Short selling

An example

You borrow 100 shares and sell them at ISK 1,000 each, for ISK 100,000 in total.

• If the price falls to ISK 800, you buy the shares back for ISK 80,000 and return them. You make ISK 20,000, before the cost of borrowing.
• If the price rises to ISK 1,500, buying them back costs ISK 150,000. You lose ISK 50,000.

When you buy an asset, the most you can lose is what you paid. In a short sale there is no upper limit to the loss, because the price can keep rising. The loss can therefore be many times the amount you received for the sale.

Short selling with crypto

With crypto, short selling is usually done with DerivativesDerivativesContracts whose value comes from another asset, such as shares, a currency or a cryptocurrency., especially perpetual futuresPerpetual futures (perps)A derivative with no expiry date that tracks the price of a crypto. Regular payments keep it close to the market price, and it allows leverage.. You take a short position that gains if the price falls, without borrowing the crypto itself. Such positions usually involve LeverageLeverageTrading with borrowed money, which multiplies both gains and losses and can wipe out your whole stake in a short time.. If the price rises too far, the exchange closes the position and the margin is lost, often very quickly.

Short selling is legal and common in financial markets, but authorities can restrict it in turbulent times. During Iceland's banking crisis, on 7 October 2008, the Financial Supervisory Authority, now part of the Central Bank of Iceland, banned short selling of shares in Kaupþing, Landsbanki, Glitnir and several other financial companies.