The cryptocurrency market is extremely volatile, making it difficult for serious investors who are accustomed to holding onto assets and watching their wealth grow put money into any given cryptocurrency. Fortunately, it is also possible to benefit from decreasing cryptocurrency prices, which can be done with Inverse Crypto Traded Indices (CTIs). In this article, we will explore the strategy of shorting the market and how you can do so with inverse CTIs. Let’s dive in, and Merry Christmas to all crypto bears! 🐻
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What Is “Shorting the Market”?
Shorting the market is a term that refers to the practice of waging or betting on the price of a given cryptocurrency crashing. Holding this belief, you wage or bet that the market will crash with another person and borrow a given amount of the cryptocurrency from them. After the market crashes, you will only have to purchase back the same amount of cryptocurrency that you borrowed, which will then be significantly less than the initial amount that was given to you and you will make a profit off of the bet or wager. For example, let’s say that you borrow a Bitcoin from a friend today (which is priced at around $4,000 at the time of writing) and it drops down to around $1,000. All you have to do is give back a bit of the money you received and you made a $3,000 profit by doing little work. You can do this with a friend, using prediction markets, or even by conducting margin trading.
How Can You Short Cryptocurrencies?
- Margin Trading: Margin trades allowing for investors to “borrow” money from a broker in order to make a trade. Margin Trading is available on multiple cryptocurrency exchanges, however interests and be costly and losses uncapped.
- Futures Market: Bitcoin, like other assets, has a futures market. In a futures trade, a buyer agrees to purchase a security with a contract which specifies when and at what price the security will be sold. If you sell a futures contract, it suggests a bearish mindset and a prediction that bitcoin will decline in price. Futures are available through CME and CBOE, but the minimum investment is quite high for retail investors.
- Prediction Markets: These markets allow investors to create an event to make a wager based on the outcome. An investor can, for instance, predict that Bitcoin will decline by a certain percentage, and if anyone takes the bet, stands to profit if the outcome passes.
- Inverse Crypto Traded Indices: Inverse Crypto Traded Indices are an innovation being developed by Trakx to allow any investor, retail or institutional, to easily bet on a decline of cryptocurrency prices. Inverse CTIs are token that inversely replicate the performance of their underlying benchmark.
What Are Inverse Crypto Traded Indices and How Can You Use Them for This Purpose?
Trakx.io extends the range of available cryptocurrency shorting solutions through Inverse CTIs. These enable to profit from a decline in the value of the underlying benchmark.
Investing in Inverse CTIs is rather straightforward: If a trader is bearish on a particular cryptocurrency (or basket) or wants to hedge a long position on another cryptocurrency or basket of cryptocurrencies, he or she simply buys the corresponding CTI. When the trader believes that the downturn has run its course, he or she will simply sell the CTI to unwind the position.
Inverse CTIs move in the opposite direction of the underlying asset. For illustration purposes, if Bitcoin declines by 10% in a given day, the Inverse Bitcoin CTI will gain approximately 10% the same day. Intended to provide the inverse return on a daily basis, Inverse CTIs enable investors to quickly and easily take advantage of falling underlying assets’ prices. Assuming that investors pay for the position outright (no leverage), their loss is also capped at the amount invested, since the price of the CTI cannot drop below zero. Levered Inverse CTIs will also be available, offering traders the possibility to magnify their exposure to particular cryptocurrencies.
Users, by taking short positions on chosen cryptocurrencies, will benefit from declining prices (should they decline) or reduce their market exposure to certain assets. They can also isolate the excess performance (Alpha) of their investments against selected cryptocurrencies, market indexes or benchmarks.
Below is an illustration of what could have happened for an investor who would have bought an Inverse BTC Crypto Traded Indice in January 2018.
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Trakx is building a one-stop shop for Crypto Traded Indices. Discover more about our project on our website and social media channels, such as Telegram http://t.me/trakx_io.
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