Short Selling

Short selling is a form of margin trading in which a trader seeks to profit from declines in asset prices. To ‘short’ an asset, a trader borrows a set number of units of an asset (ex. 100 BTC) from another party and then sells it, promising to repay the lender the same number of units at a specified point in the future. If the short seller is correct and prices go down, they are able to repurchase the same number of units that they borrowed at a lower price. Thus, the difference between the price at which they sold the borrowed units and the price at which they repurchased the units is the amount that the short seller profits.

Short selling poses a much greater risk than regular trading. When seeking to profit from rises in asset prices, the potential loss is limited to the trader’s initial investment. With short selling, however, potential rises in the price of the asset that the trader must repurchase are theoretically infinite, creating unlimited risk for the short seller.