🎯 Long and Short Positions in Crypto Trading: The Complete Guide

When you start studying the cryptocurrency market, you inevitably encounter terminology that may seem complicated at first glance. Among these concepts, two fundamental strategies stand out — long positions and short positions. Let’s understand how they work, why traders use them, and what risks they carry.

Historical Roots of the Terms “Long” and “Short”

Interestingly, the origin of these words in trading is not definitively established, but the first documented mentions appeared in The Merchant’s Magazine back in 1852.

The connection of these terms with trading logic is quite symbolic. The term “long” (from the English long — long) applies to positions aimed at price increases because rising quotes are usually a drawn-out process that requires patience and holding the position over a long period. Conversely, “short” (from the English short — short) describes a strategy for decline, as downward fluctuations tend to happen more rapidly, allowing profit in a relatively short time.

Mechanics of Long and Short Positions

Long Position — How It Works

When a trader opens a long, they simply buy an asset at the current price expecting its value to rise later. For example, if a token is trading at $100 and the trader predicts it will grow to $150, they just need to buy and wait for the target level. The financial result is calculated as the difference between the entry and exit prices — in our case, $50 per unit.

Short Position — Implementation Logic

The short strategy works differently. The trader borrows the asset on the exchange, immediately sells it at the current price, and then waits for the quotes to decline. When the price drops, they buy back the same amount of the asset at the new, lower price and return it to the lender. The remaining funds (minus borrowing costs) become their profit.

Suppose the trader is confident that Bitcoin’s price will fall from $61 000 to $59 000. They can borrow one BTC, sell it at the current rate, and when quotes decrease, buy back the same Bitcoin cheaper and return it. Their income will be approximately $2000 minus commissions.

In practice, the system operates fully automatically — the trader simply clicks a button in the trading interface, and everything else happens instantly “in the background.”

Market Participants: Bulls vs. Bears

These two archetypes of traders determine market dynamics.

Bulls believe in an upward trend — they either hold assets or open long positions. Their actions increase demand and support prices. The name comes from the visual image of a bull, which thrusts its horns upward.

Bears expect a decline in quotes and take short positions, thereby exerting downward pressure on asset prices. The image of a bear pressing down with its paw perfectly reflects their actions.

From these concepts, the familiar definitions of a bullish market (with rising prices) and a bearish market (with falling quotes) originated.

Hedging Positions to Minimize Losses

Hedging is a technique to minimize losses during unexpected price reversals. It is achieved by simultaneously using opposite positions.

Example of Hedging in Practice

Suppose a trader bought two bitcoins, predicting their growth. However, they realize a negative scenario is possible. To protect themselves, they simultaneously open a short position on one bitcoin.

If the quotes indeed rise from $30 000 to $40 000:

• Profit from the long (2 BTC): ($40 000 - $30 000) × 2 = $20 000
• Loss from the short (1 BTC): ($30 000 - $40 000) × 1 = -$10 000
• Total result: $10 000

If the price drops from $30 000 to $25 000:

• Loss from the long (2 BTC): ($25 000 - $30 000) × 2 = -$10 000
• Profit from the short (1 BTC): ($30 000 - $25 000) × 1 = $5 000
• Total result: -$5 000

Thus, losses in an unfavorable scenario are halved — from potential $10 000 to $5 000. However, the cost of this protection is halved profit in a favorable scenario.

Common Mistake by Beginners: opening two equal opposite positions of the same size. This creates a complete neutralization of profit and loss, and commissions turn the strategy from neutral into unprofitable.

Futures Contracts: A Tool for Opening Positions

Futures allow speculation on price fluctuations of any asset without owning it physically. In the crypto industry, two types are common:

Perpetual Contracts (perpetual futures) have no expiration date, allowing traders to hold positions as long as needed and close them at a convenient moment.

Settlement (non-deliverable) contracts provide only the difference in value between opening and closing the position, expressed in a specified currency.

Long positions use buy-futures, short positions use sell-futures. Additionally, traders pay a funding rate — a fee reflecting the difference between spot and futures prices — every few hours.

Liquidation: When a Position Is Closed Forcefully

Liquidation occurs when trading with leverage, and the (margin) becomes insufficient to maintain the position due to a sharp price change.

Before liquidation, the platform sends a margin call — a request to deposit additional funds. If not fulfilled, the position is automatically closed at a loss.

To avoid liquidation:

• Practice proper risk management
• Constantly monitor open positions
• Understand liquidation levels
• Use leverage conservatively

Advantages and Disadvantages of Longs and Shorts

Strengths and weaknesses of long positions:

• The logic is intuitive and similar to regular spot market buying
• Easier to manage and forecast
• Historically, the crypto market tends to grow more than fall

Strengths and weaknesses of short positions:

• Require a deeper understanding of trading mechanics
• Price declines are unpredictable and can be sharper
• Psychologically more challenging to hold a position against the overall trend

Using leverage

Traders often use borrowed funds to amplify results. However, this increases both potential profit and risks. When using leverage, it’s necessary to constantly monitor margin levels and be prepared for liquidation.

Final Recommendations

Choosing between long and short positions depends on your market forecasts and trading strategy. Both approaches are valid in a trader’s portfolio but require:

• Detailed market analysis
• Understanding of your risk profile
• Continuous learning and risk management skills
• Cautious use of leverage

Futures and other derivatives offer opportunities to profit in both rising and falling markets. But remember: tools capable of generating significant profit can equally cause substantial losses. Prudence and knowledge of trading mechanics are your main allies in crypto trading.