Crypto - shorting in the bearish market cycle
Updated: May 23, 2021
Just like any innovative market sector or asset class, the crypto tends to move in strong volatile cycles where impulsive bull markets follow the prolonged bear markets, and those bull markets cyclically then cool off or, in usual cases, crash quickly back into the prolonged cold market phase.
Those hot and cold extremes of market phases are common for innovative technology asset classes such as cryptocurrencies, but it is common for many traders or investors to be lacking the needed historical research to prepare ahead for when the market might shift into a bearish phase, or even more important, how to benefit from a bear market or to preserve the capital made in bullish market stages.
Typically beginner traders or investors keep buying until their margin runs out and at some point, such beginner is likely to become bagholders at the peak of the bull market once their ever-green long method suddenly no longer works.
Or on the other hand, a typical perma-bear with the opinion that cryptocurrencies are worthless is often shouting about how if shorting would be possible, everyone would have done it. Yet shorting is possible (bit more difficult for US residents), but most such individuals (perma-bears) are just not informed or certain enough into their thesis to place short bets.
The reality is traders are either unprepared, under-researched or just have no conviction to place the short bet when the time is right, everything else will mostly be just an excuse.
Typical participant or observer is not well prepared for the bearish phase of the crypto market, mostly because of lack of research, above all the other reasons. Experience of going through bullish and bearish market phase has as well important advantages, but speaking from my personal experience, that is not enough. If one does not put the live gathered experience into a proper researched historical context, there won't be many lessons learned.
Mind that, just because you observe the market live, it does not mean necessarily that practical lessons are being collected, to achieve that the short-term lesson has to be placed into long term context first, to be validated or disqualified as the proper action to be replicated (for which research is a must). And often, this is why many crypto investors are like a sailboat gliding through the market phases and cycles without actually implementing the lessons that the market throws at them when that same market cycle repeats, especially the bearish cycle. In the bullish cycle, people tend to absorb lessons quicker and implement the solutions. Still, for some reason, many bullish-biased traders who are well researched on the technology side of the industry have a difficult time extracting the edge in a bearish market. Some tend to just shift their holdings into Bitcoin, which might be the first basic and potentially easiest steps to take (to preserve the capital better than being stored in altcoins), but that caps the opportunity by a lot. It is one thing to preserve your wealth, and it is another to duplicate it within such a bearish cycle.
However with everything said above, do not underestimate the power of the lessons you collect just by seeing and surviving the bull and bear market cycle. As the cycle repeats next time, chances are you will be much better prepared ahead. Sure many mistakes will still be repeated, but many critical ones will not. It is not to underestimate how important it is just to see the market go through both stages in your trading or investing career. The more you limit the damage of your initial mistakes and too-dollar-hungry actions and spare as much capital for your "another-go" 3 years later, the more you might positively leverage the power of lessons in your next opportunity.
This article will very roughly give pointers on where an individual should focus if one wants to extract the edge from the bearish cycle of the crypto market. Building conviction will still be completely in the hands of the individual as extensive research is a must (especially for less experienced traders and investors) since the article is only giving the key focus points but not a complete recipe on how to do it. The focus of the article is strictly on the shorting aspect of the cryptocurrency bearish cycle.
Using the right exchanges (US and non-US residents)
To clarify ahead, there are many platforms and exchanges that allow shorting cryptocurrencies, however, the ease of use can warry a lot as well as capital safety. Usually, the strongest and biggest exchanges have the easiest access to shorting, while the smallest exchanges are often more complicated and less straightforward. Bigger exchanges as well provide traders with higher leverage and lower borrowing fees, and protection against non-liquid big whipsaw moves which could be dangerous on low liquid exchanges if one is short.
My personal preference is to use Binance or Bybit to short the crypto for these above outlined reasons. Traders can choose between futures instruments or margin shorting of spot-crypto trading to short. Futures are a lot more straightforward and easier to use, would highly recommend starting with those, however, there is one major limitation which is that there is only a limited amount of crypto assets that trade with futures, the majority do not and have the only margin shorting of spot trading as allowed access.
