📈 What do "long" and "short" mean in cryptocurrency trading?

Diving into the crypto world, users encounter a plethora of specific terms related to various aspects of this industry. Among them, the concepts of "long" and "short" are often encountered, especially in the context of trading. Let's break down what they mean, how the corresponding transactions work, and what benefits they bring to traders.

Origins of the terms "short" and "long"

The exact origin of the words "short" and "long" in trading is impossible to establish today. However, one of the first public mentions of these terms is recorded in The Merchant's Magazine, and Commercial Review for the first half of 1852.

Regarding their use in trading, according to one version, it is related to the original meaning of these words. A deal in anticipation of asset growth is often called a "long" ( in English. long — длинный ), because price increases usually occur slowly, and such a position is opened for a long time. On the other hand, an operation aimed at profiting from falling prices is called a "short" ( in English. short — короткий ), as it requires much less time to implement.

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

"Long" and "short" are types of positions that traders open with the aim of profiting from the rise (long) or fall (short) of an asset's value in the future.

A long position involves purchasing an asset at the current price with the intention of selling it after the price rises. For example, if a trader is confident that a token currently priced at $100 will soon appreciate to $150, they just need to buy it and wait for the target price. The profit in this case is the difference between the purchase price and the selling price.

A short position is opened when there is a suspicion that an asset is overvalued and will decrease in price in the future. To profit from this, the trader borrows this instrument from the exchange and immediately sells it at the current price. Then, he waits for the quotes to fall and buys back the same amount of the asset, but at a lower price, and returns it to the exchange.

For example, if a trader believes that the price of Bitcoin should decrease from $61 000 to $59 000, he can borrow one Bitcoin from the exchange and immediately sell it at the current price. When the quotes drop, he buys back the same one Bitcoin, but for $59 000 and returns it to the exchange. The remaining $2000 ( minus the borrowing fee) is the trader's profit.

Although the transaction mechanism may seem quite complex, in practice, all of this happens "under the hood" of trading platforms and is executed in a matter of seconds. At the user level, opening and closing positions occurs with a simple press of the corresponding buttons in the trading terminal.

"Bulls" and "Bears" in the market

The terms "bulls" and "bears" are widely used both in trading and outside of it. They are typically used to denote the main categories of players in the market based on their position.

"Bulls" are traders who believe that the market as a whole or a specific asset will rise, so they open long positions, that is, they buy. Thus, they contribute to increasing the demand and value of assets. The term originated from the idea that a bull should "push" prices up with its horns.

"Bears" are market participants who anticipate a decline in prices and open short positions by selling assets, thereby influencing their value. Like with "bulls," the term comes from the idea that "bears" push prices down with their paws, causing them to decrease.

Based on these designations, the commonly used concepts of bull and bear markets in the crypto industry have formed. The former is characterized by a general rise in prices, while the latter is marked by a decrease in quotes.

Hedging in Trading

Hedging is a risk management method in trading and investments. This strategy is also related to "long" and "short" as it involves using opposite positions to minimize losses in the event of an unexpected price reversal.

For example, a trader buys one bitcoin in anticipation of a price increase, but does not rule out a price drop if a certain event occurs. He does not know for sure whether this event will happen, but can use hedging to reduce losses in the event of an unfavorable scenario.

Depending on the market and trading strategy, various tools can be used for hedging, such as buying cryptocurrencies with an inverse correlation or holding a spot asset and a put option. However, the most popular and straightforward way to hedge is to open opposite positions.

For example, if a trader believes that Bitcoin will increase in price, to make a profit he opens a long position on two bitcoins. At the same time, he simultaneously opens a short position on one bitcoin to minimize losses if his expectations are not met.

It is important to remember that hedging can reduce potential income from price increases, but it is a kind of "insurance premium" against significant losses.

Futures Trading and Cryptocurrencies

Futures are derivative instruments that allow one to profit from price movements of assets without actually owning them. It is futures contracts that enable the opening of short and long positions, extracting profit from a decline in value, which is not possible in the spot market.

In the crypto world, perpetual and futures contracts are the most common. Perpetual means there is no expiration date for the contract, while futures imply receiving the price difference instead of the asset itself when closing a position.

Long positions are opened using buy futures, while short positions use sell futures. The former imply buying an asset in the future at a price set at the time of opening, while the latter imply selling it under the same conditions.

Liquidation of Positions and Risk Management

Liquidation is the forced closure of a trader's position that occurs when trading with borrowed funds. Typically, it happens during a sharp change in the value of an asset, when the margin (collateral size) is insufficient to maintain the position.

To avoid liquidation, it is important to develop risk management skills and be able to effectively manage open positions.

Advantages and Disadvantages of Using Shorts and Longs

When using "short" and "long" in a trading strategy, it is important to consider:

• Long positions are more understandable as they work similarly to buying an asset on the spot market.
• Short positions have a more complex logic and often contradict intuition. In addition, price declines usually occur faster and are less predictable than increases.

Traders often use leverage to increase potential profits. However, this comes with additional risks and the need to constantly monitor the margin level.

Conclusion

Depending on forecasts, traders can use short (short) and long (long) positions to profit from the rise or fall of quotes. Based on the held positions, market participants are classified as "bulls," expecting growth, or "bears," betting on a decline.

Typically, futures or other derivative instruments are used to open a "long" or "short" position. They allow for profiting from speculations regarding the asset's price without the need to own it, as well as creating opportunities for additional earnings through the use of leveraged funds (leverage). However, it is important to remember that their use not only increases potential income but also risks.