What is Long and Short in Crypto Trading?

What is long and short in crypto? This is a common question frequently asked by individuals new to cryptocurrency trading. When traders talk about a long position, they believe that the price of the asset will increase. On the other hand, when they discuss a short position, the indication is that the price of the asset will decline.

Long and short are the terms used in buying and selling cryptocurrencies to profit from price movements. While the concepts seem simple, understanding the key factors that impact long and short positions is essential, especially for newcomers.

Let’s break down these terms to know their meaning, relevance, and usage in cryptocurrency trading.  

Cryptocurrency Trading Basics

Cryptocurrency trading is the process of buying and selling digital currencies, such as Bitcoin (BTC) and Ethereum (ETH), to make a profit. It is done on centralized exchanges (CEXs) or decentralized exchanges (DEXs), where traders can use basic and advanced order types to trade digital assets. Unlike traditional finance, the cryptocurrency market is open 24/7, offering both opportunities and volatility.

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You can engage in spot trading to buy or sell digital assets at the current market price or use futures trading to trade a cryptocurrency at a predetermined price on a future date. For this, you can also take either a long position or a short position. Traders take a long position to buy a cryptocurrency, expecting its price to rise. On the other hand, a short position involves borrowing and selling a digital asset, anticipating its price will fall, and aiming to buy it at a lower price for profit.

Important Reads: Crypto Trading Tips: A Practical Guide for Beginners

What is a Long Position?

A long position is a commonly used strategy in cryptocurrency trading, particularly when the market is bullish. It is a practice of buying a digital asset with the expectation that its price will rise over time. Traders aim to profit by holding the asset and selling it later at a higher price.

For example, if you purchase Bitcoin at $110,000 and expect it to rise to $130,000. You take a long position and hold it. If the price goes up to $130,000, you can sell for a profit.

Long positions are straightforward strategies that enable traders to profit from rising prices. However, like any investment, you need to exercise caution since cryptocurrency prices can fluctuate at any time. Carefully manage your positions and be aware of the latest market trends to avoid losses.

What is a Short Position?

A short position is the practice of borrowing a cryptocurrency and selling it with the expectation that its price will fall. After selling the digital currency, the trader repurchases it at a lower price, returns the borrowed coins, and profits from the difference.

In simple words, you borrow a digital asset from a broker or an exchange that supports margin trading. You sell it at the current market value and wait for the price to decrease. Once it drops, you buyback the same amount of cryptocurrency at a lower price. After this, you return the borrowed coins to the lender, thus making a profit from the difference between the buying price and the selling price.

For example, if you short Bitcoin at $110,000 and the price falls to $108,000, you can repurchase BTC at the lower price, return the borrowed coins, and take the difference as a profit.

Opening a short position carries significant risk due to the digital market’s volatility. Traders need to manage risk, consider the borrowing cost, and carefully use stop-loss orders when going short.

Long Position vs Short Position Crypto – Key Differences

Long and short positions are entirely different approaches in cryptocurrency trading. To understand what is long and short in crypto, it is essential to grasp the following key distinguishing factors.

1.   Market Outlook

Traders open a long position during bullish market trends. Typically, a crypto asset’s price increases by 15% or 20% during a bull run. This is when the traders buy the digital asset, speculating its price will rise. On the other hand, a short position reflects a bearish market condition. Traders expect the price of digital currency to fall, selling at a higher price and purchasing it back at a lower cost, thus making a profit.

2.   Risk Levels

Opening a long or a short position becomes risky during a highly volatile crypto market. However, a long position is safer than a short one. The risk of a long position is limited to the purchase price. Since the price of a digital asset cannot fall below zero, even in the worst-case scenario, a trader can only lose the amount invested.

In a short position, a trader borrows an asset and sells it, expecting the price to fall. The risk is higher because the price can rise indefinitely. For instance, shorting Bitcoin at $10,000 could result in unlimited losses if it rises to $15,000 or higher. In practice, most exchanges set a liquidation price to prevent losses from spiraling out of control. Once liquidation is triggered, the trader loses their margin. Without such liquidation, losses from a short could exceed the account balance and create negative equity.

3.   Time Horizons

A long position is a long-term strategy in which traders hold crypto assets for an extended period. It could be months or even years of waiting for a significant price increase. On the other hand, a short position is a short-term strategy. Traders open short positions to profit from quick price fluctuations.

4.   Entry Strategies

A trader enters a long position at a lower price, expecting the asset’s price to go up. While a short trader enters at a high price, fearing that it will decrease. Additionally, managing a short position requires more complex analysis due to the high risk. To do this, traders should assess market sentiment and utilize technical indicators such as the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) to place trades effectively.

5.   Profit Potential

Traders open a long position in a bull market, where the profit potential is unlimited. Investors hold digital assets in the long run and sell when the price increases significantly.

The profit potential of a short position is limited since it is based on short-term time horizons. A short position profit is limited to the difference between the selling price and buy-back cost.

Valuable Tips to Open a Long or Short Position

There are several useful tips that traders can follow before opening a long or short position in cryptocurrency trading.

• Market Trend: Analyze the broader market trend (bearish or bullish) before opening a position.
• Assess Market Volume: Higher liquidity ensures there is enough trading activity in the market, making it easier to exit positions without slippage.
• Manage Risk: Define your position size, stop-loss, and take-profit target to avoid losses during volatile market conditions.
• Technical Indicators: Use technical tools, such as Bollinger Bands or MACD, to confirm bullish or bearish market conditions.
• News and Events: Stay informed on major announcements, macro updates, or regulations that can impact the price of a cryptocurrency.
• Timeframe and Strategy: If you are a short-term trader, define your trading strategy, such as day or swing trading. If you are a long-term trader, stick to that plan like HODLing (HODL).
• Emotional Discipline: Stay composed and avoid chasing the market when trading cryptocurrencies. Focus on your strategy and act on signals.

Final Takeaways

Long and short positions are the core elements of cryptocurrency trading. The more traders understand them, the better decisions they can make about when to buy, sell, or hold cryptocurrencies. As a beginner, trading digital currencies can be challenging due to higher market volatility. Therefore, if you plan to go long or short, consider your risk tolerance and conduct thorough market analysis before investing in digital assets.