Bitcoin has had a bad year so far. But traders who knew how to successfully short bitcoin and other cryptos on the way down have done rather well. In this article, we’ll explore the concept of shorting crypto further.
Disclaimer: shorting is risky—especially with volatile assets. Personally, I would only ‘go short’ if I have a strong conviction that the price will go down. As always none of this is investment advice, it’s for information and education only.
In this series of Technical Analysis 101, we explore one of the most commonly used technical trading indicators: the Relative Strength Index (RSI).
The RSI is a momentum indicator that can be used to show whether an investment approaching overbought (sell signal) or oversold (buy signal) territory.
To be a successful trader or investor you need to manage your risk. One of the most important risk management tools in trading is the Stop Loss. In this post, we’ll explore the Stop Loss in more detail.
This post gives a fairly detailed overview of the Bitcoin system. I have taken the content from chapter two of The Crypto Portfolio.
Bitcoin was the first blockchain based cryptocurrency. It was also the second most searched term in Google in the Global News category in 2017—right behind Hurricane Irma. On that note, I’m guessing you already know a bit about Bitcoin, so I hope this post adds to your knowledge in some way.
Bitcoin is two things:
- A digital form of money that people can use to buy stuff with (bitcoin with a small ‘b’).
- A system that supports the use of that digital money (Bitcoin with a big ‘B’).
There are many ways to trade or invest in bitcoin. In this post, I’ll explain how bitcoin futures contracts work.
What are futures contracts?
A futures contract is essentially a forward contract that can be bought or sold on an exchange.
A forward contract is an agreement to buy or sell X amount of an asset at price X in the future. This allows people to “lock in” a buy or sell price of an asset in the future to protect them from the risk of an unfavourable price change. The example in the box below explains this concept in more detail:
Forward Contracts: the wheat farmer and the baker
A wheat farmer sells wheat to a baker at the end of the wheat harvesting season. The baker uses the wheat to make bread. The price of wheat at the end of the harvest season affects the wheat farmer and the baker differently:
- If wheat is cheap in the future, the farmer loses out when he sells it to the baker. The baker wins because he can buy the wheat cheaply from the farmer.
- If wheat is expensive in the future, the farmer makes more money when he sells it to the baker. The baker loses out because he has to buy wheat at the higher price.
In this case, wheat is the underlying commodity. Its price fluctuates up and down all the time, yet the bakers’ bread stays the same price all year. This is made possible through forward contracts.
Say the baker wants to buy 10 bushels of wheat from the farmer in two months time. He could enter into a forward contract with the farmer to buy those 10 bushels of wheat at a price they both think is fair. Now the farmer and the baker have “locked in” the price of their future business deal.
So that’s the basic idea behind a forward contract—the baker and the farmer are hedging price risk.