A short position (or "going short" / "shorting") is a trade that profits when an asset's price decreases. It allows traders to make money in falling markets — something impossible with simple buy-and-hold investing.
How Short Positions Work
Via Futures (Most Common in Crypto):
1. Open a short contract at the current price
2. If the price falls, the contract gains value
3. Close the contract to realize profit
Via Spot Margin:
1. Borrow the asset from the exchange
2. Sell it at the current price
3. Buy it back later at a lower price
4. Return the borrowed asset, keep the difference
Example:
- Open short BTC at $50,000 with 10x leverage
- Margin: $1,000 → Position: $10,000
- BTC drops to $45,000 (-10%)
- Profit: $10,000 × 10% = $1,000 (100% return on margin)
Risks of Short Positions
- Unlimited theoretical loss: Prices can rise indefinitely
- Short squeeze: Rapid price increases force shorts to close, accelerating the rise
- Funding costs: In bullish markets, shorting can be expensive due to positive funding rates