It should be noted that when it comes to shorting the crypto, the process complicates more for US residents as the regulation is stricter. This means less leverage and less access to shorting brokers or exchanges for US residents.
Some decent higher liquid exchanges to choose for shorting: Bybit, Binance, Bitmex.
An additional option is as well Forex brokers which allow the use of CFD instruments, where traders can short the crypto assets with such an approach, however, most of such platforms are limited only to the top 5 crypto coins, therefore limited in the asset pool.
Average bull/bear cycle duration
When it comes to trading the crypto identifying the cycles correctly is perhaps one of the most important aspects that trader has to get right. Missing this or identifying the cycle incorrectly will lead to prolonged losses and eventually a capital dry out most likely.
Shorting innovative sectors with swing positions or shorting intraday in a bullish cycle is just a complete no-no for beginners and in many cases even for experienced traders. . To short successfully, one should first have a good grip on each bull and bear cycle; to estimate and approximate that correctly, a historical context and research has to be used. There are no guarantees when it comes to correctly identify the current cycle if the cycle has not been already firmly formed by 6 months of sustained move; however, the only way to approximate it is by using historical behavior in first place. This means that if the current cycle shift only lasts for 2 months, chances still might be that the new cycle has not yet fully taken place as it might just be a pullback and the only actual way to confirm that would be a period of 6 months of such repeatable behavior. But since trading is never about guarantees, that does not really qualify as a realistic counter-argument, which means that trader will have to use certain estimation when it comes to that, as by the time that when cycle truly confirms as shifted (from bull to bear), it might be already too late, as the majority of best shorting opportunities will already be gone. Being early into the cycle is just as important as avoiding being late in the cycle for grabbing the best opportunities or avoiding large losses.
Or to present the concept on cycle adaptation with using this image:
The image above outlines two different identification points for cycle shift and the advantage/disadvantage of using either shift confirmation. Being early would provide a much better RR on shorting. However, it can result in being still caught in a bull trend and need to cut the losses on cycle resumption while being late would potentially avoid being caught in the wrong cycle, but the best RR opportunities would be missed in such case. The key critical component is to increase the probability of cycle shift using the additional confirmations of behaviors that are not specifically related to just price action but go beyond that. The fundamentals, the overall hype present in social media, the correlations of optimism for Bitcoin price estimates from masses between 2017s and the current bull cycle, the influx ratios of new traders....., and comparing the ratios to previous cycles. The more data that one uses, the less likely one is to be caught under the wrong cycle; however, the data has to be meaningful. Using tons of un-effective data will not provide any meaningful clues; the data must be obvious and distinctive in how it behaves or stands out in bullish versus bearish cycles. It should have been present in at least one cycle but ideally two or three.
One of the challenging issues for less-experienced traders is to tell the difference between meaningful and non-meaningful information. Is knowing that a major institution has bought 50.000 Bitcoins significant info while 2. the current bullish trend has lasted for four weeks less meaningful? If so, how to tell which is which, or which one is more impactful and which is less, since one often cannot isolate the price reactions to specific news or information.
Identifying the cycle sustainability is not about picking a specific single news case and making an informed decision on how that info/catalyst might impact the cycle. Identifying the cycles are about the ability for a trader to absorb a large amount of news and information and knowing how to piece them all together as a potential indication of how much more fuel or how little fuel the cycle might still have. There are no shortcuts to knowing that, other than experiencing the market cycles from the front row, sort to speak. A common mistake that many make is they try to isolate a single news piece as the start or the end of a new cycle, it almost never is that easy.
Identifying the shifts of the cycle is about the realistic weighting of the left and right side, and placing the pieces (many of them) of the puzzle within the right context:
Let's return to the main component mentioned above, which trader has to study and keep well in mind, the length of each cycle historically, and how the cycles expand in their time durations as the whole crypto market matures.
Basic data guide:
-Each bull and bear cycle expands by a factor of 1.5X (in duration/length) very roughly after each new cycle.
