IS IT UNETHICAL TO SHORT CRYPTO?
In my early days as a crypto enthusiast, one of the first things I learned was that if sellers refuse to sell at lower prices, the price will go up. It was a horrible bear season and asked; why not just raise all sell orders to $100k so bitcoin can get to $100k already? Why do we have to suffer a bear season?
Until I realized that legends were making a bank with prices going lower! Not only that; there were a lot of factors controlling prices.
At some point, I felt it was really unethical! How can you make money at the detriment of investors who want the price to go up?
Scratch that! Traders care about money – so do investors. If money can be made from pushing down the price of an asset, who can justify that it is unethical?
This brings us to the concept of shorting.
Shorting/ short selling simply means selling an asset with the intention to buy back at lower prices. Traders short in order to make money when the price of an asset is going down. This is most profitable in bear seasons of any market cycle.
Shorting is very common in the financial markets – be it stocks, commodities, forex, or crypto. Both retail traders and professional trading firms like hedge funds make use of this strategy to make a killing. You could do this with margin, futures, or options trading.
By entering a short position, you’re anticipating that the price of the asset will go down. This can be seen as betting against an asset instead of for it. If the prices go down, you make money, but if it begins to go up, you lose money instead. This is why trading with a stop-loss can never be over-emphasized.
When you short-sell an asset and the price starts going up, you have two options: cut your losses quickly or wait for the price to come back down to/below your entry price so you can take profit.
Cutting your losses early helps you prevent potential disastrous effects the current market trend may have on your capital. Also, considering that results from this form of trading can be amplified using leverage.
Traders short an asset when they think it is currently trading above more than what it is actually worth; this means that the asset has been overbought. One good indicator for checking overbought/oversold price levels is the Relative Strength Index (RSI); although your decision should not be based on just a single indicator.
In trading, the opposite of shorting is longing. You enter a long position on an asset when you anticipate that the price is going to increase.
As mentioned earlier, results can be amplified with leverage. However, traders (especially new traders) must be careful about playing with leverage. This is because using higher leverage increases your profit margin by far while increasing your chances of getting liquidated (losing your entire capital). Most cryptocurrency derivatives exchanges offer leverage of up to 100X which can be tempting for undisciplined traders.
Instead of sitting out and waiting for a prolonged bear season to be over before you can rebuy, skilled traders can short their favorite assets all the way down and still make profit.
Meanwhile, do you think shorting is in any way unethical? Won’t the market be feared as a bubble if it just keeps going up?
You can leave your thoughts in the comments!