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Trading Strategies When Bitcoin Goes Down - A Short Guide

Estimated reading: 5 mins

Trading Strategies When Bitcoin Goes Down - A Short Guide

As we all know, the cryptocurrency market is incredibly volatile. One day, a currency might be soaring to previously unheard heights, and the next, it could be worth almost nothing. This volatility makes it difficult to predict when to invest and how to make profits from the market fluctuations. However, there are a few trading strategies you can use when the value of Bitcoin goes down that can help you make money even in the toughest of markets. This article will discuss some of these strategies and explain how they work.

 

What Determines the Price of Bitcoin?

Before discussing the different trading strategies that can be used when the price of Bitcoin drops, it is important to understand what determines its worth in the first place. Since many cryptocurrencies are not backed by physical assets like gold or silver, their prices are determined by supply and demand. When more people buy a cryptocurrency, the price goes up. The inverse is also true, so when the demand drops, so does the price.

This is why it is vital to keep an eye on news and events that could affect the supply or demand of a particular currency. For example, if there is positive news about a cryptocurrency, such as a new partnership or product release, this could increase demand and cause the price to go up. Alternatively, suppose there is negative news about a cryptocurrency, such as a security breach or regulatory crackdown. In that case, this could lead to a decrease in demand and cause the price to drop.

How Do Cryptocurrencies Have Value

 

Bitcoin Price History

When it comes to Bitcoin, things haven't always looked so rosy. The currency has had several dramatic price swings over the years. Let's look at some of the most significant changes in Bitcoin price history (in USD).

  • In June 2011, Bitcoin reached a high of $31.91 but crashed to a low of $2.05 by mid-November. The following year, this cryptocurrency saw a massive rally, reaching a high of $13.50 by mid-August.
  • In 2017, the price of Bitcoin floated at around $1,000 until May, when it almost doubled. This was only a taste of things to come, though: by December 15, it reached the then-high of $19,345.49.
  • Bitcoin welcomed 2020 with a $6,965.72 price tag. The global COVID-19 pandemic actually helped Bitcoin and other major cryptocurrencies: by November 2020, its trading value jumped to $19,157.16.
  • At the time of writing this article, Bitcoin's value is estimated at $46,630.17, and its value is still rising.

 

The Benefits of Bitcoin Trading

Despite the risks, there are several benefits to trading Bitcoin.

Firstly, it is a very volatile market, which means that there is the potential to make a lot of money if you can predict future price movements correctly.

It is also a very liquid market, which means that you can buy and sell Bitcoin easily without waiting for a buyer or seller - just use a retailer who’s always buying and selling, such as BitPrime, for instance.

Finally, Bitcoin is a global currency accepted in many places worldwide. Nowadays, even traditional banks are getting into the cryptocurrency game and offering various services involving digital assets.

 

bitcoin trading strategies

The Risks of Investing in Bitcoin

Although there are many benefits of investing in Bitcoin and other cryptocurrencies, a few risks should be considered.

A major one is that the price could drop at any time, causing you to lose money (if you were to lock that loss in by selling at such a time). Additionally, cryptocurrencies are still relatively new and unproven, and considering most are not backed by any real-world assets, owning them does represent a measure of risk.

Another thing you should keep in mind, especially when trading, is the market’s volatility. Because the prices can change rapidly, you could gain or lose a lot of money in a short period.

 

Bitcoin Trading Strategies: How to Profit When Bitcoin Price Goes Down

Now that we have a basic understanding of how things work and what affects the price of cryptocurrencies such as Bitcoin, we can discuss different trading strategies that can be used when their price goes down.

 

Short Selling

Short selling is one of the most popular strategies to turn to when the price of Bitcoin goes down. It is a scenario in which you borrow a currency from somebody else and sell it immediately, hoping to repurchase it at a lower price and return it to the original owner.

For example, let's say that you think the price of Bitcoin is going to drop soon. You could borrow some Bitcoin from a broker for a short period, sell it immediately, and hope to repurchase it at a lower price. If the price does drop, you’ll make a profit! However, if the price goes up, you will have to repurchase the cryptocurrency back at a higher price and probably lose some money.
As rewarding as it can be, this is a high-risk strategy that only experienced traders should use.

 

Hedging

Another strategy you can use when the price of Bitcoin goes down is hedging. This technique allows you to buy and sell different assets simultaneously to reduce your risk. For example, you could buy some Bitcoin while selling some futures contracts for the cryptocurrency. This way, if the price of Bitcoin goes down, you will make money from the traded futures contracts. However, if the price goes up, you will gain money from your Bitcoin investment.

This is a less risky strategy than shorting, but it’s also one where you’ll have lower gains. Depending on the results, you could still lose money or make less of a profit compared to short selling, but it’s also a great safety net for highly volatile investments such as cryptocurrencies.

 

Taking a Break

When the market is volatile and prices are changing rapidly, it can be challenging to make money. It may be better to take a break and wait for the market to calm down before trying again in these situations.

This doesn't mean you should give up on cryptocurrency altogether, but rather that you should take a step back and analyse what is happening before making any big decisions. Having a long-term goal and strategy is essential to avoid getting too discouraged when things inevitably hit a rough patch.

 

Final Thoughts

Although the price of Bitcoin and other cryptocurrencies can be unpredictable, there are many bitcoin trading strategies you can use to profit even when it goes down. Keep in mind the risks involved with trading and only use methods you are comfortable with. Do your research, stay informed about news and events, and have a plan for when things go wrong.

 


About the author:

Ilija Acimovic is predominately a researcher, someone who likes to dig deep, and finds connections between different insights. Currently contributing to Fortunly, he dwells on all topics related to crypto, tech and finance.

Disclaimer:

The above references an opinion and is for informational purposes only. Do not take this as personalised financial advice or investment advice. The views expressed by the author do not necessarily represent the opinion of BitPrime.

 

Last updated: 13/04/2022

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