Long vs. Short Positions in Crypto Trading: Knowing the Difference

The crypto market is more competitive than ever, and traders expect more from their cryptocurrency exchanges than basic offerings. You need to go the extra mile and offer features and support for things like: 

• Leverage trading to help investors increase their trading positions
• Cross-margin and isolated margin trading to give them control over their risks
• Long and short positions to enhance profit-making opportunities 

 

In this post, we’ll focus on long and short positions. Understanding these trading strategies can help you improve your offerings to attract a broader trader base. It can also help you serve clients better, increasing their likelihood of staying loyal to your exchange. 

What Is a Long Position?

A long position is a strategy that involves buying a cryptocurrency with the expectation that its price will rise. Traders who take this position profit from selling the currency at a higher price. 

Say Trader X buys Bitcoin (BTC) at a current market price of $50,000, expecting its price to appreciate to $60,000 — they are taking a long position. If the asset’s price increases according to their predictions, they’ll make a profit of $10,000. 

Long positions can attract clients looking for growth opportunities, which could mean more revenue from transaction fees for your trading platform. 

What Is a Short Position?

A short position is a strategy where traders bet against a cryptocurrency. They sell the asset, believing its price will fall, allowing them to profit from the decrease. 

Usually, traders who take the short position don’t own the assets they speculate on — they borrow them, sell them, buy them at lower prices, and then return them to their owners, typically brokers. 

Say Trader Y believes that the price of Ethereum (ETH) will fall from $3,000 to $2,000, so they borrow the altcoin and sell it at $3,000. If its price drops to $2,000, they can buy it back, return the borrowed asset or amount, and register a $1,000 profit. 

Traders can also take short positions using crypto derivatives — options, futures, or perpetual futures. This way, they speculate on the price of a cryptocurrency using a contract rather than the crypto asset itself. 

Offering support for this trading strategy can attract advanced traders and boost platform engagement during bear markets, potentially increasing your trading volume and revenue. 

Key Differences Between Long and Short Positions in Crypto Trading

Since long and short positions are completely different trading approaches, there are a lot of differences between the two, including:

Market Outlook

Long positions rely on bullish market trends. During bull markets, a crypto asset‘s price typically increases by 20% or more. This is why traders speculate they’ll profit from buying at current low prices.

Short positions, on the other hand, reflect a bearish market condition. Traders who short-sell assets expect a price decrease, which allows them to profit from the difference between the selling price (higher) and purchase price (lower). 

Entry Strategies

Long-position traders enter the market at a lower price, expecting asset prices to go up, while short-position traders enter at a high price, expecting prices to decrease. 

The level of due diligence required for each position also differs — short positions require more complex analyses since their risks are higher (more on this in the next section). 

With short positions, traders must assess technical indicators like the moving average and relative strength index (RSI), while also checking market sentiment on news platforms and social media sites. 

Long-position traders, on the other hand, typically focus solely on technical indicators to identify trading patterns. 

Risk Levels

Both positions are risky, especially when the cryptocurrency market is experiencing significant volatility. However, a long position is less risky than a short one. 

With a long position, a trader’s risk is limited to the purchase price, since the crypto asset’s price can’t fall below zero. This means that, even in the worst-case scenario, they can only lose the money they invested. 

Potential losses in a short position, however, are unlimited because there’s no cap on how high an asset’s price can rise. A trader may decide to sell an asset at $3,000, expecting it to fall to $2,000, only for its price to rise thousands or even hundreds of thousands of dollars. 

Profit Potential

The profit potential of a long position in a bull market is theoretically unlimited for investors who hold digital assets in the long term. Recall that an asset’s price can rise indefinitely. 

On the other hand, in a bear market, a short position‘s profit potential is limited to the difference between the selling price and buy-back price. 

Time Horizons

Long positions are typically long-term, with traders holding their crypto assets for months or even years, waiting for significant price increases. 

Short positions are often short-term, as investors use them to maximize profits on quick price declines. Holding them for short timeframes also helps with risk mitigation. 

Tax Implications

Profits from long positions are subject to capital gains taxes in many jurisdictions. Most regions charge higher taxes on short-term gains than on long-term gains, but it varies by country. 

Short positions aren’t as straightforward because they mainly involve leverage trading. In some jurisdictions, the short position remains open until the trader buys back the borrowed asset. When this happens, they may experience capital gains or losses (depending on price movements), leaving a lot of uncertainty regarding tax obligations. 

Pros and Cons of Long Positions for Crypto Traders

Let’s take a look at some of the benefits and drawbacks of taking a long position.

Pros

• Investors who implement a long-term buy-and-hold investment strategy can register unlimited profits if their crypto assets appreciate indefinitely. 
• This trading strategy is relatively straightforward, as it involves simply buying and holding cryptocurrencies. 
• A long position has limited risk exposure because traders can only lose the amount invested. 

Cons

• Traders may need to hold their digital assets for long periods to register substantial gains. 
• If traders hold on to losing long positions for too long, their assets may experience significant price fluctuations. 

Pros and Cons of Short Positions for Crypto Traders

As with long trading, short trading has its unique pros and cons, which may make it more suitable for some traders than others.

Pros

• Short positions present arbitrage trading opportunities. Traders can sell assets for high prices on one exchange and then buy them back at lower prices on another exchange if there are price differences. 
• This trading strategy can result in incredibly high profits if traders leverage it in a bear market. 

Cons

• They pose a considerable risk, since there’s no limit on how high crypto asset prices can go. 
• Short selling is complex, as it involves borrowing assets and closing out positions quickly. 
• Traders’ profit potential is limited to an asset’s initial value.

Elevate Your Crypto Exchange Platform With AlphaPoint

Taking a long position in a bull market or a short position in a bear market can result in high profits for traders and significant revenue for your exchange. To maximize your earning potential, educate beginner investors about both positions to help them make informed decisions and provide features that help them implement these trading strategies. 

AlphaPoint can help with the latter. Our user-friendly white-label exchange software lets you add multiple brokers and technical analysis tools to help traders execute their positions. Our technology is also equipped with risk management capabilities, such as real-time monitoring, which can help minimize losses resulting from errors. 

Schedule a demo with AlphaPoint today to see how our software can help you seamlessly expand your crypto exchange offerings!