A Leveraged Short position in crypto entails selling a borrowed digital asset with the expectation that its price will decline, allowing the trader to repurchase it at a lower price and return it to the lender, profiting from the difference. Leverage amplifies both potential gains and losses through the use of borrowed capital.
Mechanism
This position is executed by borrowing a cryptocurrency from a lending pool or broker, immediately selling it on the open market, and holding the proceeds. A margin account serves as collateral. If the asset’s price falls, the trader buys it back for less, repays the loan, and retains the excess. Conversely, a price rise triggers margin calls or liquidation.
Methodology
Traders employ a Leveraged Short strategy to capitalize on bearish market views or to hedge existing long positions. This methodology requires rigorous risk management, including setting stop-loss orders and monitoring collateralization ratios, due to the unbounded loss potential in a rapidly appreciating asset.
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