When I am unsure whether a coin/stock will go down or up I usually take a small short position on my own investment to protect it.
Let’s say you own 500 ETH that just went up to $40. The market is stable for now and you have no idea what will happen next. You don’t want to sell any of the 500 ETH because you think it will go up more but you also would hate it if it would crash back to $20.
In these situations, you can consider shorting your own investment.
Shorting works pretty simply.
You lend 100 ETH (I do this on the Kraken exchange) and pay a small fee. You sell the ETH instantly for $40 each. If the price of the ETH goes down to $25 you buy the ETH back and you return the ETH to the lender. The $15 price difference is your profit. In this case 100x$15 = $1500,-
If the price goes up to $65 you are forced to buy back the ETH for a higher price. Your loss is 100x$25 = $2500,-
Why I like going short
There are times you just don’t want to sell your assets. You think the markets will probably go up but you are not 100% sure. A small short position gives me peace of mind. If the markets crash at least I’ll have some extra profits to cover my losses. And if the market goes up further I still make a profit but just a little less.
I took a small short position on 20 ETH this morning for €40, It's 20 euro in the minus because ETH went up to €41.
Naked short
Because I own the underlying assets that I short, I never have to worry about not being able to pay up in case the price skyrockets. If need be I can just sell some ETH to cover the losses on the short position.
Naked short is how people lose their house. It means the exact same thing as described above the difference is you don’t own the underlying asset.
Example
You don’t own ETH. You lend 100 ETH and sell them at $50 each because you think the price will go down. The opposite happens instead and the price goes up to $700. You must now cover the loss. 100x $650 = $65,000.
But because you don’t own any ETH yourself you can’t sell your own ETH to cover the loss. It must come from your own pocket. This is how people get wrecked.
Never go naked short if you don’t know what you are doing. Your losses can be huge!
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