What is short selling? The trading minute

Profit when everything goes down. This is the promise of short selling, the famous short, a technique that fascinates beginners and has ruined more than one professional. We have already seen the collateral damage with the short squeeze; it was time to tackle the beast itself. Because betting on a decline is something everyone has thought about on a red market day. Few know what it really entails. Key points of this article:

• Short selling allows betting on market declines, but it has led to disastrous losses for some investors.
• In 2022, hedge funds attempted to short Tether, betting on a spectacular drop, but the stablecoin held its ground, leaving the funds with significant losses.

Short selling: how to bet on declines

The principle can be summed up in one sentence: sell an asset you do not yet own, to buy it back cheaper later. This is the short, in jargon. Specifically, you borrow bitcoins, sell them at the current price, and if the price drops, you buy them back at a lower price to return to the lender. The difference is your profit. In crypto, the mechanics often involve perpetual contracts or margin trading, where leverage almost always enters the equation.
Except that the symmetry with buying is an optical illusion. A buyer risks at worst 100% of their stake if the asset falls to zero. A short seller, on the other hand, faces theoretically unlimited losses, as there is no ceiling on how high the price can go. Their maximum gain, conversely, is capped. Therefore, short selling means accepting a bet where you can lose much more than you hope to gain. A detail that changes everything. 2022, when hedge funds shorted Tether and lost

The case in point comes from traditional finance. In March 2022, Bloomberg revealed that the New York fund Fir Tree, managing about $4 billion, had set up a significant short against Tether's USDT, convinced that its reserves hid dubious assets. After the collapse of the UST stablecoin in May, the movement gained traction. In June 2022, the Wall Street Journal, echoed by CoinDesk, estimated these bearish bets against USDT in the hundreds of millions of dollars.
What was the outcome? USDT briefly wavered below its peg in May 2022, Tether honored several billion dollars in redemptions within days, and the stablecoin is still here four years later, bigger than ever. Funds that held their shorts paid borrowing fees for months for a bet that never paid off. Even the best-informed professionals struggle when the market refuses to validate their positions in time. The opening quote is not there by chance. Shorting as a retail trader, with what precautions?

The first rule is to size the bet like a bet, not like a conviction. A short is protected by a tight stop, sized small, and quickly reassessed, because time works against you, between financing costs and squeeze risk. The second rule is to beware of "obvious" shorts on a hated asset. When everyone is selling, the slightest rebound forces a chain of buybacks and the price skyrockets. It’s mechanical.
To broaden the perspective, note that short selling also plays a useful role, deflating bubbles and smoothing prices, which explains why regulators oversee it without ever banning it outright. But on the personal portfolio side, the risk/reward ratio of a poorly managed short remains one of the worst in all trading. Fir Tree had analysts, lawyers, and $4 billion. And Tether is still standing.

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