users. Lending is relatively safe since all borrowers have to provide collateral, but it requires you to have a significant capital to receive noticeable profits.
Diversifying Your Portfolio: Exploring Alternative Investment Opportunities Amidst the Crypto Downtrend
We have already touched on the idea of using diversification to protect your portfolio from market volatility. Let’s talk about specific ways to further diversify your investments when the crypto industry experiences a period of stagnation.
- Diversifying a crypto portfolio with stocks or commodities. Some crypto investors experience bad cases of tunnel vision and focus too heavily on buying tokens regardless of whether it makes sense in a volatile global financial market. Some companies are undervalued and can be a perfect addition to your assets and commodities are often overlooked, but a couple of wheat futures can go a long way if you know when to buy them.
- Exploring real estate or precious metals investments during a cryptocurrency decline. A good idea is to focus on assets that have been rock solid for centuries. Real estate is always a good capital allocation simply because you will always have a roof over your head if something goes wrong. While prices of homes and commercial spaces are on the rise, they can dip during tumultuous periods. If you don’t want to deal with the fallout of homeownership crisis in the Western world, take a closer look at gold, silver, and platinum. Precious metals will never lose their value.
- Other alternative investments during a bear market. There are many asset classes that may catch your attention. Putting money in funds of funds, trust management companies, and government bonds can be a good idea in the long run. Using fixed income assets is generally a good strategy if safety if your main concern. These are usually less profitable due to lower returns or management fees, but they do not carry the same risk as putting all your money in Bitcoin or other crypto assets.