How short selling works

Today I’m going to explain what short selling
is. Once again, this concept is not specific to
cryptocurrency or even to margin trading in general, so if you got to this video from
another channel, feel free to stick around. The zoomed out view of short selling is it
is used when you expect a currency to decrease in value, so you place a somewhat complex
trade to make a profit off that decrease. When you place a short, the exchange loans
you shares in whatever financial instrument you’re trading in — in this case currency
pairs. Notice I said the exchange is loaning you
shares – NOT the cash of the value of those shares. You then immediately sell them for the cash. Hopefully over time the value of the currency
decreases significantly, at which time you use your cash to buy the currency (at the
lower value) and return the borrowed shares to the exchange. You’ve now made a profit. Let’s look at a concrete example. Let’s pretend the current value of BTC/USD
is $1000. ( If you haven’t yet watched my video explaining
currency pairs, it might be helpful to watch first)
Crissy has a suspicion the price is about to fall. She places a short trade with the exchange. The exchange gives her $1000 worth of BTC. NOT $1000 USD. $1000 WORTH of BTC, which comes
out to be 1 BTC at the present time. She is now in debt to the exchange for 1 Bitcoin
The computer software she’s using (Meta Trader 4) then exchanges that 1 Bitcoin for
$1000 cash behind the scenes. On Tuesday Crissy logs into her trading account
and sees that the value of BTC/USD has fallen dramatically to $900 and she decides to close
out the trade. She has $1000 at her disposal, but NOW – because
the value has fallen, it only take $900 to buy one Bitcoin, so she does. She now has $100 in USD and 1 BTC. She returns the 1 BTC loan to the exchange
and pockets the $100. That’s it! We now know two types of trades: Longs and
shorts. Longs are used to profit when we anticipate
the value of a currency pair will increase, and shorts are used to profit when we anticipate
the value of a currency pair will decrease. It’s that simple. As always, let me know in the comments if
you have any questions or need any more clarification.

10 thoughts on “How short selling works”

  1. I might be stupid, but I really don't understand shorting. First of all, how does one borrow from say, Bittrex? Second of all, what's the point in borrowing money if you know the price is going to dip? Why not just wait for the dip, then buy in at it and make a profit when it stabilizes again? Third of all, what happens if you short, buy in at 900 and the stock keeps falling? How is this any different than the basic buying low selling high?

  2. Would this allow you to then cover an arbitrage trade from say Gemini to Kraken? Kraken allows margin trading, so say there was a $50 arbitrage opportunity (Gemini @ $2600 & Kraken $2650) if you shorted on the Kraken side immediately after you bought on the Gemini side wouldn't you cover any loss between the transfer of the Bitcoin from Gemini to Kraken? Even if the market went up your losses on short would be covered by the extra gain on the sale of the Gemini coin.

    Or am I missing something?

  3. Wow fantastic explanation! So hard and rare to find simple and to the point explanations in crypto! Thanks!!! BTW How does the exchange determine its okay to "lend" money to you without credit checks? I mean how do they determine whether you are a good candidate for lending $ to you?

  4. Thanks! Very straight forward video! I'm understand more and more about peoples ideas and strategies more before I decide to join in. 🙂

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