-Bull cycles are shorter in duration, while bear cycles last longer (however, the ratio will largely depend on where trader starts to count the start/end of each cycle).
-Last bull cycle length was 1 year (2017-2018), and the bear cycle length was 2 years (2018s-the 2020s).
However, it is essential to use the above data only as a rough guide and not get too close to it. By no means, this data guarantees how long the current cycle should last to replicate the previous last two cycles. Even with applying the average cycle stretch ratio of 1.5X since 2009 in crypto, the current cycle could still perform quite differently overall.
Therefore, it is essential to fit more guides than just cycle lengths to estimate where the cycle might shift, which has been mentioned before. It is a frequent mistake where investors tend to pull macro charts and expect the current cycle to repeat precisely like the last cycle regarding how long it should last to time their entries and exits. If you applied such an approach to SP500 over the past 20 years, you would likely have made some significant miscalculations (plus-minus three to five years). It's essential to know how to weigh pluses and minuses well in markets to estimate as accurately as possible, never just focus on a single data point to extrapolate the opinion.
Below is SP500 / SPY example to illustrate the point above:
High-risk-projects frenzy at the top of each bull market cycle
To position well in the crypto market in any phase, it is important to understand the capital flows between high-risk and low-risk projects/assets in each market's cycle. This does not apply only to crypto itself but any market in existence, especially innovative sectors with high growth rates. The basic premise being the difference on how the capital positions or shifts in each cycle:
-Low risk asset flows under bearish market cycle:
Once the market shifts towards the bearish phase, the capital will start to leave high-risk projects. Those of the most promising, revolutionary, or innovative projects are usually riskier as their chances of failure or just under-delivery are that much higher. And in overall market conditions where the capital is flying out, the capital that remains present from the highest capitalized holders/players will eventually start slowly shifting out of high-risk projects into low-risk projects/assets. This creates an environment where the highest-ranked assets and those with highest market capitalizations will keep outperforming those with lower market capitalizations as the capital will shift towards where the long-term value hold is, the safety. The most obvious such asset in the crypto market is Bitcoin, so there is no surprise why under a bearish market, the Bitcoins dominance increases while the altcoins dominance factor fall.
-High risk asset flows under bullish market cycle:
When the outside capital keeps flowing into the market, it distributes from lower-risk assets into higher-risk assets (where reward is potentially bigger), especially with those sitting at decent capital gains will be more prone to take some of the additional risks, and the newcomers to the market are often attracted to riskier assets as well as those provide higher potential returns. This creates conditions where the more the macro bullish cycle extends, the more such behavior will get exaggerated, to the point where it usually becomes the most obvious and at extreme ratios at the peak of the bullish cycle, where the key safest assets do not move anywhere but any tiniest and riskiest assets keep ballooning at 100s of % daily. This is important behavior to observe, especially when it starts to stretch at very abnormal peace; it is likely to signal the topping conditions. This again does not apply just to crypto historically. Instead, it has been present in many other markets, such as the 2000s internet boom-bust, 2007 housing bust, and others.
How to use high-risk asset flows as potential determination of broad market-topping
The key is to be accurate in identifying the real difference in the disconnect between the main market index and the risky high-growth assets. It is not enough to say, "oh, this asset is up 300% against a key market index. Therefore we are in the stretched territory", which is a too oversimplified view. It has to be done from broad market assets comparison; there have to be hundreds and hundreds of such assets that cumulatively all exceed at valuation at many times versus the key market index (Bitcoin) over the span of last three months. To point this out with the image example below, the difference between high-risk ERC20 (Ethereum) tokens versus the main market index asset (Bitcoin) on the image below.
Notice how near the peak of each bull cycle the inflows of Ethereum tokens and high growth-risky projects pick up at parabolic peace against Bitcoin. This behavior is present near the tops of all such tech sector bubbles, where the inflows into risky assets will outpace the inflows broad market index by large factor, which soon, later on, will be the actual topping of the broad market. Use those inflows as one of the confirmation factors of potential market top, however as stated "one of confirmations", not a "final confirmation".
