What is short and long?
Shorts and longs - short and long positions (for sale and for purchase) in trading .
Most cryptocurrency assets are characterized by high volatility. The use of shorts and longs allows traders to make a profit in the process of price fluctuations.
The origin of shorts and longs
In medieval Europe, debt-bearing sticks or counting sticks made of hazel were used to account for debts. On one of the faces of the tag, the cross-cut marks indicated the amount put into circulation, after which the tag was split along the notches, but not completely, but with a cut in the area of the “handle”. The result is a long part with a handle (stock) and a short part (foil), complementing this long part to a full stick. Notches were on both sides. By coincidence of these parts, control was carried out. It was believed that because of the texture of hazel, fake was impossible. Two parts were stored by two parties involved in the transaction. From this practice, the terms “stock market”, as well as “long” (long) and “short” (short), supposedly arose.
The expressions “short” and “long” positions were spread on the American stock and commodity exchanges in the 1850s. Perhaps the earliest mention of short and long positions is in The Merchant's Magazine, and Commercial Review, Vol. XXVI, January-June 1852.
Despite the names, the period for a short position can be quite long (week, month), and the period for long can be quite short. From the world of traditional finance, the terms short and long migrated to the bitcoin industry.
Exchange players are usually called bulls or bears, depending on what strategy they are following. Bulls are called bulls, and bulls are called bears.
What is a long?
Long (long position) - buying an asset in anticipation that it will increase in value. The amount of profit depends on the increase in the value of the asset.
What is a short?
In simple words, a short is selling a financial instrument in anticipation that it will become cheaper.
However, the mechanics of a short position are somewhat more complicated than long. Under this scheme, a trader takes an asset on loan and sells it on the open market at the current price. Then he waits for the depreciation, buys the amount of the asset that he borrowed at a lower rate and repays the debt with interest. The trader retains the profit received due to changes in prices. Otherwise, if the price of the asset rises, the investor will receive a loss.
An example . In December 2017, a trader acquired bitcoins at $ 19,000 per coin. He sold these coins at the same time for $ 19,000, and then paid the lender approximately $ 6,000 for each BTC, when in February 2018 the price dropped significantly . With each coin, he made a profit of $ 13,000.
What is margin trading?
Margin trading can be used to open both longs and shorts. As part of margin trading, the user must provide a deposit - deposit an amount (margin) guaranteeing payment of debt obligations according to the rules established by the exchange. The difference between margin trading and ordinary (spot) trading is that when buying cryptocurrency without leverage, the trader gets it in ownership . When buying with a leverage, he can not withdraw either cryptocurrency or margin.
The concept of margin is closely related to the concept of leverage or leverage - a multiplier that increases the user's deposit available for a transaction at the expense of borrowed funds. In the cryptocurrency market, this ratio can range from 2: 1 to 100: 1 or more.
If the market value of the cryptocurrency moves in the direction expected by the trader, the income increases in proportion to the selected leverage. At the moment of closing such a position, the body of the pledge is returned to the creditor together with the commission fees, and the rest of the profit received is credited to the user's account.
If the price moves in the opposite direction, then as soon as the value of the trader’s assets (both own and borrowed) reaches the size of the loan with interest (the amount that the trader must return to the creditor), the exchange will automatically liquidate all the player’s positions and return his funds to the creditor. The amount returned to the creditor fully includes the margin.
In classical trading with leverage in the stock market, liquidation of a position is preceded by the so-called margin call - the requirement of additional collateral. Often, the moment of liquidation is called directly the margin call, on the slang of cryptotraders - “catch the walrus”.
A trader can complete a failed transaction on his own, without waiting for liquidation. However, he does not lose the entire position, but only part of the margin. You can manually liquidate a position manually and through a “stop loss” (from the English stop loss - stop loss) - an order to limit trading risks, which involves automatic closing of a transaction when a certain price level is reached.
What is hedging?
In the cryptocurrency market , a mechanism known as hedging is used - insurance in case of a situation where the general trend remains positive, but a temporary reduction in the price of the asset is possible.
At the heart of hedging is the opening of short positions that balance long positions and allow you to stay “at zero” in the event of an undesirable change in the market situation. The investor leaves the initial long position intact and opens a short, or uses additional opportunities.
Hedging is a solution for long-term investment advocates. This mechanism is somewhat contrary to traditional trading, where market speculation prevails. Therefore, it will not work effectively to use it, for example, in intraday trading.
A popular way to hedge positions involves the use of futures contracts: unlimited and urgent.
Perpetual contracts work according to the following principle: every eight hours a so-called financing rate is set. The last parties to the transactions pay each other instead of transferring the contracts themselves or their full costs. Depending on the market situation, either the long-contract holders of the short holders pay the rate or vice versa.
Fixed-term contracts are executed automatically if the investor does not close them himself before the expiration day.
You can hedge not only with futures , but also with options - derivative financial instruments for more advanced market participants.
What is averaging?
As part of this strategy, an investor buys an asset at an ever lower price, thereby lowering the average purchase price.
Example : Bitcoin price reached $ 2900, then began to decline. Having seen the correction phase, the trader began to buy coins at successive levels of decrease: $ 2800, $ 2600, $ 2400, $ 2200, $ 2000. The average purchase price was $ 2,400. After the correction phase, the rate began to grow and subsequently returned to the level of $ 2900 dollars.
Pros and cons of longs and shorts
Opening long positions is a more understandable strategy for a beginner, which boils down to the simple principle of "buy cheaper, sell more expensive."
Shorting can be an effective investment strategy, but much more risky than long-term investments or averaging. Opening short positions in large amounts is only necessary for experienced traders who are able to comprehensively analyze market dynamics.