'Short' and 'Long' Positions: An Essential Guide to Trading Cryptocurrencies

A Necessary Introduction to Fundamental Concepts

When someone begins exploring the world of cryptocurrencies and trading, they inevitably encounter a fairly dense technical vocabulary. Among the most recurring terms are ‘short’ and ‘long’, expressions that are constantly heard in any trader conversation. But, what is short in trading? And what do these words exactly mean? This analysis aims to clarify those doubts and provide a practical understanding of how these operations work in reality.

A Brief Overview of the History of These Terms

Although it is difficult to precisely identify when ‘short’ and ‘long’ first emerged, there is evidence of their public use in the January-June 1852 edition of The Merchant’s Magazine and Commercial Review. The etymological roots of these terms relate to their application in markets: an operation aimed at benefiting from price growth generally requires waiting a considerable time, hence the term ‘long’ (long in English). In contrast, operations seeking to profit from price drops are usually executed over shorter time horizons, which is why they are called ‘short’ (short).

Understanding Buy and Sell Positions

Essentially, ‘long’ and ‘short’ represent two opposite betting orientations on the future behavior of an asset.

When a trader opens a long position, they are expressing confidence in the asset’s value growth. The mechanism is straightforward: acquire the instrument at the current market price, wait for its appreciation, and then sell at a higher price. Imagine a trader estimates that a certain token, currently trading at $100, will reach the $150 in the short term. The strategy would be to buy it now and wait for that moment. The profit would simply be the difference between the two prices.

Short positions operate under an inverted logic. The trader anticipates an overvaluation of the asset and a future decline in its quotes. To implement this strategy without owning the asset, they borrow from the exchange, sell immediately at the current price, and wait for the value to decrease. Once it does, they buy back the same amount at a lower cost and return the borrowed amount. Suppose someone believes that Bitcoin will drop from $61,000 to $59,000. They would borrow one Bitcoin, sell it immediately at $61,000, wait for the decline, and buy it back at $59,000. The remaining $2,000 (minus loan fees) would constitute their profit.

Although this procedure sounds elaborate and laborious, in practice it is executed automatically and almost instantly on modern trading platforms, remaining hidden from the end-user who simply presses buttons to open and close positions.

The Market Language: Bulls vs. Bears

The industry has developed a particular nomenclature to classify market participants according to their orientation. The terms ‘bulls’ and ‘bears’ transcend the trading realm and have become widely popular in discussions about financial markets.

‘Bulls’ are those operators who maintain a bullish view of the market or specific assets. These traders open long positions, buying assets and generating demand, which theoretically drives prices upward. The term derives from the metaphorical image of a bull pushing its horns upward.

‘Bears’, on the other hand, are those who anticipate price declines and open short positions, selling assets and influencing their value downward. This term alludes to how a bear strikes downward with its paws. These two archetypes have given rise to expressions like ‘bull market’ (bull market) for periods of growth and ‘bear market’ (bear market) for contraction phases.

Hedging Strategies for Protection

Hedging (hedging) is a sophisticated risk management technique that directly relates to the concepts of ‘short’ and ‘long’. Its fundamental purpose is to minimize potential losses in case of adverse price movements.

Consider a trader who buys Bitcoin expecting its appreciation but recognizes the possibility of an unforeseen drop due to an external event. Although they are not sure if such an event will occur, they can use hedging to limit losses. The simplest and most popular approach involves opening opposite positions simultaneously.

For example: a trader opens a long position in two Bitcoins to capitalize on its anticipated growth. At the same time, they open a short position in one Bitcoin for protection. If the price rises from $30,000 to $40,000, the calculation would be: (2-1) × ($40,000 - $30,000) = $10,000 profit.

In an adverse scenario where the price drops to $25,000, the result would be: (2-1) × ($25,000 - $30,000) = -$5,000. Note that the hedge reduced losses by half compared to an uncovered position of two Bitcoins. The cost of this ‘insurance’ is that the potential profit is also halved.

A common mistake among novice traders is believing that opposite positions of equal size completely eliminate risk. In reality, this strategy only ensures that the gains of one operation exactly offset the losses of another, and when commissions and operational costs are added, the net result becomes negative.

The Role of Futures Contracts

Futures are derivative instruments that allow generating income from price variations without owning the underlying asset. These contracts specifically facilitate opening short and long positions, enabling profits even when prices fall, something not possible in the traditional spot market.

In the cryptocurrency ecosystem, there are two main modalities: perpetual futures and futures with settlement dates. Perpetual futures have no expiration date, allowing positions to be held indefinitely. Futures with settlement dates involve closing the operation without receiving the physical asset, only the difference between its value at opening and closing, expressed in a specific currency.

For long operations, futures purchase contracts are used, while for short operations, sale contracts are employed. Both establish a predetermined future execution price. Additionally, most platforms charge a funding rate every few hours, representing the gap between the asset’s spot market price and its futures price.

Critical Risks: Liquidation

Liquidation occurs when the platform forcibly closes a trader’s position operating with margin or borrowed funds. This event is typically triggered after abrupt price movements when the available collateral is insufficient to support the position.

Before automatic liquidation, the exchange sends an alert called a ‘margin call’, requesting the trader to add funds. If the trader does not respond promptly, and the price reaches a specific critical level, the platform proceeds to close the position without consent.

Avoiding liquidation requires two fundamental capabilities: implementing prudent risk management and maintaining constant monitoring of multiple open positions simultaneously.

Advantages and Disadvantages Assessment

Long positions have a gentler learning curve, as they replicate the behavior of buying in a traditional spot market. Short positions, on the other hand, operate under a more abstract and often counterintuitive logic, and declines tend to be more unexpected and rapid than rises.

An aggravating factor is that many traders apply leverage to amplify returns. However, borrowed funds create a double-edged situation: they magnify both gains and losses, and require constant vigilance over collateral levels to avoid surprise liquidations.

Final Reflections

Managing long and short positions is the central pillar of any sophisticated trading strategy. Depending on their outlook on future price behavior, traders can choose to bet on the rise or fall. This choice also classifies them into ‘bulls’ or ‘bears’, depending on their predominant orientation.

Derivative instruments, especially futures, facilitate the realization of these strategies without owning the underlying assets, opening opportunities to profit in any market direction. Leverage multiplies these opportunities but also exposes to proportional risks. Mastery of these tools requires not only theoretical understanding but also practical experience and disciplined risk management.