Between 10th and 12th October, markets were hit by a sudden liquidity-driven correction that rippled across equities and crypto alike.
In a matter of hours, major digital assets such as Bitcoin and Ethereum plunged double digits as leveraged positions were forcibly liquidated, triggering a cascade of selling.
It was a brutal reminder that when markets move fast, leverage and short positions can become lethal. What began as a technical sell-off — sparked by tightening liquidity, rising bond yields, and algorithmic trading unwinds — quickly morphed into a full-blown liquidation event.
Traders who thought they could profit from the chaos by using leverage or shorting risk assets soon found themselves on the wrong side of violent swings in pricing.
That’s the danger of leveraging and shorting: it can make you feel clever right up until the moment it destroys you.
In this article, we’ll unpack what it really means to go long and short, how shorting works in practice, and why it can wipe you out in a flash — especially in volatile markets like crypto.
We’ll also look at how new funds now offer retail investors the ability to short at the click of a button, and why, for most people, it’s still a game not worth playing.
The Rise of Short and Inverse Funds
Even if you never trade directly, shorting has gone mainstream through new financial products. There are now exchange-traded funds (ETFs) that let you bet against the market without having to borrow stocks yourself.
For example, you can buy an “inverse” ETF that rises when the underlying index falls — effectively allowing you to short the S&P 500 or Bitcoin futures with a simple click.
There are even leveraged inverse ETFs that promise 2x or 3x the daily inverse return. If the index drops 1%, the fund aims to rise 2% or 3%.
Sounds tempting — but these products are not built for long-term investors. They reset daily, meaning performance compounds in strange ways. If the market moves sideways or whipsaws, you can lose money even if your broader prediction was correct.
In volatile assets like crypto, that’s a recipe for disaster.
Why Shorting Can Destroy You
Let’s summarise why shorting can be so dangerous:
- Unlimited losses: Theoretically, a stock or crypto can rise forever, meaning there’s no limit to how much you can lose.
- Margin calls: A small move against you can trigger a broker demand for more cash, forcing you to close at a loss.
- Borrowing costs: You pay daily fees for the borrowed asset, eating into potential profits.
- Timing risk: Even if you’re right in the long term, being early can wipe you out before your thesis plays out.
- Short squeezes: When prices rise sharply, panicked short sellers rush to buy back positions, driving prices even higher.
Even professional hedge funds have been caught out. The famous case of GameStop in 2021, when retail investors united on Reddit to squeeze institutional short sellers, caused billions in losses for funds that were betting against the company.
The Safer, Smarter Alternative
Unless you have deep experience, access to large amounts of capital, and money you can afford to lose (and then some), shorting is a dangerous game. It’s less about smart investing and more about gambling on short-term moves.
For most investors, a better approach is to own great businesses — or diversified funds that do so on your behalf — and let time and compounding do the heavy lifting.
Equity funds, particularly those focused on innovative, well-managed companies with strong balance sheets, have a history of building wealth through cycles. You can’t lose more than you invest, and over time, you benefit from growth, dividends, and the natural upward drift of human progress.
Shorting a stock — or any asset — may seem exciting, especially when markets look overheated. But it’s a strategy that can quickly spiral out of control.
When you go long, your downside is limited, and your upside is open-ended. When you go short, it’s the exact opposite — your potential losses are infinite.
So, before you think about betting against the market, remember: volatility doesn’t always equal opportunity. Sometimes it’s best to sit it out, keep your focus on quality, and invest for the future rather than trying to outsmart it in the short term.
In investing, patience and discipline beat bravado every time.
Carl Roberts, Director
If you want to learn more about this topic, please find the link here.
More information about our fund the YFS Intelligent Wealth Fund can be found here: Hargreaves Lansdown or AJ Bell.
Risk warnings
The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change. This blog is based on my own observations and opinions.
