My personal thoughts about “short” on spot market
(which already let to many discussions)
There are no gains from the “short” on spot itself. You have to buy and hold all currencies that you want to “short” trade. But by holding the currencies you participate from uptrends (and downtrends). Only those movements change your portfolio size.
The stats for “short” spot only tell you how much funds, that were already in the deal before, you get out again.
Every deal that starts with a volatile currency, as also “short” deals do it, does not know at what price a currency was bought before and may sell at a loss on open. But if they are successful you still have the same amount of the currency plus some funds out of the deal.
In my opinion only a separate sub-account for the “short” deals allows you to measure their performance.
“Short” deals on spot don’t gain anything but only get some funds out of the deal, that were in there before. ONLY an uptrend after closing the “short” deal can give you profits, if and only if it offsets the losses of the dump.
A “short” spot deal that takes profit by buying back at a lower price doesn’t give you any extra funds that weren’t already in the deal before. If it does give you profit, it does so by opening, i.e. selling, at a higher price than it was bought at. Only the inherent long deals when there is no “short” deal running can give you profits.
That’s the mindset of “short” deals on spot: Hold base and profit from uptrends and capture at least some of the funds on downtrends.
But since only a small portion of the base currency is used during downtrends, the downtrend will reduce the portfolio’s value.
If you should really be able to get all the funds that you spent on the base currency converted to quote, then your base currency may give you more than you invested something extra.
But since short deals only take profit on downtrends, the unused funds lose value at the same time. If you buy base for 100, the price crashes to 0 in several steps and you are only able to save 10 from your initial 100 by “short” deals, then it doesn’t help you that you, that you still have the same amount of base, if the price doesn’t recover.
More detailed
Understanding “Shorting” Spot Crypto
Let’s clarify the often-misunderstood concept of “shorting” spot in the volatile crypto market. It’s not a true short position like in other asset classes. “Shorting” spot crypto simply means selling portions of your existing holdings incrementally as the price declines, with the plan to buy back those portions at lower levels. It’s a hedging tactic within a long position, designed to mitigate losses, not a strategy for independent profit generation.
Analogies and Interpretations
Analogy 1: Spot “Shorting” as an Inverted Long Position
A “short” position on a pair like BTC/USDT is functionally equivalent to a long position on a hypothetical inverse pair (USDT/BTC). “Shorting” BTC/USDT means betting on a decrease in BTC’s value relative to USDT. Profit is made by buying back BTC at a lower price. This is analogous to profiting from a long position in USDT/BTC (if it existed) as BTC decreases in value against USDT. Importantly, this is an analogy; you are not trading a non-existent pair. You are using your long BTC position to hedge against downtrends.
Analogy 2: Spot “Shorting” as a Dynamic Long Strategy
A simple long-only strategy consists of repeated buy-low, sell-high cycles:
[buy low, sell high], [buy low, sell high], [buy low, sell high].
Each of those long deals, if they are successful, makes sure to take profit on close.
A conceptually similar, but not identical, strategy incorporating “shorting” can be represented as:
buy low, [sell high, buy low], [sell high, buy low], sell high.
The “short” deals are embedded in a long deal implicitly or explicitly. Each successful “short” deal makes sure to take profit on close. The surrounding long position, if it is a long deal with “short” orders instead of DCA orders, can also make sure to close the overall position with profits. Only if we buy base to start “short” deals, we have to take care to close sell the base with profit again later.
This perfectly symmetrical “shorting” strategy mirrors the long-only strategy, with each “short” cycle generating its own profit independently from the long-only profits.
However, a real-world spot “shorting” strategy differs from this symmetry. Instead of selling and re-buying the entire position during each increment, traders typically sell only portions of their holdings. This allows for greater flexibility:
- locking in profits during uptrends
- and mitigating risk during downtrends.
This asymmetrical approach allows traders to benefit from upward price movements by taking partial profits at various levels, and also to limit losses during downward movements by strategically selling portions.
How “Shorting” Affects Profit/Loss
Your ultimate profit or loss depends on the difference between your initial purchase price and your final selling price, regardless of interim “shorting” trades. These trades aim to preserve capital during a downturn, but they don’t create profit on their own. Profit comes from the price appreciating above your average buying price (considering all your buy and sell orders).
Spot “Shorting” During an Uptrend
During an uptrend, the base currency held for “shorting” increases in value, contributing to overall portfolio growth. Furthermore, scaling into a “short” position (selling portions) during an uptrend, especially above the initial purchase price, acts like multiple take-profit events, securing profits at progressively higher levels. This combines the benefits of holding a long position with the strategic advantage of locking in gains during upward momentum.