Also, keep one aspect in mind, when actual topping starts taking place, there will be a conflicting signal if the trader tries to isolate the view only on one particular side (high or low-risk assets). At the actual topping, there will be the biggest disconnect in price behavior between high-risk assets and key index (Bitcoin) due to all the conditions explained above and how the capital flows are exaggerated right at the peak of the cycle. This means that the main (low risk) index will most likely be already turning south, while the high-risk assets will be ramping at full speed ahead. If one does not accurately take the above explanations under the correct context, it is easy to come to the wrong conclusion; make sure that you place such behavior under the right context; looking at only one side of the equation will likely leave the observer confused.
With other words, Bitcoin will already be turning south first before the rest of the high-risk altcoins follow.
Bitcoin dominance chart:
As the chart above demonstrates, it concludes the points explained above on how the capital shifts inside the sector/market between higher or lower risk assets, depending on the cycle that the market is in. One can study the same behavior under crisis events or the peaks of bullish cycles in equity markets; the same dominance exchange between such assets will take place.
The reasons why this dominance shift happens are many fold; from a trading perspective, they are not really critical to understand but to outline some of them for the sake of informing the reader, lets state some of them below.
The hype train is a huge component of the crypto market, especially in the riskiest crypto projects and altcoins. The "marketing" effects of Youtubers spreading the word around has huge implications as to why exactly near the strongest bullish phases of the cycle, the capital is flying into such altcoins the fastest. And the exaggerated speed adds to the decreasing dominance of Bitcoin until the hype dries out. Once the hype dries out (usually after significant correction) the majority of such altcoins enter into red territory, the cooling effect of pulling the "marketing" away has huge consequences as without fresh influx of demand, the prices are just unable to sustain, which leads to Bitcoin sustaining more % value against such coins, mainly for the reason that it has a much higher market cap, which makes it harder to lose at its value, relative to smaller projects, at least when it comes to percentages.
All of which creates the flight to safety mentality between more experienced and medium-experienced investors. In contrast, typical beginner investors will usually result in being a bagholder and trapped at the high prices of risky new altcoin projects. This imbalance creates more capital flows leaving altcoins and moving into Bitcoin.
On the other side, there are large net worth investors, or seasoned crypto traders, which over time as the bull market is extending they slowly pack their bags of profits made in altcoins and move them slowly into Bitcoin, as this is where their gains are likely to sustain value over a period of bear market, once the market deflates again. This behavior keeps Bitcoins' value somewhat sustained as the bull market cycle moves higher. Meanwhile, it keeps chipping away from the altcoins, but the interesting aspect is that this comes with the lag effect. Meaning that the actual results of those actions will only start being noticeable with a time delay of few months once the cycle is already in a bearish stance for a while. A great example of such same situation can be seen in the current coronavirus crisis and the prices of global resources/commodities, where the actual prices are ramping and supply issues only became visible and impactful several months into the crisis, rather than being present straight away (lumber, steel, iron ore, etc...). The lag effect of how large players and their capital distribution and prioritization effects are done takes a while to be obvious and noticeable. The same applies to the crypto market.
To understand these differences of how seasoned high net worth individuals think, one has to place oneself into the mindset of those who entered the crypto space the earliest, with already high net worth then and high conviction. Those individuals do not have a short-term mentality that so many in crypto investors have (make quick profits, withdraw all into fiat currency, and be done with it); they stay in the market for years, holding their holdings locked in Bitcoin rather than fiat currency. This difference in mentality is what essentially creates the bottoming on Bitcoin and allows the dominance of Bitcoin to shift higher as the market enters into a bearish phase (revert to the picture above about Bitcoins dominance chart). So next time when you are trying to make sense of why those shifts take place the way they do, do not seek an answer from your own perspective, but rather place yourself into the shoes of those long-term seasoned crypto holders present in the market for years since its inception.
