Practical Guide to Long and Short Positions Learned from Bitcoin and Ethereum

Understanding the Factors Moving the Cryptocurrency Market

Before learning the basics of cryptocurrency trading, it is important to understand the multiple factors that influence the overall market. Regulatory news, geopolitical events, advances in blockchain technology, investor sentiment—all of these directly impact price fluctuations.

For example, events such as a major exchange facing a crisis, approval of spot cryptocurrency ETFs, statements by political leaders related to Bitcoin, or meme coin surges can shake the entire market and significantly alter traders’ buy and sell decisions.

The supply and demand balance is also a crucial factor. When scarcity increases, prices rise; when supply becomes excessive, prices fall. Without understanding this fundamental principle, you cannot become a successful trader. Technical knowledge, market trend analysis skills, and the ability to identify the value proposition of individual cryptocurrencies are required.

How Long Positions Work and Practical Application

A long position is a strategy where you buy a specific cryptocurrency expecting its value to increase in the future. It is based on the simplest trading principle: “buy low, sell high.”

Let’s look at an example. If you buy Bitcoin at $60,000 and expect it to rise to $65,000, you are taking a long position. If it reaches $65,000 as predicted, you can sell to realize a profit.

The appeal of a long position is that, in theory, the profit potential is unlimited. Since asset prices can rise indefinitely, assuming Bitcoin’s market continues to go up forever, profit opportunities are not limited. However, there is a risk of losses if the price drops.

How Short Positions Work and Strategies

A short position involves borrowing cryptocurrency from a broker and selling it at the current market price, expecting the price to decline. Later, you buy it back at a lower price, return the borrowed amount, and profit from the difference.

For example: If you short Bitcoin at $60,000 and it drops to $55,000, you can buy it back at the lower price. Returning the borrowed Bitcoin, the difference is your profit.

The profit from a short position is limited to the price dropping to zero. In other words, compared to long positions, the maximum profit is capped. At the same time, if an unexpected price increase occurs, losses can theoretically grow infinitely.

Step-by-Step Guide to Executing Long and Short Positions

How to Take a Long Position

1. Choose a Reliable Trading Platform - Select an exchange that handles the cryptocurrencies you need, and complete identity verification and two-factor authentication.
2. Deposit Funds - Deposit fiat currency or cryptocurrencies from your bank transfer or another wallet.
3. Place a Buy Order - Buy the target cryptocurrency at the current market price or set a limit order.
4. Hold and Manage the Position - Monitor market movements and decide when to take profits or cut losses.

How to Execute a Short Position

1. Use a Platform Supporting Short Selling and Margin Trading - Confirm that your account supports margin trading.
2. Borrow Cryptocurrency - Borrow cryptocurrencies from the exchange.
3. Sell the Borrowed Assets - Sell the borrowed cryptocurrencies at the current market price.
4. Buy Back and Return - After the price drops, buy back at a lower price, return the borrowed assets, and realize the profit.

Risks and Rewards of Margin Trading

Margin trading allows you to trade with more than your own capital. For example, if you have $2,000 and borrow $5,000, you can trade with $7,000 worth of assets.

If Bitcoin drops from $10,000 to $8,000, you can buy back 0.7 BTC at $5,600, making a $1,400 profit. Conversely, if it rises to $12,000, buying back 0.7 BTC costs $8,400, resulting in a $1,400 loss. Margin trading amplifies both gains and losses, making it a highly risky method.

Various Trading Strategies Used by Cryptocurrency Traders

Experienced traders combine simple long and short strategies with more complex ones.

Leverage Trading involves borrowing funds to increase investment size and amplify profits, though losses are also magnified.

Futures Trading involves contracts that settle on a specific future date, used for speculation or hedging against price movements.

Hedging is a method to protect existing positions from losses. For example, investors holding Ethereum long-term might short Ethereum futures to hedge against short-term declines.

Options Trading gives the right (not obligation) to buy or sell at a specified price before a certain date. It is effective for protecting against price fluctuations or speculating on future price directions.

The same principles apply to meme coins and altcoins, but it is necessary to carefully consider each asset’s unique characteristics and market environment.

Common strategies for meme coin trading:

• Trend-following: Long during uptrends, short during downtrends
• Reversion trading: Expecting prices to revert to the mean after large swings
• Arbitrage: Exploiting price differences between decentralized and centralized exchanges

Risks Hidden in Long and Short Trading

Pitfalls of Long Positions

Cryptocurrencies can exhibit unpredictable price movements, and sudden drops after purchase can lead to unexpected losses. When using margin, there is a risk of losing all assets during significant declines (liquidation). Additionally, invested funds are locked in, causing opportunity costs by missing other opportunities.

Risks of Short Positions

The biggest threat in short trading is that losses can theoretically grow infinitely. As the price rises, losses increase continuously. Margin calls (additional collateral requirements) may occur, requiring additional funds to maintain the position. Short selling also involves fees and interest, which can eat into profits. Sudden news or market reversals can make it difficult to close positions, increasing risk.

Mindset for Safe Trading

Considering these risks, conduct thorough research before investing. Understanding market trends and only investing what you can afford to lose are essential principles. Grasping the characteristics of long and short positions and choosing strategies aligned with your risk tolerance are fundamental to generating sustainable profits in the cryptocurrency market.