Long and Short Positions in Crypto Trading: A Complete Guide

In studying the crypto industry, traders encounter a multitude of specialized terms. Among them, the concepts of "long" and "short" hold a special place, as they are the foundation of trading strategies in the cryptocurrency market. In this article, we will thoroughly examine these key concepts, explain how they work, and show how professional traders use them to generate profit.

The History of the Terms "Long" and "Short"

The historical origin of the terms "long" (long) and "short" (short) in trading is difficult to establish, however, one of the first official mentions dates back to 1852 in The Merchant's Magazine, and Commercial Review.

There is a version that the names of these positions are related to their literal meaning. "Long" (long) reflects the nature of the position aimed at holding the asset for a longer period in anticipation of price growth, as upward trends usually form gradually. In turn, "short" (short) got its name due to the shorter time required to implement a strategy based on declining quotes.

The Essence of Long and Short Positions in Trading

Long position (long position) is the purchase of an asset with the aim of selling it later at a higher price. A trader opens such a position when they forecast an increase in the asset's value.

Short position (short position) is a strategy that allows you to profit from a decline in the asset's price. In this case, the trader borrows the asset from the exchange and sells it at the current market price, then buys it back at a lower price and returns it to the exchange.

Example of long position

If a trader is confident that a token worth $100 will soon rise to $150, he buys it at the current price and waits for the growth. Upon reaching the target value, the trader sells the asset and makes a profit of $50.

Example of a short position

If the analytics show that Bitcoin could drop from $61 000 to $59 000, the trader borrows one BTC from the exchange and sells it at $61 000. After the price falls to $59 000, he buys back Bitcoin at the new price and returns it to the exchange. The profit in this case will amount to $2000 ( minus fees and the cost of the loan ).

Despite the apparent complexity, modern trading platforms automate these processes, allowing traders to open and close positions with the push of a button.

Bulls and Bears in the Cryptocurrency Market

In trading, market participants are often classified as "bulls" or "bears" depending on their expectations and trading strategies:

Bulls are traders who predict market growth and open long positions. The metaphor is based on the idea that a bull tosses its opponent upwards with its horns, symbolizing the upward movement of prices.

Bears are market participants who expect a decline in prices and open short positions. The image of a bear is associated with the movement of its paws from top to bottom when attacking, symbolizing a fall in prices.

Based on these terms in the industry, the concepts of bull market ( period of general price growth ) and bear market ( period of predominant price decline ) have formed.

Hedging: protecting investments

Hedging is a risk management strategy where a trader opens opposite positions to minimize potential losses. This is especially relevant in the context of high volatility in the cryptocurrency market.

Example of hedging

A trader anticipating a rise in Bitcoin opens a long position for two BTC. To protect against a possible decline, he simultaneously opens a short position for one BTC.

If BTC rises from $30 000 to $40 000, the profit calculation will be as follows: (2-1) × ($40 000 – $30 000) = 1 × $10 000 = $10 000

If BTC drops from $30 000 to $25 000: (2-1) × ($25 000 – $30 000) = 1 × -$5 000 = -$5 000

Thus, hedging reduced the potential loss by half from (000 to $10 000$5 , although it also reduced the potential profit in the event of a price increase.

It is important to understand that opening two opposite positions of the same volume is not an effective strategy, as the profit from one trade will be offset by the loss from the other, and the commissions will lead to net losses.

Futures in Crypto Trading

Futures contracts allow traders to profit from price changes without owning the underlying asset. Most long and short strategies in the cryptocurrency market are implemented through futures.

In the crypto industry, two types of futures are the most popular:

1. Perpetual Futures — have no expiration date, allowing traders to hold a position indefinitely.

2. Cash-settled ) futures — when closing a position, the trader receives not the asset itself, but the difference in price between the moment of opening and closing the position.

When trading futures on most platforms, traders must regularly (usually every 8 hours) pay a funding fee — a kind of charge for using borrowed funds, the amount of which depends on the price difference between the spot and futures markets.

Liquidation of Positions and Risk Management

Liquidation is the forced closing of a position by the exchange when the funds in the trader's account are insufficient to maintain the open position. This occurs during a sharp price movement against the trader's position, especially when using leverage.

Before liquidation, the exchange usually sends a margin call — a notification of the need to add additional funds to maintain the position. If the trader does not respond, the position is automatically closed when a certain price level is reached.

To prevent liquidation, professional traders:

• Use moderate leverage
• Set stop-losses
• They constantly monitor their positions
• They use hedging methods

Advantages and Disadvantages of Long and Short Positions

When building a trading strategy, it is important to consider the characteristics of each type of position:

Long positions:

• More intuitive for beginners
• Similar to traditional investing in the spot market
• Potential losses are limited (the asset price cannot fall below zero)
• Suitable for long-term holding during market growth

Short positions:

• They require a deeper understanding of market mechanisms
• Have a more complex execution logic
• They are characterized by theoretically unlimited risk ( price can rise infinitely )
• Effective during market downturns, which usually occur more rapidly.

When using leverage in both types of positions, both potential profits and risks increase, requiring the trader to monitor positions more carefully and adhere to risk management principles.

Results for the trader

Understanding the mechanisms of long and short positions is a fundamental skill for successful trading in the cryptocurrency market. These strategies allow you to profit during both periods of growth and during market declines.

To open long and short positions in the cryptocurrency market, futures and other derivative instruments are most often used. They allow for trading without owning the underlying asset and increase potential profits through the use of leverage.

Professional traders combine different types of positions depending on market conditions, applying hedging techniques and strict risk management to protect their capital. Regardless of the chosen strategy, it is important to remember that high potential returns always come with increased risks.