Since using X-BTC pairs as shorting mechanism, or just in general tickers that are extended versus the index of Bitcoin is one of the key trading reasons/aspects on this article, it might help to point out the fundamental reasons why this approach might make sense and the underlying reasons behind it. The altcoin versus Bitcoin and the capital allocation or flows as core foundation of such shorting strategy.
The outperformance of altcoins against Bitcoin at the peak (top) of bull cycle
Let's look at some of the current charts that might the highlight current outperformance of such altcoins against Bitcoin, relative to their performance over the past bearish crypto cycle, basically outlining the same pattern repeating, indicating some clues for potential market topping:
The freshest altcoins/projects that are the most extended at the late stage of the bull cycle are the best shorting opportunities as the capital will be drained out the fastest out of those once the bull trend is over.
Two key variables:
-The fresher the coin since its inception (weak community, small use case likely)
-The more extended (versus Bitcoin, especially not just dollar or USDT)
Think of it, as the last guy to the party trying to hold it all up. Its the one who gets the least joy out of it as cleaning the tables is the next task just around the corner.
Its worthy to look at sustained demand within each crypto coin in the sense of how matured the coin is, how extended the price move is over a short time period, and how much development activity is ongoing behind the project. If the asset is rather matured (for a new sector, let's say that this is just 3 years) and the development activity is very high, the chances are that such project will have more sustained demand over time and would be able to weather off during the bearish market phase better. Such projects have higher amounts of institutional investors in this game for the long run and more sustained media exposure so that even when the market does cool off, there is still someone at least talking about those assets. Do not underestimate how important it is to keep the word alive about such coins when the market cools off! The marketing effects (non-targeted) are a big portion of long-term value and price moves within crypto markets. Reasons for why the word still spins around is not as important, as just the fact that it is spinning around.
Majority of altcoins, especially fresh projects enter into a complete media desert once the bear market kicks in. That is one key difference to keep eye on.
Or to place it on a chart, the difference of word of mouth and media exposure of Bitcoin or other more matured cryptos versus fresh ERC20 or similar cryptocurrencies at top of market and bear market phase that soon follows:
Meanwhile, if the asset is very fresh, new chick around the block, and there is not much development activity, the capital inflows are at high peace when last stages of bull market are present. Such an asset is heavily outperforming Bitcoin initially (near market top); then the chances are that once the market shifts into a cool-down bearish phase, the capital will deflate out of such a project at the highest peace, really quickly. Usually, what fresh investors gets the most excited about in the bull market are going to be such projects, and those will tend to collapse the hardest since the most promising/revolutionary projects at the peak of the bull cycle are also the riskiest and the outflows will be much quicker from such project as compared to the Bitcon, hence creating the downtrend in X-BTC currency pairs.
Use the above two factors to determine which altcoin or ER20 token might be worthy of being placed on shorting watchlist.
If one overlaps all the critical components explained above in the article, it should not come as surprise as, why a large portion (70-80% of assets) of X-BTC cryptocurrency pairs have a downtrend after the crypto market tops out.
Typical X-BTC pair relationship (X standing for newer altcoin or token that performed very well against Bitcoin near the peak of bull cycle):
The image above is a key outline of why one should be shorting X-BTC pairs in a bearish market cycle of cryptocurrencies. This however only applies to specific pairs, with reasons of selectivity noted above.
The supply (dilution or burning the supply)
It should also be worth looking into the supply of asset or the burn rate of tokens because the assets that tend to perform poorer against Bitcoin in a bear market are the ones with excessive addition of fresh supply (dilution). Those that tend to perform slightly better are the ones that are burning tokens and decreasing supply or are capped at very low outstanding supply (float). This is one additional factor that traders can choose to determine which X-BTC tickers might or might not be worth as short plays.
The more detailed work that trader does in carefully picking the watchlist of potential multi-month shorting assets, the better the performance might be. There is a lot that goes into doing a good background check, which is the subject of discussion for another article. But the burn rate or the drop rate of tokens/currencies is something I pay close attention to, same as with float numbers when it comes to stocks.
