Shorting: The strategy that allows you to profit when the market falls.

Why do some traders win while others lose in declining markets?

During a prolonged price drop, most conventional investors can only watch their capital erode. But there is a strategy that transforms this scenario: shorting or selling short. Although it sounds complex, the concept is surprisingly simple: selling something you do not own, hoping to buy it back later at a lower price.

This tactic has existed for centuries in traditional markets, but gained global prominence during events like the 2008 crisis and the GameStop event in 2021, where retail investors spectacularly capitalized on short positions.

The basic mechanism: how it really works

When you decide to short an asset, you execute these steps:

1. You request a loan You borrow an asset (stocks, cryptocurrencies, or commodities) through your broker or trading platform.

2. You sell immediately You place those units on the market at the current price, obtaining cash capital.

3. You wait for the drop If your analysis is correct and the price drops, you take advantage of that difference.

4. Buybacks and closes You buy the same volume again at a lower price and return what was borrowed to the creditor.

5. You receive your profit The difference between the initial selling price and the repurchase price is your profit ( minus commissions and interest ).

Let's see two concrete examples

Case 1: Operation with Bitcoin

Suppose you are shorting BTC. You borrow 1 BTC when it is priced at 100,000 USD and sell it immediately. Your position now generates daily interest for the lender. The price drops to 95,000 USD. You buy back 1 BTC for 95,000 USD and return it. Your net profit is 5,000 USD (after deducting fees).

However, if the market surprises with positive news and BTC rises to 105,000 USD, your repurchase will cost you an additional 5,000 USD, resulting in a loss. And if it keeps rising… your losses could be unlimited.

Case 2: Stock Operation

An investor believes that the shares of XYZ Corp (, priced at 50 USD), are going to fall. He borrows 100 shares, sells them for 5,000 USD. When they drop to 40 USD, he repurchases them for 4,000 USD and makes a net profit of 1,000 USD.

But if they rise to 60 USD, you must pay 6,000 USD to return what was borrowed, resulting in a loss of 1,000 USD plus additional costs.

Two different approaches to shorting

Short selling: It is the standard form. You borrow the actual asset and sell it. It is regulated and safe.

Short selling: You sell without having requested the loan first. It is riskier, generally restricted or prohibited because it allows for market manipulation.

The requirements you must meet

To short through a margin or futures platform, you need:

Initial guarantee (initial margin)

• In stocks: typically 50% of the total value of the position
• In cryptocurrencies: it varies by platform. With 5x leverage, a position of 1,000 USD requires only 200 USD in collateral.

Maintenance Fund (maintenance margin) It is the minimum level of funds that your account must maintain. It is calculated by dividing your total assets by your total liabilities.

Forced liquidation risk If your margin level falls too low, the platform will issue a margin call. If you do not deposit more funds, it will automatically liquidate your position, potentially with severe losses.

The great advantages of this strategy

Profits in Bear Markets Unlike traditional trading (, shorting allows you to capitalize on price declines. It is especially valuable during sustained corrections.

Wallet protection )coverage( If you hold a long position in Bitcoin for the long term, you can temporarily short Ethereum to offset losses during volatile market events.

More accurate price discovery Many academics argue that shorters help identify overvalued or fraudulent companies, improving market efficiency.

Greater liquidity in markets Increases activity and facilitates transactions for all participants.

The risks you cannot ignore

Potentially unlimited losses This is the most critical risk. In theory, the price of an asset can rise indefinitely. While a buyer )long position( can lose a maximum of 100% of their investment, someone who shorts can lose multiples of their initial investment.

Short squeeze: The market trap If many traders are short on an asset and bad news turns into good news, the price can quickly skyrocket. Short sellers are forced to close positions simultaneously, causing a bullish spiral that amplifies the losses. GameStop was the most notable example.

Significant loan costs You pay daily fees and interest rates to the creditor. For actions or assets with high loan demand, these costs can significantly erode your profit.

Dividend payments ) in shares ( If the asset pays dividends during your short position, you must pay that amount to the owner. It is an additional cost that many traders do not anticipate.

Sudden regulatory restrictions Regulators may impose temporary shorting bans during market crises, forcing you to close at unfavorable prices without an option.

The ethical and regulatory debate

Short selling is controversial in financial and political circles. Critics argue that it amplifies market declines, especially during periods of panic, and can unjustly target healthy companies, harming employees and minority shareholders.

During the 2008 crisis, aggressive short selling led to temporary bans in multiple jurisdictions.

However, defenders argue that shorting exposes fraud, corrects speculative bubbles, and improves market transparency. Regulators try to balance this with measures such as the uptick rule ) which restricts shorting during rapid declines ( and disclosure requirements for large positions.

In the United States, the SEC's SHO Regulation specifically regulates shorting to prevent manipulation and practices like naked shorting.

In summary: Is shorting for you?

Shorting is a powerful tool that allows institutional traders and investors to profit in bear markets and manage risks in portfolios. It is fundamental in stock, commodity, forex, and cryptocurrency markets.

However, it is not a passive strategy. It requires rigorous analysis, disciplined risk management, and a deep understanding of liquidation mechanisms and short squeezes. Losses can be catastrophic if risks are underestimated.

The key is to understand exactly what you are doing, why you are doing it, and how much you are willing to lose before opening any position.