About shorting

The average trader is naturally a chronic bull.

It is human nature to prefer optimism to pessimism.”

Philip Carret

To be short the market is complicated business.
There is a difference in meaning between complicated and difficult. A car is a quite complicated mechanical and thermodynamic achievement, and yet driving one isn’t particularly difficult.

What does it mean to short anyway?

Let’s start from defining what it means to be long the market, as it is less complicated.
If you believe the market of a particular asset is going to trade towards higher prices, you can put your wallet where your mouth is and “go long”, in the case of crypto by two main ways: purchasing said asset itself and waiting for its appreciation (spot market) or use futures trading (most commonly perpetual futures) to open a long position. In this case your margin/capital stays denominated in dollar, and you can use leverage to decrease your risk (yes, decrease! Check “About leverage” ). There’s a third way, which is options, but we don’t go into that today, and in fact options were initially commonly used as hedge, not as a main trading vehicle.

To be short is to bet on the market getting worse, that is, prices trading lower.
Here it arises a first complication: if you have money and you want to go long you just need to buy, but if you have money and want to short, how can you sell now for high price something you don’t have?

So, short is always done through “borrowing”. You borrow assets at today prices, to sell them “today”, with the promise to repurchase them at a later time. If you’re right, later will be lower price and you will cash the difference, if you’re wrong, you will still need to repurchase them, but price will be higher and it will cost you money.

So closing a short is always a “buy” event, that is why sometimes you see some weak “recovery” after a big dump, it’s shorters taking profits. In the same way as closing a long is necessarily a “sell” event.

On top of this, the lender of the assets won’t just stay there watching you until you run the value of your investment to zero, so he will set a “liquidation price” to forcibly get you out of the trade and recover (for himself) whatever little is left before you go into full ruin.

The other, and in my opinion, main complication is of philosophical, or rather I should say psychological nature.

You see, humans are not wired to “bet on a worse future”. We are wired to look forward to the future, to believe things will be better, rosier, greater, happier.

That is a powerful survival mechanism in the wild, you need to believe you will find more food, more fresh water, a shelter from rain and snow, a mate to breed with, a fire for warmth.
But it makes shorting something of a taboo in our brain: it takes going against our very own animal programming to say “I think things are gonna get worse, and I think I can make this good for me by betting on it”.

There’s a reason “bears” in the market are always described with negative adjectives, or even amoral/unethical and evil, and it’s not just because people are salty that they lose money. It’s a psychological mechanism of recognising someone who is going against the “tribe” collective bet on survival, and must be ostracised or better kicked out.

There’s no space for sociopathic behaviour (in literal terms) in a tribe of walking monkeys. You’re “long the tribe” or you’re out.

It takes a special kind of person to go above and beyond the fear lurking in shorting the future, it takes individuals who have strong sense of self and feel little attachment to the community at large, people who are able to “bypass” nature warning to our brain and can feel comfortable in such position, and also bear (sorry for the pun) the reprieve of society, or at least the trading community, who will always be majorly “long” on average.

Being a bear can be a lonely journey, albeit profitable when the trend is negative.