Shorting meaning

Short selling or shorting is a trading strategy where an individual sells a borrowed asset and then repurchases it later at a lower price.

What Does Short Mean in Crypto?

Short selling, also known as shorting, is a trading strategy that involves borrowing an asset, selling it, and then repurchasing it later on at a much lower value. When an individual short sells an asset, they are anticipating that it will decline in value and thus can be repurchased at a cheaper price.

While betting on an asset’s value to drop is counterintuitive to the fundamental concepts of making profits from value appreciation, short selling allows traders to benefit from price declines. In other words, it enables traders to gain from a negative exposure to a digital asset. 

How Does Short Selling Work in Crypto?

To short-sell crypto:

1. Choose a crypto exchange or broker – Find a cryptocurrency trading platform that offers short selling opportunities, margin trading, prediction markets, contracts for difference (CFDs), and futures or options contracts.
2. Borrow the cryptocurrency – Borrow the cryptocurrency you intend to short from your selected exchange or broker.
3. Sell the borrowed cryptocurrency – Immediately sell the borrowed asset at the current market price without ever owning the crypto itself.
4. Repurchase the crypto – Buy back the cryptocurrency once its value declines.
5. Return the crypto to the lender – Return the borrowed asset to the exchange or broker and pocket the price difference.

As such, the short seller makes a profit only if they repurchase the asset at a much lower price than when borrowed. Otherwise, the short seller loses money if the price appreciates before they repurchase it. This means that shorting is equally risky as it is potentially profitable.

For example, if you open a short position of BTC at $70,000 and its value declines to $60,000, you can repurchase it at a cheaper price. After buying it back, you return the borrowed BTC and pocket the difference. In this case, you make a $10,000 profit. However, if the price increases after shorting to $75,000, you would buy BTC back at a higher price, resulting in a $5,000 loss. 

Since cryptocurrency prices can theoretically increase indefinitely, short selling has an unlimited potential for losses. However, crypto prices cannot drop beyond $0 and thus short sellers have a capped profit potential.