What are trading shorts?

What are shorts?

Shorts is to “sell short”, that is to say to sell an asset that one does not hold with the aim of buying back the contract later at a lower price. If the investor decides to short a cryptocurrency and the value of the underlying falls, then the difference between the purchase price and the sale price makes it possible to generate a capital gain.

The shorts allow make money when financial markets go downbut not only, it also offers the possibility of hedging against the risk of a drop in a cryptocurrency price.

It is not strictly speaking a “direct” investment, because it is the derivative product that replicates the underlying (the cryptocurrency) that we buy, and not the underlying itself. A major difference, because it is what makes it possible to speculate on the fall of an asset that one does not hold, but also to use leverage.

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What is leverage?

Leverage allows you to increase your market exposure with a low starting bet and works both in the direction of buying and selling. Unlike a spot trade where you have to hold €100 to buy 100, leverage gives the trader the ability to invest more than its initial capital.

How ? He finances only part of the investment, the rest is provided by the intermediary who gives him credit. Only condition to open a position, the intermediary requires a security deposit, which corresponds to a deposit. Every day this deposit, also called “margin call”, fluctuates according to market conditions.

If the position is in deficit, the margin call will increase: the intermediary requires a higher deposit to keep the position open. If the trader fails to pay the cost of the margin call on time, then the position is automatically liquidated through the financial intermediary.

Principle of leverage

Leverage may be very risky, but it is popular with investors. In fact, thanks to a leverage of 10, it is possible to invest €1,000 in cryptocurrencies with a starting bet of only €100. Enough to boost performance… But be careful, because if the market fluctuates in the opposite direction to the anticipated scenario, you can lose your entire bet or having to replenish your account very quickly to keep the position open.

Derivatives that allow you to short a cryptocurrency

Derivatives represent a vast family that can take different forms: contract for difference (CFDs), futures contracts (futures), forward contracts, Turbos or options… All have their own specificities.

Their common point? They are called ” derivatives in the sense that they derive from the value of the asset. They were designed as insurance contracts which help to protect against a hazard, such as a drop in price. These products create a time lag between the moment the contract is signed and the moment it is completed, which makes it possible to do two things that are impossible with a spot contract: short selling (the short) and leverage. .

Conclusion

Derivatives, such as futures and CFDs, are therefore an excellent way to sell short and use leverage. But they are also very risky! They should be handled with the utmost care.on pain of losing his entire bet in less time than it takes to tell.

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About the Author : Florentine Loiseau

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Passionate about trading, I have been analyzing and commenting on financial market news as an economic journalist for over 10 years. Crypto-enthusiast since 2019, I follow this universe with great interest, the repercussions of which go far beyond the world of finance.
All articles by Florentine Loiseau.

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