Introduction
There are countless ways to generate profits in the financial markets. Some traders use technical analysis, others invest in companies and projects using fundamental analysis. Therefore, you, as a trader or investor, have many different options for creating a profitable trading strategy.
What if the market is going through an extended bear market where prices are continually falling? What can traders do to maintain a source of income from their trading activities?
Shorting allows traders to profit from falling prices. Entering a short position can also be an excellent way to manage risk and hedge your funds.
In this article, we will explain what shorting is, how to use this strategy for Bitcoin on Binance and we will also talk about the risks involved.
What is shorting?
Shorting selling means selling an asset in the hope of buying it again at a lower price. A trader who enters a short position expects the asset's price to fall, that is, he is “bearish” in relation to that asset. Therefore, instead of just holding the asset and waiting, some traders adopt the short selling strategy as a way to profit from an asset's falling price. This is why short selling can also be a good way to preserve capital during price drops.
Shorting is very common in practically every financial market, including stock markets, commodities, Forex and cryptocurrencies. Short selling is widely used by retail investors and trading companies to hedge funds. Short selling is a very common strategy also in the stock and cryptocurrency markets, used by both short-term and long-term traders.
The opposite of a short position is a long position, where the trader buys the asset with the expectation of later selling it for a higher price.
How does shorting work?
Typically, shorting occurs with borrowed funds, but not in all cases. If you are selling part of your Bitcoin spot position for $10,000 with plans to repurchase it later for $8,000, that is effectively a short position. However, shorting is also done with borrowed funds. This is why shorting is closely related to margin trading, futures contracts and other derivative products. Let's see how this works.
Let's say you are bearish on a financial instrument, like a stock or cryptocurrency. You provide the necessary amount of collateral (collateral), borrow an amount of that asset, and sell it immediately. Now, you have an open short position. If the market meets your expectations and suffers a decline, you repurchase the same amount borrowed and pay it back to the lender (with interest). Your profit is the difference between the initial sales point and the repurchase point.
Let's see a more concrete example. You borrow 1 BTC and sell it for $8,000. You now have a 1 BTC short position that you are paying interest on. Bitcoin's market price drops to $6,000. You buy 1 BTC and return that 1 BTC to the lender (usually a broker). Your profit, in this case, would be $2,000 (minus fees and interest).
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The risks of shorting
We must consider a series of risks when entering a short position. One of them is that, in theory, the possible loss is infinite. Many professional stock traders have gone bankrupt with short positions. If the share price increases, thanks to unexpected news, this increase can quickly become a “trap” for short sellers.
Of course, if you are reading Binance Academy articles, you know that it is essential to have an invalidation point and set a stop-loss for all trades. Still, let's revisit these concepts, as they can help with understanding.
What is the value of your possible loss when you are long on the spot market? Well, it's the size of your position. If you purchased 1 BTC for $10,000, the worst possible case would be for the price of Bitcoin to drop to 0 and you to lose your entire initial investment.
But what if you are selling Bitcoin on a margin trading platform? In this case, your possible loss is infinite. Why? Because the possible gain from price variation is also infinite. On the other hand, in a long position, the price cannot be lower than 0.
Therefore, if you borrow an asset, open a short position and the price continues to rise, you will continue to make a loss. That said, it is more of a theoretical risk than a practical one, as most platforms will liquidate your position before you reach a negative balance. Still, it's worth mentioning as it shows the importance of observing margin requirements and always using a stop-loss.
Other than that, standard risk management principles apply to shorting. Limit your losses, use a stop-loss, reflect on position size and understand liquidation risks.
How to short Bitcoin and other cryptocurrencies on Binance
Let's say you want to open a short position on Bitcoin or another cryptocurrency on Binance. You can do this in different ways.
How to Short Bitcoin on Binance Margin Trading
First, you can open short Bitcoin and altcoin positions on the Binance Margin Trading platform:
Open a margin account if you don't already have one.
Access the Binance Margin Trading platform.
Choose your preferred market pair, such as 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 open short Bitcoin and altcoin positions on Binance Futures:
Access Binance Futures.
Choose between perpetual or quarterly futures contracts.
Make sure you understand how the platform works through our Binance Futures guide.
Follow the instructions in this video.
If you want to try paper trading first, you can access the Binance Futures testnet (testing platform). So you can learn how shorting works without having to risk real funds.
How to short Bitcoin on Binance Options
You can also try the Binance Options platform available on iOS and Android. Options contracts can also be an excellent way to trade a short position. If you expect the price of Bitcoin to fall, you can buy Put options. This gives you the right, but not the obligation, to sell Bitcoin at a certain price. See how to do it:
Download the Binance mobile app. The options platform is available for iOS and Android.
Activate your Binance Futures account. This is required to access the Binance options platform.
Follow the instructions on this page.
It is worth noting that this is one of the most difficult and risky ways to short Bitcoin and cryptocurrencies. Before you get started, read our Binance Options Guide for iOS and Android for all the details.
Final considerations
Now we know what a short position is and why traders trade this way. As we mentioned, traders who are in a short position generally have a bearish expectation of the market. Short selling allows traders to profit from falling prices and this can be done without necessarily having to hold the assets.
If you want to learn more about shorting and many other trading techniques, check out our Complete Guide to Cryptocurrency Trading for Beginners.
Still have questions about shorting Bitcoin and cryptocurrencies? Check out our Q&A platform, Ask Academy, where the Binance community will answer your questions.
