Understanding "long" and "short" positions in crypto trading: a complete guide

In the world of cryptocurrency trading, newcomers often encounter a multitude of specialized terms. Among them, the concepts of "long" (long) and "short" (short) hold a special place, as they are fundamental for successful trading. In this article, we will thoroughly analyze these concepts, their origins, mechanisms of operation, and practical applications in cryptocurrency markets.

Historical Roots of the Terms "Long" and "Short"

Although the exact origin of the terms "long" and "short" in financial trading is difficult to establish, one of the earliest documented references to these concepts relates to the publication The Merchant's Magazine, and Commercial Review for January-June 1852.

The etymology of these terms is closely related to their literal meaning in English. The position "long" ( eng. long — long ) got its name due to the prolonged nature of the trade — the price of the asset usually takes a significant amount of time to rise. In turn, the term "short" ( eng. short — short ) reflects the relatively short period of time required to implement a strategy based on a price decline.

The essence of "long" and "short" positions in trading

Long position ( position for an increase ) is a strategy where a trader buys an asset at the current price with the aim of selling it later at a higher value. Profit is generated from the difference between the purchase price and the subsequent selling price.

Example: If a trader is confident that a token worth $100 will soon rise to $150, they buy the asset and wait for the target price. After reaching the desired price, the trader sells the token, earning a profit of $50.

Short position (a position for decline) is a strategy that assumes earning from the decrease in the value of an asset. The mechanism involves borrowing the asset from the exchange with an immediate sale at the current price, and then repurchasing it at a lower price to return the loan.

Example: If a trader forecasts a decrease in the value of Bitcoin from $61 000 to $59 000, he borrows 1 BTC from the exchange, immediately sells it at the current price, and after the price drops, buys back the same amount at the reduced price and repays the loan. The difference of $2000 ( minus fees) constitutes his profit.

Bulls and Bears: Key Market Participants

In trading, market participants are often classified by their predominant attitude towards price movement:

Bulls ( in English. Bulls ) are traders who expect the market or a specific asset to rise. They predominantly open long positions, thereby increasing demand and contributing to price growth. The name comes from the movement of a bull, which lifts its opponent upward with its horns.

Bears ( — market participants expecting a decline in prices. They open short positions, putting pressure on prices. The name is related to how a bear attacks its opponents — from top to bottom.

Based on these concepts, widely used terms in the crypto industry have formed:

• Bull Market — a period of sustained price growth
• Bear Market — a period of prevailing price declines

Hedging: Risk Management Strategy

Hedging is a method of protecting capital from adverse market changes. This strategy is closely related to the concepts of "long" and "short," as it involves opening opposite positions to minimize potential losses.

Practical example of hedging: The trader acquires bitcoin, expecting its value to rise, but wants to protect against a possible decline. He opens a long position of 2 BTC and simultaneously a short position of 1 BTC for partial risk hedging.

Let's consider two scenarios:

1. Favorable scenario: BTC rose from )000 to $30 000

   • Calculation: $40 2-1( * )(000 - $40 000$30 = 1 * )000 = $10 000 profit

2. Unfavorable scenario: BTC dropped from $10 000 to $30 000

   • Calculation: $25 2-1( * )(000 - $25 000$30 = 1 * )-(000$5 = )000 loss

By hedging, the trader reduced potential losses by half from $5 000 to (000$10 , but also halved the possible profit when the price increases. This is a classic trade-off between return and risk.

Important: Opening two opposing positions of the same size does not provide full protection against risks, but on the contrary, may lead to losses due to commissions and other operational expenses.

Futures as the main tool for "long" and "short" positions

Futures are derivative financial instruments that allow trading of assets without actual ownership of them. They provide the opportunity to open both long and short positions.

In the crypto industry, there are two main types of futures contracts:

1. Perpetual futures — contracts without an expiration date, allowing you to hold a position for as long as you want.

2. Cash-settled $5 futures — upon completion of the transaction, the trader receives not the asset itself, but the difference in value, expressed in a specific currency.

To open long positions, buy futures ) for purchasing an asset in the future (, and for short positions, sell futures ) for selling an asset in the future (.

Important Aspect: When holding futures positions, traders usually have to regularly pay the funding rate — the fee for the difference between the spot and futures price of the asset.

Liquidation of Positions and Methods to Prevent It

Liquidation is the forced closure of a trader's position by the trading platform due to insufficient collateral margin ). This occurs during sharp price changes of the asset, when losses on the position approach the size of the collateral.

Before liquidation, the platform usually sends the trader a margin call — a notification to provide additional funds to maintain the position. If the trader does not top up the account, the position is automatically liquidated upon reaching a certain price level.

To minimize the risk of liquidation, the following are necessary:

• Thorough risk management
• Regular monitoring of open positions
• Correct calculation of the collateral size
• The use of stop-losses and other protective orders

Advantages and Disadvantages of "Long" and "Short" Strategies

When using long and short positions in a trading strategy, their characteristics should be taken into account:

Advantages of Long Positions:

• Intuitive understanding - similarity to a regular asset purchase
• Theoretically unlimited profit potential
• More historical data and analytics for forecasting growth

Disadvantages of Long Positions:

• Usually require a longer position holding period.
• Limited effectiveness during a declining market

Advantages of Short Positions:

• The ability to earn in a falling market
• Usually a faster implementation of the strategy
• The potential for high returns during periods of market panic

Disadvantages of Short Positions:

• Complex counterintuitive execution logic
• Theoretically unlimited risk (price can rise infinitely)
• Higher collateral requirements on many platforms

Overall Risk Factor: Using leverage (borrowed funds) significantly increases both potential profits and possible losses, requiring stricter risk management.

The Use of "Long" and "Short" Positions in Trading Practice

Effective trading implies the ability to apply both strategies depending on market conditions:

Optimal for long positions:

• Periods of stable upward trend
• Situations after a significant price correction
• Markets with high liquidity and stable growth

Preferred for short positions:

• Clear downward trends
• Periods of high volatility
• Market overbought situations
• Negative fundamental factors

Professional traders usually possess both strategies and choose them based on technical and fundamental market analysis rather than personal preferences.

Conclusion

Depending on the price movement forecast, a trader can use short (short) or long (long) positions to profit from both rising and falling quotes. Based on preferred strategies, market participants are divided into "bulls" who expect growth and "bears" who bet on decline.

To open "long" and "short" positions, futures and other derivative instruments are usually used, allowing one to profit from the price changes of an asset without the need to own it. These instruments also provide the opportunity to use borrowed funds (leverage) to increase potential profits, but this also increases the risks.

Regardless of the chosen strategy, the key to successful trading is thorough market analysis, proper risk management, and a disciplined approach to trading.