Shorting ICOs in a bearish market
Additional opportunities to short in bear market cycles are ICOs. Just as in a bearish stock market cycle, the IPOs are likely to fall, as institutional capital is not interested in partaking in risky assets under the bearish cycle of equities; the same is true to an extent for crypto as well. However, what happens in most cases is that the issuance of fresh ICOs or IPOs in the bear market already drops down substantially (their issuance).
The image below outlines the IPO activity during both the financial crisis of 2008 and 2020, relative to the normal market conditions before. While the chart below is tied more to issuance than price performance, the price performances are just as much within similar flows and distribution as the issuance is when it comes to bear market.
The same above applies to crypto ICOs as well. But since crypto is much less regulated, the amount of new ICOs does not dry out as much. Instead, new ICOs keep coming, which actually is good. It presents the shorting opportunities in a bearish trend. Many ICOs will tend to underperform Bitcoin, just as much as IPOs will underperform the SPX index during bearish conditions.
Therefore, keeping an eye on ICOs is a good side opportunity field in the crypto space during the bearish phase of the market as shorting opportunity. However, the difficulty might be getting borrows on such assets. On the biggest exchanges, traders might get access to X-BTC shorts early, while on smaller exchanges, it might take few months before those are accessible; having access to the right exchanges can make a difference.
While ICOs might take 2 months or more before they are even margin-shortable on most exchanges. But regardless the opportunity is there, even if being slightly late, since the bear markets last way longer than just 2 months.
Intraday shorting strategy for X-BTC pairs
Let's start with some basic statistics data from the Januarys 2018 market top in the crypto market and the performance results of X-BTC pairs (certain bigger cap altcoins versus Bitcoin):
-80% of altcoins faded against Bitcoin within several months (up to a year)
-Out of 80% of those altcoins, the majority lost between 70-90% of its value against Bitcoin
For this data count, I have included approximately 50 major altcoins, but if data were stretched to many more microcap coins, it would point to similar performance; data was limited in focus as mostly higher liquid coins are sortable, not microcap coins.
The data above is critical on why shorting X-BTC pairs makes sense, why shorting spikes along with a downtrend in the first year of a bear market is a valid approach.
The underperformance of altcoins in the bear cycle as core outline for intraday shorting:
The above two charts are just two of those 50 examples, which all follow a more or less similar path; the only difference is that some fade very quickly against Bitcoin, and some take a while over many months. More robust projects tend to be more range-bound and harder to fade, while weaker and fresher ones fade quicker on average.
The behavior stated above is a macro picture that traders should trade with. Still, the actual trading approach or entries/exits are up to trade to specify and perhaps backtest first before applying or choosing. My personal two standard methods will be outlined below. Still, for anything outside of that, a trader should test the method's performance in the previous bear cycle before applying it to the current/future one.
Trend following method of shorting pullbacks
A relatively straightforward approach is to zoom out a bit and wait for pullbacks along the bearish trend on X-BTC tickers to short into. The difficulty is that one can never tell well how long the pullback will last or how far it will go, making risk management a bit confusing. Using indicators might create a more robust execution environment with such an approach, but it is up to the trader to decide which method to go with.
My personal preference is to wait for a macro time frame to pull back decently up, and then the lower time frames to start reversing or curling down with lower lows, and then using the micro time frames as risk guide and executions.
How tight traders want to go on stop-losses will depend on skill level, those with higher skill level can choose stricter stop losses, but accuracy will have to be decent. Less experienced traders should go with wider stop losses and smaller position sizes, only aiming for two or 3R gains per trade within one week per 1 X-BTC pair; that would be my recommendation. Trying to pick the tops at each pullback along the macro bear trend can be more complicated than it sounds, especially if one wants frequent 10R trades back to back, which requires good accuracy of entries. Start slower and smaller and only tighten when your skill level suggests it's good to do so. Patience is critical to keep in mind; even if a trader takes just a 2R trade here and there, under a prolonged bearish cycle that can last over a year or two, there are plenty of trades to stack up eventually into decent chunks of Rs.
