As a novice Bitcoin trader, it may seem logical to think that long and short trades are pretty much equivalent. You decide if you think price is going up or down, and long or short it accordingly, right?
But that ignores the asymmetrical nature of the two options, as Scott Melker, a trader at TxWestCapital tweeted yesterday. Even a short from all-time high to bottom was less profitable than a long from that bottom back up to $6.5k.
And of course, even that isn’t the whole story.
Asymmetrical Nature Of Bitcoin Shorts And Longs
The first thing to consider is that short and long trades are not equal in every respect. For simplicity, let’s look at a starting bitcoin price of $5k.
Now sure, you can choose to either short or long that price, and if the price goes down (or up), say $500, then you get a tidy 10% dollar profit, on either option.
But you aren’t content with 10%. You want to double your money, which means if you are shorting, Bitcoin price needs to drop to zero, and at that point you hit a limit. If you are going long, however, then price has to rise to $10k, from which point it can keep going and further increase returns.
This is why a short from the top of the market to the bottom (around $20k to $3200, or 84%) would have netted you less profit than a long from $3200 back to $6500 (103%). If you consider the (currently hypothetical) long from bottom back to $20k, then you are looking at 525% profit.
Dollar Profit Versus Satoshis
As pointed out in some of the replies to Melker’s original tweet, however, this doesn’t tell the whole story.
Whilst the dollar profit in the above example is certainly greater for the long option than the short, a successful short ends with a lower bitcoin price, hence your profit would be substantially more in terms of bitcoin. 84% of $20k would buy 5.25 bitcoin at $3200, whereas 525% of $3200 would only buy you 0.84 bitcoin at $20k.
So if you held the gains in bitcoin then the potential profit (after another swing in price) favours an initial short… and that’s before you even start looking at leverage.
But Melker does state that “Shorting can be massively profitable when well timed and managed by a professional trader.” However, for the majority of us, it is far easier to buy a dip and hold in a generally upwards trending market.
So at $8k, bitcoin has far more potential to the upside than the down.
Do you agree that Bitcoin has a better upside potential at $8,000? Add your thoughts below!
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