Understanding the positions of "long" and "short" in the cryptocurrency market

When diving into the crypto world of trading, a trader inevitably encounters professional terminology, among which the terms "long" (long) and "short" (short) hold a special place. These fundamental concepts define the basic types of trading positions and strategies in the digital assets market.

Origin of the terms "long" and "short"

The exact origin of these terms in trading is difficult to establish, however, one of the earliest documentary mentions can be found in the 1852 edition of The Merchant's Magazine, and Commercial Review. The etymological connection with the English words long (длинный) and short (короткий) reflects the nature of these positions: "long" positions often require a longer time, as price increases usually occur gradually, while "short" positions are associated with relatively quick movements characteristic of falling markets.

The mechanics of "long" and "short" positions

Long position (a position for increase) – this is the purchase of an asset in anticipation of its price increase. The principle is simple: buy at the current price, wait for the increase, and sell at a higher price. For example, if a trader buys a token for $100, expecting it to rise to $150, the potential profit will be $50 from each token.

Short position (position for a decline) – a more complex mechanism that allows one to profit from the decrease in the asset's price. When opening a short position, the trader borrows the asset from the exchange, immediately sells it at the current price, and then, after the price drops, buys back the same volume at a lower price and returns it to the exchange. The difference between the selling price and the subsequent purchase (minus the borrowing fee) constitutes the profit.

Short example: the trader predicts the fall of Bitcoin from $61 000 to $59 000. He borrows 1 BTC, sells it for $61 000, and after the drop, buys it back for $59 000 and returns it to the lender. The net profit is $2 000 minus the borrowing fee.

Modern trading platforms automate these processes, allowing traders to open and close both long and short positions with the click of the corresponding buttons in the interface.

Market Psychology: Bulls vs Bears

In the trading community, market participants are traditionally divided into two categories depending on their prevailing sentiment and positions:

Bulls (bulls) – traders who expect the market to rise and predominantly open long positions. The name originated from the image of a bull lifting prices up with its horns.

Bears (bears) – market participants who predict a decline in prices and open short positions. The image of a bear pushing prices down with its paws is the basis of this term.

This classification also applies to the characteristics of market cycles: bull market (bull market) is characterized by a sustained increase in prices, while bear market (bear market) is marked by a prevailing downward trend.

Hedging Strategy: Balancing Risks

Hedging is a risk management technique that involves using opposite positions to minimize potential losses. This strategy is particularly relevant during periods of high market uncertainty.

The classic hedging scheme involves opening opposite positions of different sizes. For example, a trader expecting the price of Bitcoin to rise opens a long position of 2 BTC while simultaneously opening a short position of 1 BTC for partial capital protection.

With this approach:

• In the case of a price increase from $30 000 to $40 000, the profit will be (2-1) × ($40 000 - $30 000) = $10 000
• In case of a drop from $30 000 to $25 000, the loss will be limited to (2-1) × ($25 000 - $30 000) = -$5 000

Hedging reduces both potential profits and possible losses, operating on the principle of "insurance." It is important to understand that opening equal-sized opposite positions neutralizes potential income, and when considering commissions and other expenses, it makes the strategy inherently unprofitable.

Futures Contracts as the Main Tool

Futures are a derivative financial instrument that allows traders to profit from price fluctuations without actually owning the underlying asset. It is primarily through futures contracts that strategies for opening short and long positions in crypto trading are implemented.

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

• Perpetual futures – contracts without a fixed expiration date, allowing you to hold a position indefinitely.
• Cash-settled futures – contracts where cash settlement occurs upon closing a position without the physical delivery of the underlying asset.

To open long positions, buy futures (, and for short positions – sell futures ). When working with perpetual futures, traders periodically pay or receive a funding rate – a mechanism that synchronizes prices in the spot and futures markets.

Risk of Liquidation and Methods of Control

Liquidation is the forced closing of a position by the exchange due to insufficient collateral (margin). This is one of the main risks when trading with leverage.

Before liquidation, the trading platform usually sends a margin call – a notification to top up the deposit to maintain the position. If the trader does not respond to the warning and the price continues to move in an unfavorable direction, the position is automatically closed when the established level is reached.

Effective liquidation risk management includes:

• A thorough calculation of position size in relation to available capital
• Using moderate leverage
• Setting stop-losses to limit losses
• Regular monitoring of margin levels
• Diversification of positions for risk distribution

Advantages and Risks of Long and Short Strategies

When integrating longs and shorts into a trading strategy, it is important to consider their characteristics:

Long positions:

• More intuitive, especially for beginner traders.
• Theoretically have unlimited growth potential
• Psychologically more comfortable, as they correspond to the natural desire for asset value growth.
• Require less monitoring during periods of low volatility

Short Positions:

• Have a more complex execution mechanics
• Provide the opportunity to earn in a falling market
• Linked with increased risk due to potentially unlimited losses
• They require more active management due to the high speed of corrections.

The use of leverage amplifies both potential profits and risks for both types of positions, requiring the trader to pay increased attention to capital management and constant monitoring of the market situation.

Practical Application in Trading

Depending on market conditions and individual strategy, experienced traders combine long and short positions to optimize their trading portfolio:

• In a growing market, long positions dominate with selective hedging through shorts.
• During correction periods, the share of short positions increases to secure profits.
• During sideways consolidation, scalping strategies using both types of positions are effective.
• In high volatility, managing position sizes and timely closing of losing trades becomes critical.

To successfully work with various types of positions, the following is necessary:

• A clear trading plan with defined entry and exit points
• Disciplined adherence to risk management rules
• Understanding market cycles and their impact on the effectiveness of different strategies
• Regular analysis of trading results to adjust the approach

Conclusion

Long and short positions are fundamental tools in the arsenal of a crypto trader, allowing for profit extraction in both rising and falling markets. Understanding the mechanics of these positions, their risks, and the correct application in various market conditions is a necessary condition for building a successful trading strategy.

To work with longs and shorts, futures contracts and other derivative instruments are most often used, allowing the advantages of leverage to be utilized. However, the increased potential for profit is inevitably associated with increased risks, requiring a thoughtful approach to capital management and disciplined execution of the trading strategy.