Shorting cryptocurrencies may seem like a good idea at first glance. After all, you can make money when cryptocurrency prices go down. However, there are several factors that investors need to consider before they short a digital currency.
Bitcoin has been among the top digital currencies, and many prefer to short bitcoin. But is it worth it? Before you decide on any of this, here are some things you should learn:
The lack of regulation is one of the most concerning aspects of digital currencies. Without rules governing the market, it’s challenging to determine what factors are influencing the value of cryptocurrencies and how much they will be worth in the future. If there was an easier way for investors to track their investments and receive a more accurate picture of where cryptocurrency prices are going, shorting digital currencies would be much easier.
The high volatility
Volatility is the movement in the price of a security or asset over time. This can be both a risk and an opportunity for short sellers: it’s risky because there’s no guarantee that your short position will turn out profitable, but if you’re a trader who wants to make money, volatility can work in your favor.
When you buy shares, you are betting their value will increase over time. But when you sell them before maturity at higher prices than their original price, this is known as scalping.
SoFi experts explain, “Yes, there are a few different ways that an investor can choose to short Bitcoin. Generally, the idea behind shorting is that you would borrow a certain amount of bitcoins and sell them at their current price. Then in the future, you’d purchase bitcoins to repay the loan—at which point, ideally, the price would have dropped, so you’d be paying back the loan with bitcoins that were cheaper than the ones you borrowed.”
The lack of a global consensus
The lack of a global consensus, the absence of regulation, and the high volatility are some significant factors that could affect your investment decisions in this market. However, security concerns exist due to how users store digital currencies.
With any new technology, security concerns are always a possibility. It’s important to remember that cryptocurrencies are still in their infancy and have had their fair share of security issues. It’s not uncommon for some exchanges to store user funds on wallets that aren’t encrypted or secure by design, a potential breach that can lead to hackers stealing your coins before you even get them.
It is better that you do your research while choosing which exchange or wallet service you’ll use to avoid such situations from occurring. It would be best if you looked into the background of any company or person offering products or services related to cryptocurrency, so you know they’re reputable and stable enough for your needs.
Immaturity of the market
In addition to the above mentioned concerns, you should also keep in mind that this market is immature. It has very little regulation, and its volatility can be extreme, to put it mildly. Shorting digital currencies is a risky investment strategy that not everyone should pursue.
When shorting digital currencies, you must ensure that you do it right. This means researching the market and understanding what makes an excellent short. If you follow these tips, your chances of making money are much greater.