Introduction
There are many ways to make profits in the financial markets. Some traders use technical analysis, while others invest in companies and projects using fundamental analysis. Thus, you, as a trader or investor, also have many different options in creating a profitable trading strategy.
However, what if the market is in a prolonged bear market, where prices continue to decline? What can traders do to maintain a source of income from trading?
Shorting allows traders to profit from falling prices. Entering a short position can also be a great way to manage risk and protect the value of your holdings with a hedge.
In this article, we will discuss the meaning of shorting, how to short Bitcoin on Binance, and learn about the risks.
What is shorting?
Shorting (or short selling) means selling an asset with the hope of buying it back later at a lower price. Traders who enter a short position expect the price of an asset to decline, that is, they are “bearish” on that asset. So, instead of just holding and waiting, some traders adopt a short selling strategy as a way to profit from falling asset prices. This is why short selling can also be a good way to preserve capital during falling prices.
Shorting is very common in any financial market, including stock, commodity, Forex and cryptocurrency markets. As such, shorts are widely used by retail investors and professional trading firms, such as hedge funds. Short selling stocks or cryptocurrencies is a common strategy for both short-term and long-term traders.
The opposite of a short position is a long position, where the trader buys an asset with the hope of selling it later at a higher price.
How does shorting work?
Typically, shorting is done with borrowed funds, although not in all cases. If you sell some of your spot Bitcoin positions for $10,000 with the plan to buy them later at $8,000, that is an effective short position. However, shorting is also usually done with borrowed funds. This is why shorting is closely related to margin trading, futures contracts, and other derivative products. Let's see how it works.
Let's say you are bearish on one of the financial instruments, such as stocks or cryptocurrencies. You put up the necessary collateral, borrow a certain amount of the asset, and sell it immediately. Now, you have an open short position. If the market moves in your favor and continues to decline, you buy back the same amount you previously borrowed, then return it to the lender (with interest). Your profit is the difference between your sales price and your repurchase price.
Now let's look at a more concrete example. You borrow 1 BTC and sell it for $8,000. Now you have a short position of 1 BTC. The market price of Bitcoin fell to $6,000. You buy 1 BTC, and return 1 BTC to the lender (usually, an exchange). Your profit, in this example, is $2,000 (less interest payments and fees).
➟Want to own cryptocurrency? Buy Bitcoin on Binance!
Risk of shorting
There are a number of risks to consider when entering a short position. One is that, in theory, the potential loss on a short position is unlimited. Countless professional traders have gone bankrupt over the years from shorting stocks. If stock prices rise thanks to unexpected news, a quick spike could “trap” short sellers.
Of course, if you read Binance Academy, you already know that having an invalidation point and setting a stop-loss is very important in every trade. However, we will still discuss this concept, because you need to understand it.
What is your potential loss when entering a long position in the spot market? Well, it depends on the size of your position. If you have 1 BTC that you bought for $10,000, the worst thing that could happen is that the price of Bitcoin drops to 0, and you lose your initial investment.
However, what if you are shorting Bitcoin on a margin trading platform? In this case, your potential losses are unlimited. Why? Because the potential for price increases is unlimited. Conversely, the price cannot be lower than 0 while you are in a long position.
So, if you are shorting a borrowed asset and the price goes up and up, you will continue to incur losses. Admittedly this is more of a theoretical risk than a practical risk, as most platforms will liquidate your position before the balance hits a negative number. However, keep in mind, it is very important to keep an eye on margin requirements, and always use a stop-loss.
Additionally, standard risk management principles apply to shorting. Protect your weakness, use stop-losses, pay attention to position sizes, and make sure you understand liquidation risk.
How to open a short position against Bitcoin and other cryptos on Binance
So, let's say you want to short Bitcoin or another cryptocurrency on Binance. You can do this in several different ways.
How to short Bitcoin on Binance Margin Trading
First of all, you can short Bitcoin and altcoins on the Binance Margin Trading platform:
Open a margin account, if you don't already have one.
Buka platform Margin Trading Binance.
Open a market pair of your choice, such as BTC/USDT or BTC/BUSD.
Follow the instructions in our margin trading guide or via this video.
How to short Bitcoin on Binance Futures
You can also short Bitcoin and altcoins on Binance Futures:
Enter Binance Futures.
Choose between perpetual or quarterly futures contracts.
Make sure you understand how this platform works by reading our Binance Futures guide.
Follow the instructions in this video.
If you want to try paper trading first, you can visit the Binance Futures testnet. This way, you can test how shorting works without risking real funds.
How to short Bitcoin on Binance Options
Third, you can also try the Binance Options platform which is available on iOS and Android. Options contracts can also be a great way to enter a short position. If you expect the price of Bitcoin to fall, you can buy a put option. This gives you the right, but not the obligation, to sell Bitcoin at a certain price. Here's how to do it:
Download the Binance mobile app. Platform options are available for iOS and Android.
If you haven't already, activate your Binance Futures account. This is required to access the options platform on Binance.
Follow the instructions on this page.
It should be noted that this is one of the most difficult and high-risk ways to short Bitcoin and other cryptocurrencies. Make sure you read the options guides on iOS and Android for all the necessary details before you get started.
Conclusion
Now we know what it means to enter a short position, and why traders want to do it. As we have seen, traders who are short are usually bearish on the market. Short selling allows traders to profit from falling prices, and they can do it without having to own the asset.
If you want to learn more about shorting and other trading techniques, check out The Complete Guide to Trading Crypto for Beginners.
Still not sure how to short Bitcoin and other cryptocurrencies? Check out our question and answer platform, Ask Academy, where the Binance community will answer your questions.