Short Position
A short position can increase in value if the price of a crypto falls. If the price rises instead, the short position loses value.
What is a short position?
In traditional short selling, you borrow a cryptocurrency, for example, and sell it right away. Later, you buy back the same amount to repay the loan. If the coin's price has fallen, you keep a profit before fees.
You can also take a short position using futures. These are contracts that track the price of a crypto. You don't have to borrow or sell the coins yourself.
Short selling isn't the same as selling crypto you already own. After a regular sale, you don't directly profit if the price continues to fall.
An example of a short position
Someone borrows 1 ETH and sells it for €2,000. Later, 1 ETH costs €1,500. They buy back 1 ETH, repay the loan, and make a €500 profit before interest and other fees.
If 1 ETH later costs €2,500, the loss is €500 before fees. This shows that a short position profits from a price drop but loses value when the price rises.
Why are short positions important in crypto?
Traders use short positions to bet on an expected price drop. They can also hedge some of the risk of crypto they already own.
The term often comes up in discussions about derivatives trading, leverage, and liquidations. Leverage makes a position larger than the collateral put up. As a result, even a small unfavorable price move can lead to liquidation: the trading platform forcibly closes the position.
In theory, a traditional short position can result in unlimited losses because a price can rise without limit. During a short squeeze, the price rises and short sellers may have to buy back their positions to close them. Those purchases can push the price up further. Rules about collateral, fees, and possible remaining debt vary by product and trading platform.
