Short is a way to profit from a price decline: a complete guide for crypto traders

When you start learning crypto trading, you need to understand two fundamental concepts: long and short. Short is essentially a method that allows traders to profit not only when the asset’s price rises but also when it falls. This is one of the main features that distinguish the cryptocurrency market from traditional stock trading on the spot market.

What is a short: definition and basic mechanism

A short is opening a short position, meaning betting on a decline in the asset’s value. Unlike traditional buying (going long), where the trader buys the asset first and sells later, opening a short involves doing the opposite.

Here’s how it works: the trader borrows an asset from the exchange (for example, one Bitcoin), immediately sells it at the current price, and then waits for the price to drop. When the price decreases, they buy back the same amount of the asset at a lower price and return it to the exchange. The difference between the initial sale price and the buyback price is the trader’s profit.

If Bitcoin is trading at $61,000 and the trader expects the price to fall to $59,000, they can borrow one Bitcoin, sell it for $61,000, and wait. When the price drops to $59,000, they buy back Bitcoin at a lower amount and return it. After deducting platform fees, their profit will be approximately $2,000.

Long and short: two sides of the same coin

Long and short are opposite strategies, each effective under certain market conditions. Going long is a bet on growth: the trader buys an asset at the current price of $100, expecting it to rise to $150, and sells at the target level to make a profit.

Short is a mirror operation on a price decline. Instead of directly buying the asset, the trader borrows it and sells immediately, planning to buy it back cheaper later.

In practice, both positions are equally important. Going long is suitable for bullish markets when prices are rising. Shorting is useful in bearish markets or during local corrections when the asset is overvalued.

Bulls and bears: market participants

The terms “bulls” and “bears” describe two types of traders. Bulls are participants who believe in market growth and open long positions, buying assets. Their demand pushes prices higher.

Bears are traders expecting prices to fall and open short positions by selling assets. These terms form the basis for concepts like a bull market (when prices are rising) and a bear market (when prices are falling).

Futures as a tool for opening shorts

If on the spot market you buy and hold an asset, futures allow you to profit from price movements without owning the asset itself. These are derivative instruments enabling both long and short positions.

In the crypto industry, the most common types of futures contracts are:

Perpetual Contracts — they have no expiration date. Traders can hold a position as long as needed and close it at any time. This provides flexibility for long-term trading.

Cash-Settled Futures — these do not deliver the actual asset but pay the difference between opening and closing prices in cash. Settlement is in a stable currency, simplifying operations.

To open a short, sell futures contracts are used, which involve a contractual sale of the asset. To maintain the position on most platforms, traders pay a funding rate every few hours — the difference between spot and futures prices.

How hedging works: protection against unforeseen movements

Hedging is a risk management strategy that uses both long and short positions simultaneously. Suppose a trader bought two Bitcoins expecting growth but also wants to hedge against a potential decline. They can open a short position on one Bitcoin.

If the price rises from $30,000 to $40,000:

• Long profit: 2 × ($40,000 – $30,000) = $20,000
• Short loss: 1 × ($30,000 – $40,000) = –$10,000
• Net profit: $20,000 – $10,000 = $10,000

If the price drops from $30,000 to $25,000:

• Long loss: 2 × ($25,000 – $30,000) = –$10,000
• Short profit: 1 × ($30,000 – $25,000) = $5,000
• Net loss: –$10,000 + $5,000 = –$5,000

Thus, hedging reduced the potential loss by half—from $10,000 to $5,000. However, this comes at the cost of reduced potential gains. Also, opening two positions of equal size will fully offset profits and losses, and with fees, this strategy can become unprofitable.

Liquidation: the main risk when trading with leverage

Liquidation is the forced automatic closing of a position when trading with borrowed funds. It occurs during sharp price movements when the collateral (margin) becomes insufficient to support the position.

Before liquidation, the platform usually issues a “margin call” — a warning to add more funds. If not done, when a critical price level is reached, the position is automatically closed, and the trader loses part or all of their funds.

To avoid liquidation:

• Properly calculate position size
• Use stop-loss orders
• Constantly monitor margin levels
• Understand the asset’s volatility

For beginners: common mistakes when opening shorts and how to avoid them

Shorting is a tool that requires experience. Here are the most common mistakes beginners make:

Ignoring volatility — price drops tend to happen faster and are less predictable than rises. Shorts are often liquidated quickly during sharp upward movements.

Using excessive leverage — leverage amplifies both gains and losses. Beginners should start with minimal leverage (2–3x).

Opening opposite positions of the same size — this is not protection but a loss, especially considering fees.

Lack of an exit strategy — traders should predefine at what price they will close the short to lock in profits or limit losses.

Pros and cons of short positions

Advantages of shorts:

• Ability to profit during price declines
• Additional earning opportunities in sideways markets
• Tool for hedging long positions
• Functionality in highly volatile markets

Disadvantages and risks:

• More complex logic than regular buying
• Rapid stop-loss triggers due to sharp corrections upward
• Need for constant margin monitoring
• Fees for borrowing and funding rates
• Risk of liquidation when using leverage

Final recommendations

Shorting is a powerful tool in a crypto trader’s arsenal, but its use requires a deep understanding of market mechanics. Long positions (longs) are more intuitive and suitable for beginners, while shorts demand experience and strict risk management discipline.

Futures contracts allow opening both longs and shorts, profiting from price movements in either direction. Using leverage can significantly increase potential returns but also raises the risk of losing funds.

Practice, patience, and continuous learning will help you master this tool and use it effectively in your trading strategy.