To outline the differences mentioned above:
One of my personal all-time favorite trading patterns is shorting distributions under bearish trends, and there is one pattern that for sure is not lacking under the bearish trend of crypto markets, the distribution. It does take a bit of time dedication to spot those on daily basis but it is well worth it, usually helps if few eyes within a small group of traders are watching for the same pattern to notify each other as it might be easy to miss plays in between.
To read more about distribution pattern, check the "distribution" article.
Crypto tickers with shorting opportunities, futures or spot-margin assets, which to focus on?
For Tradingview users, below are attached two files with a list of assets to trade (personally filtered from volume/volatility/opportunity quality); import each of the lists into your own watchlist or custom list.
List of Binance listed Bitcoin cross pairs (only more liquid coins are included in the list, those easier to borrow, liquid and volatile to allow for higher RR even if swinging short):
List of Binance listed USDT pairs for futures trading / shorting:
There are two different approaches to short the altcoins during the bear market phase or the topping of the bull cycle, each with its own advantages and disadvantages.
Using futures is very straightforward and requires little technical knowledge on executing the trades. There is no need to maintain collateral or be confused about how margin allocation works if spread across multiple positions. It is especially great to use if one is trading a single asset along the projected macro path and requires higher leverage. The disadvantage mainly comes from the limitation to only trade higher liquid cryptos on major exchanges. Since there are plenty of good shorting opportunities in lower liquid or medium liquid cryptos, the futures approach prevents traders from capitalizing on those.
This is where margin spot-currency shorting comes into play, as with it trader has access to a much larger pool-base of assets at the scale of 10X relative to futures assets. The disadvantages of using margin versus futures are that it is a bit more complicated and less straightforward when it comes to using it in trading; few extra steps need to be provided for the trader to successfully execute or maintain the position (including such things as higher swing fees).
Example of both methods listed in the Binance trading platform:
Each method with its own pluses and minuses; in my view, there is no such thing as a must to pick and choose just one; it completely depends on the situation and the opportunity. For regular conditions sticking to futures will be an easier and better choice. Still, every so often, a solid opportunity arrives in lesser liquid cryptos for which traders might be forced to use margin shorting to execute on opportunity. Both of the methods should be chosen upon the needs of the situation.
In either case, for someone not experienced with leveraged or margin trading overall in currencies, a testing phase of using very small position sizes and careful calculations of stop losses is a must to avoid large losses made by miscalculations forced liquidations. The margin calculations are not the same as with equity trading (those used to stock trading platforms), and it requires a bit of adaptation. In many trading platforms there is a calculator icon (right top corner in Binance) provided to quickly calculate the stop losses distances in dollar terms, for one to get used to proper position sizing, would highly recommend using that for beginner traders.
Building swing short portfolio as an optional route
As previously mentioned above, both futures and spot-margin trading are the way to approach shorting in a bearish market cycle. Ideally, it's not to pick just one of those methods but to combine them together. Using different risks comes on both of them.
Since spot-margin shorting has a wider pool of assets, it is an excellent approach to build a short swing portfolio of tickers that trader sees as worthy shorts against the Bitcoin. This approach of creating more of a passive swing portfolio rather than re-shorting each day allows the trader to distribute the time elsewhere and spare some time. It makes it an excellent complementary shorting approach to using futures. Also, futures assets tend to be more highly correlated, making a swing short portfolio less correlation exposed.
Adaptive bias and escaping the "holder trap"
Some trading approaches are suitable for beginners. Some are not; some are difficult to grasp. They require a lengthy experience curve, while others are easier to grasp and implement as understanding the cycles or experiencing them might not be of much importance.
