Short the newly listed coin is good strategy?
Shorting newly listed coins: A high-risk strategy with potential for significant returns
Cryptocurrency traders are always on the lookout for strategies that can yield substantial profits in the volatile digital asset market. One such approach that has gained attention is shorting newly listed coins. But is this really a good strategy? Let's dive into the details and examine the potential benefits and risks.
The allure of shorting new listings
When a cryptocurrency is newly listed on a major exchange, it often experiences significant price volatility. This volatility can create opportunities for traders who are willing to take on substantial risk. The strategy of shorting newly listed coins is based on the expectation that the initial hype and price surge will be followed by a correction (Hasso et al., 2019).
One trader reported achieving an impressive 300% Annual Percentage Rate (APR) by consistently shorting coins during listing and delisting events on major exchanges like Binance, Huobi, OKex, Bybit, and Coinbase (Not_Allowed, n.d.). This trader's approach involves monitoring news about new listings or delistings, checking for short-selling availability through futures contracts or margin trading, and then executing short positions at the highest price in the current range.
The mechanics of shorting cryptocurrency
Shorting cryptocurrency works similarly to shorting stocks. Peter Eberle, president and chief investment officer of Castle Funds, explains: "You essentially borrow the asset from someone and sell it. You then buy it back some time in the future and return the borrowed assets. If the idea [in traditional trading] is to buy low and sell high, shorting is just reversing the order — sell high, then buy it back lower" (Eberle, n.d.).
There are several ways to short cryptocurrencies:
- Margin trading
- Futures contracts
- Options trading
- Contracts for difference (CFDs)
Each method has its own complexities and risk profiles, requiring a deep understanding of both the cryptocurrency market and derivative financial instruments.
The risks: A double-edged sword
While the potential for high returns is enticing, shorting newly listed coins comes with significant risks. Cryptocurrency markets are notoriously volatile and largely unregulated, making them particularly dangerous for short sellers.
Unlimited loss potential
Unlike going long, where your maximum loss is limited to your initial investment, shorting has theoretically unlimited loss potential. If the price of the shorted asset rises instead of falls, losses can quickly spiral out of control.
Margin calls and liquidation
When shorting on margin, traders risk facing margin calls or having their positions liquidated if the market moves against them. This can result in substantial losses and may even leave traders in debt to the exchange.
Regulatory and platform risks
The lack of comprehensive regulation in the cryptocurrency space adds another layer of risk. Exchanges may suddenly change their policies or face regulatory crackdowns, potentially affecting open short positions.
Expert opinions: Proceed with caution
Many experts warn that shorting cryptocurrencies, especially newly listed ones, is not a strategy for the faint of heart or the inexperienced trader. As one industry professional puts it, "Unless you're an absolute expert on that particular crypto that you're shorting, I would steer clear of it. It's not a game for amateurs" (Fidelman, n.d.).
Gabriella Kusz, CEO of the Global Digital Asset and Cryptocurrency Association, acknowledges that shorting can have benefits for financial markets, such as enhancing liquidity and increasing price efficiency. However, she also emphasizes that this doesn't necessarily mean it's suitable for individual investors (Kusz, n.d.).
Alternative strategies to consider
For those intrigued by the potential of profiting from cryptocurrency price movements but wary of the risks associated with shorting, there are alternative strategies to consider:
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Long-term investing: Focus on researching and investing in cryptocurrencies with strong fundamentals and long-term potential.
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Dollar-cost averaging: Regularly invest small amounts to reduce the impact of volatility on your overall investment.
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Diversification: Spread investments across multiple cryptocurrencies and other asset classes to manage risk.
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Staking and yield farming: Participate in proof-of-stake networks or decentralized finance (DeFi) protocols to earn passive income on your cryptocurrency holdings.
Conclusion
Shorting newly listed coins can be a lucrative strategy for experienced traders with a high risk tolerance and deep understanding of the cryptocurrency market. However, it's crucial to recognize the significant risks involved, including the potential for unlimited losses and the highly volatile nature of newly listed assets.
For most investors, especially those new to cryptocurrency trading, more conservative strategies that focus on long-term growth and risk management may be more appropriate. As with any investment decision, thorough research, careful risk assessment, and a clear understanding of your own financial goals and risk tolerance are essential before engaging in any cryptocurrency trading strategy.
Not_Allowed. (n.d.). Strategy short selling coins during listing/delisting news 300% APR. Medium.