What is a short position?
- Author
- CRYPTO PORT Editorial
- Published
- Updated
- Reading time
- 4 min
In short
A short position is opened by selling first: it gains when the price falls and loses when it rises. Since there is no theoretical ceiling on price, there is none on the loss either, and it can exceed the collateral posted.
Key points
- Opened by selling and closed by buying back
- It gains on a fall and loses on a rise
- No ceiling on price means no ceiling on the loss
- Borrow fees or funding charges apply while it is open
Definition
A position created by selling an asset you do not own, closed by buying it back, with the difference between the two prices forming the profit or loss.
Mechanically you borrow the asset, sell it, and buy it back later to return it. Sell at 1,000,000 yen and buy back at 800,000 and the 200,000 difference is profit; buy back at 1,200,000 and it is a 200,000 loss. Perpetual contracts book this as a contract position rather than a real loan, but the arithmetic is the same.
The crucial difference from a long is how the loss behaves. A long cannot lose more than the price falling to zero. A short that sees the price double loses the full amount it sold, and a fivefold rise costs four times it. With no ceiling on price, there is none on the loss.
Holding a short normally incurs borrow fees or funding charges. When shorts crowd one side of the market, the funding rate can flip so that the short side becomes the payer. Rates move with conditions and differ across exchanges.
Watch out for
- · A sharp rally can push losses past the collateral and leave a shortfall to settle
- · Liquidation executes automatically, and a later decline does not bring the position back
- · Borrow fees and funding charges accumulate for as long as the position is held