Table of contents
Introduction
What is short selling?
How short selling works
What are the risks of short selling?
How to short Bitcoin and other digital currencies on Binance
How to Short Bitcoin on Binance Margin Trading
How to short Bitcoin on Binance Futures
How to Short Bitcoin on Binance Options
Summarize
Introduction
There are countless ways to make money in the financial markets. Some traders use technical analysis to make profits, while others use fundamental analysis to choose which companies and projects to invest in. So as a trader or investor, there are many different methods you can choose from to create a highly profitable trading strategy.
However, what should you do if the market is going through a prolonged bear market with falling prices? How can traders maintain a source of trading income?
Shorting the market allows traders to profit from falling prices. Opening a short position is also an ideal way to effectively manage risk and hedge the price risk faced by an existing asset.
In this article, we will explain in detail what shorting is, how to short Bitcoin on Binance, and what risks there are with shorting.
What is short selling?
Going short (selling short) is selling an asset in the hope that it can be bought back at a lower price in the future. A trader who opens a short position expects the price of the asset to fall, which means the trader is "bearish" on such an asset. Therefore, some traders no longer simply hold and wait, but adopt a short-selling strategy to profit from falling asset prices. Therefore, short selling can also be a good way to hold capital during falling prices.
"Short selling" can be seen in almost all financial markets (including stock markets, commodities, foreign exchange and digital currencies). Retail investors and professional trading companies such as hedge funds are loyal fans of this operation. Shorting stocks or digital currencies is a common strategy among short-term and long-term traders.
The opposite of a short position is a long position, which means a trader buys an asset with the hope of selling it at a higher price in the future.
How short selling works
While this cannot be generalized, short selling typically uses borrowed funds. If you sell a spot Bitcoin position for $10,000 and plan to buy it back for $8,000 in the future, you have effectively established a short position. Because short selling typically uses borrowed money, it is closely related to margin trading, futures contracts, and other derivatives. Let's understand how it works.
Let's say you think the price of a certain financial instrument, such as a stock or a digital currency, will fall. You have established a short position by taking out the required collateral, borrowing a specific amount of that asset, and selling it immediately. If the market falls as expected, you can buy back as much as you borrowed and pay it back to the lender with interest. The difference between the initial sale price and the buy-back price is your profit.
Next, we explain a more specific example. Let's say you borrow 1 Bitcoin and sell it for $8,000. Now, you have a short position of 1 Bitcoin and pay interest on it. Since then, the market price of Bitcoin has dropped to $6,000. You buy back 1 Bitcoin and return it to the lender (usually an exchange). So in this case, your profit is US$2,000 (deducting certain interest and handling fees).
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What are the risks of short selling?
There are many risks to consider when entering into a short position. For example, there is theoretically no upper limit to the potential loss on a short position. Countless professional traders have gone bankrupt over the years shorting stocks. If the stock price rises due to some breaking news, the rising market will quickly "trap" short sellers.
Of course, if you have been studying Binance Academy materials, you must know the importance of choosing failure points appropriately and setting stop loss points for every trade. Still, we'll touch on this concept a little bit because understanding it can be a big benefit.
What is your potential loss when going long in the spot market? It depends on how big your position is. If you buy 1 Bitcoin for $10,000, the worst-case scenario is that the price of Bitcoin returns to zero and your initial investment is lost.
However, what’s the worst-case scenario if you’re shorting Bitcoin on a margin trading platform? At this point, your potential losses will be unlimited. Why? Because the potential price upside is unlimited. In contrast, if you are long, no matter how the price falls, it is impossible to fall below 0 yuan.
Therefore, if you short an asset you borrowed, you will continue to incur losses as long as the price continues to rise. However, this is more of a theoretical hypothesis than a real situation, as most platforms will force-close your position directly before the balance becomes negative. Even so, we should keep this in mind as it is a good illustration of the importance of paying attention to margin requirements and always setting a stop loss.
Beyond this, standard risk management principles apply to short selling. You need to protect your short positions, set stops, consider position size, and make sure you understand the risks of liquidation.
How to short Bitcoin and other digital currencies on Binance
Let’s take a look at how to short Bitcoin or other digital currencies on Binance. You can do this in a number of different ways.
How to Short Bitcoin on Binance Margin Trading
First, it is possible to short Bitcoin and other digital currencies on the Binance margin trading platform:
New users need to open a margin account first.
Go to the Binance margin trading platform.
Select the desired market pair (e.g. BTC/USDT or BTC/BUSD).
Follow the instructions in our margin trading guide or this video.
How to short Bitcoin on Binance Futures
You can also short Bitcoin and other digital currencies in Binance Futures:
Visit Binance Futures.
Choose between perpetual or quarterly futures contracts.
Read our guide to Binance Futures to make sure you understand how the platform works.
Follow the instructions in this video.
If you want to start with simulated trading, you can try the Binance Futures testnet. This allows you to try short selling without risking real money.
How to Short Bitcoin on Binance Options
Finally, you can also try Binance Options available on iOS and Android platforms. Options contracts are also an excellent way to enter a short position. If you expect the price of Bitcoin to fall, you can buy put options. Through these methods, you will have the right to sell your Bitcoin at a certain price without any obligation. The specific operation method is as follows:
Download the Binance mobile app. The Binance Options platform is available to both iOS and Android users.
You need to activate your Binance Futures account before using it. This is a requirement to access the Binance Options platform.
Follow the instructions on this page.
However, it is worth pointing out that shorting Bitcoin and other digital currencies through this method is the most difficult and risky. Before you start trading, read our Options Guide for iOS and Android users for all the must-know details.
Summarize
Now, we have understood what opening a short position is and why traders choose this strategy. As we know, short traders are generally bearish about the market outlook. With short selling, they can profit from a price drop without having to own the asset.
To learn more about short selling and other trading techniques, read The Beginner’s Guide to Cryptocurrency Trading.
Still not sure how to short Bitcoin and other digital currencies? Please visit our Q&A platform Ask Academy, where members of the Binance community will patiently answer your questions.