Here’s an example illustrating a “short” DCA scenario, starting with a price of $100 and an initial purchase of 1 unit of Crypto A:
| Action | Crypto A (Units) | Price | USD Balance | Total Value | Average Price (Long Position) | Weighted Avg. Sell Price | Re-buy Target (2% below Avg. Sell Price) |
|---|---|---|---|---|---|---|---|
| Initial Buy | 1 | $100 | $0 | $100 | $100 | - | - |
| Sell 0.1 | 0.9 | $100 | $10 | $100 | $100 | $100 | $98.00 |
| Sell 0.1 | 0.8 | $110 | $21 | $109 | $100 | $105 | $102.90 |
| Sell 0.1 | 0.7 | $120 | $33 | $117 | $100 | $110 | $107.80 |
| Sell 0.1 | 0.6 | $130 | $46 | $124 | $100 | $115 | $112.70 |
| Buy 0.4 | 1 | $112.75 | $0.9 | $113.65 | $105.10 | - | - |
Spot “Shorting” During a Downtrend
As explained earlier, “shorting” on the spot market is not true shorting, but rather a risk mitigation strategy. During a downtrend, selling portions of your holdings allows you to preserve some capital and potentially buy back at lower prices, reducing your overall loss. This does not generate profit independently but can improve your position for a potential future recovery.
Here’s how it might play out.
You buy 1 unit of Crypto A for $100. Your initial portfolio:
- Crypto A: 1 unit (worth $100)
- USD: $0
- Total Value: $100
As the price of Crypto A falls, you execute the following trades:
-
Sell 0.1 units at $90 (receiving $9):
- Crypto A: 0.9 units (worth $81)
- USD: $9
- Total Value: $90
-
Buy back 0.1 units at $80 (spending $8):
- Crypto A: 1 unit (worth $80)
- USD: $1
- Total Value: $81
-
Sell 0.1 units at $70 (receiving $7):
- Crypto A: 0.9 units (worth $63)
- USD: $8
- Total Value: $71
-
Buy back 0.1 units at $60 (spending $6):
- Crypto A: 1 unit (worth $60)
- USD: $2
- Total Value: $62
Notice how the total portfolio value decreases alongside the falling price of Crypto A, even though you’re “shorting” portions. You’ve preserved $2 compared to holding and experiencing the full $40 drop to $60. Your net loss is $38 instead of $40.
If the price recovers to $70:
- Crypto A: 1 unit (worth $70)
- USD: $2
- Total Value: $72
You’re now better off than if you had simply held ($70), demonstrating the benefit of mitigating losses.
Here’s a table summarizing the transactions:
| Action | Crypto A (Units) | Price | USD Balance | Total Value |
|---|---|---|---|---|
| Initial Buy | 1 | $100 | $0 | $100 |
| Sell 0.1 | 0.9 | $90 | $9 | $90 |
| Buy 0.1 | 1 | $80 | $1 | $81 |
| Sell 0.1 | 0.9 | $70 | $8 | $71 |
| Buy 0.1 | 1 | $60 | $2 | $62 |
| Price at $70 | 1 | $70 | $2 | $72 |
What “Shorting” Statistics Really Mean
“Shorting” statistics typically show the capital preserved during the downturn — $2 in this example — not your overall profit. A separate sub-account or meticulous record-keeping can help track these interim trades, but the real profit/loss comes from the difference between your average purchase price and your final selling price.
The Core Strategy: Hedging Your Long Position
The core strategy is to hold the asset, benefiting from uptrends, and mitigating losses during downtrends by strategically selling and rebuying portions. However, your portfolio value remains tied to the asset’s price movements. “Shorting” spot crypto aims to preserve capital during downturns, giving you more buying power at lower prices and boosting potential gains if the price recovers. This is especially crucial in the volatile crypto market.
True Shorting: Futures, Perpetuals, and Margin Trading
Unlike spot, true shorting is possible with derivatives like futures and perpetual contracts, as well as with margin trading.
-
Futures: You agree to sell an asset at a specific price on a future date. If the price falls below that agreed-upon price, you profit by buying the asset at the lower market price and fulfilling the contract at the higher price.
-
Perpetual Futures (Perps): Similar to futures, but without an expiration date. These contracts use a funding rate mechanism — periodic payments exchanged between long and short position holders — to keep their price tethered to the spot market.
-
Inverse Perpetuals: These contracts use the quote currency (e.g., USD) as collateral, and profit/loss is calculated in the base currency (e.g., Bitcoin). They allow leveraged shorting, magnifying potential gains and losses.
-
Spot Margin: You borrow funds to amplify your trading position. Shorting on margin involves borrowing the asset itself, selling it at the current market price, and hoping to buy it back later at a lower price to repay the loan and keep the difference as profit. This also carries increased risk due to leverage.
In these instruments, you don’t need to own the underlying asset to short it. You’re essentially betting on the price going down, and your profit (or loss) is realized when you close your position. The use of leverage in these instruments can significantly magnify both profits and losses, making them higher risk than spot trading.
Disclaimer: This information is for educational purposes only and should not be considered financial advice. Consult with a qualified financial advisor before making any investment decisions.