Using the shorting approach outlined above might not be suitable for beginner traders, who only started to dabble with markets just recently. One does not have to be an experienced crypto trader to implement the approach above, but in my view, one does need at least some experience of observing different cycle shifts within the prior trading experience. A large-cap trader might need to go through both bullish and bearish SP500 markets to observe such shifts, which might require few years of trading experience. Smallcap equity traders might need less experience because cycles tend to shift quicker in small-cap stocks. Even someone with just 2 years of experience will be exposed to both bullish and bearish market conditions, most likely. It will depend a lot on the market chosen. For crypto traders, one has to go through a period of the bullish market cycle and bearish market cycle to successfully deploy shorting approach during the bearish market cycle, at least in my view (3 years experience). Let me explain why that might be so.
To have a realistic view on crypto without exaggerated views such as "crypto will collapse to 0 within few months" or "Bitcoin will go to 1 million soon", one needs a solid understanding of technology and the capital flows during both bullish and bearish markets in cryptocurrencies. These require certain study time, observational time, the experience of mistakes, and chances are for most; this will happen slowly during both bullish and bearish market phases. But most of all, one cannot deploy a realistic bearish thesis without first fully grasping the strength points of blockchain technology, which requires participation under the bullish market phase. And by participation, I do not mean watching from a distance, reading a news article once a day; that does not equal participation. A lot more than that has to be done.
I have been involved in crypto space since 2011, withplenty of in-depth research, mining Litecoin since 2013, and investing in plenty of ICOs. Even with a lot of that being done in early 2011-2013 somewhat bullish stages of the market, it still took a heavy crash before the key lessons were learned what are the right actions to take that during both phases of the market (hindsight lessons that you realize in the middle of bear cycle). Meaning, even with plenty of in-depth research, if one does not yet experience a bear market, chances are the whole picture has not yet been built; there are just so many lessons that one learns going through the bear market at least once.
It is widespread to see beginners within the crypto community, especially technology enthusiasts to get very excited about the sector in general. If they are traders or investors as well, their judgment will be clouded and too optimistic; such individuals will have a difficult time deploying bearish/shorting strategies when the time arrives to do so. Which in my view, it is why experiencing one bearish phase of the crypto market is so much needed before one starts to deploy a bearish approach well. There are few factors why that might be.
Suppose one wants to short early into a bearish cycle. In that case, this means shorting altcoins at their highest volatility conditions, the riskiest (if one is not using leverage and position sizing correctly). It is straightforward to get burned if one is shorting too early into a bullish cycle or falling for the too simplified statements of when the market is actually "over-stretched." From my personal experience, getting trapped with few long positions and then watching the behavior of the market up close for few years (2014-2018) was required before the realistic and use-able bearish/shorting approach had actual firm ground. Although to put it into perspective, shorting until 2017 in the crypto space was not really common and, luckily, was not accessible. It surely helped prevent some losses at the early stages of my own trading.
For seasoned traders, who are very good at adapting to market cycles in whatever the assets they trade (not crypto), using such shorting approach might come easier and natural to adapt to, even if they have not been tracking crypto markets for a while.
From my personal observations, there are such traders I had a chance to trade with, but they are much more uncommon than common, something that should be kept in mind. Most traders will need to observe or experience the bear market first fully (while being long, or just observing it as opportunity cost), before it all clicks in the right manner.
Plenty said above on article was meant for bearish cycle and how to approach the shorting, but many of said can be flipped around and used in the bullish market as well, as long as one is somewhat early and not chasing at the heights of the bullish cycle (basically inversing the guides of high-risk/low-risk shorts into high-risk/low-risk longs). For example, if it is common to expect high-risk assets to deflate at the peak of 1 year sustained bull cycle and shorting such might start to make sense against Bitcoin, then longing such assets after a very prolonged 2-year bear cycle of cryptocurrencies might be the right moment, as long as one inverts the same conditions under the right cycle timeframe.
For any crypto trader, it is highly recommended to research the behavioral cycles of innovative technologies over the past 100 years. Most of such will be in equity markets. Research how the capital flows work within the equities around those technologies, then research the crypto since the inception of 2009 and apply the lessons of cycles forward on. Without firm knowledge of cycle behavior, everything else will be built on weak foundations when it comes to crypto trading.