Content
Introduction
What is shortening?
How does shortening work?
Risks of shorting
How to Short Bitcoin and Other Cryptocurrencies on Binance
How to go short Bitcoin when trading on margin on Binance
How to go short on Binance Futures
How to Short Bitcoin on Binance Options
Summary
Introduction
There are many different ways to make money in the financial markets. Some traders conduct technical analysis, others invest in companies and projects based on fundamental analysis. So, you as a trader or investor also have many different options to create a profitable trading strategy.
But what if the market is experiencing a prolonged bear trend in which prices are constantly declining? How can traders maintain trading income?
Short positions allow traders to profit from falling prices. Taking a short position can also be a great way to manage risk and hedge existing assets against price risks.
In this article, we will explain what shorting is, how to open short positions on Bitcoin on Binance, and also look at the risks of shorting.
What is shortening?
Shorting (or going short) means selling an asset in hopes of buying it later at a lower price. A trader going short expects the price of an asset to decline, which means he is bearish on that asset. And rather than just holding and waiting, some traders use a shorting strategy as a way to profit from a fall in the price of an asset. This is why short selling can also be a good way to preserve capital during price declines.
Shorting is widespread in almost any financial market, including stocks, commodities, Forex and cryptocurrencies. It is widely used by retail investors and professional trading firms such as hedge funds. Shorting 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 a trader buys an asset in hopes of selling it later at a higher price.
How does shortening work?
As a rule, shorting occurs through borrowed funds, but not in all cases. If you sell part of your Bitcoin spot position at $10,000 with plans to buy it back later at $8,000, that is effectively a short position. However, shorting is usually done through borrowed funds. This is why it is closely related to margin trading, futures contracts and other derivatives. Let's see how it works.
Let's say you are bearish on a financial instrument, such as a stock or cryptocurrency. You post the required collateral, borrow a certain amount of that asset, and sell it immediately. You now have an open short position. If the market meets your expectations and falls, you buy back the same amount you borrowed and pay it back to the lender (with interest). Your profit is the difference between the initial sale price and the repurchase price.
Now let's look at a specific example. You borrow 1 BTC and sell it for $8,000. You now have a short position of 1 BTC on which you pay interest. The market price of Bitcoin drops to $6,000. You buy 1 BTC and return it to the lender (usually an exchange). In this case, your profit will be $2,000 (minus interest and fees).
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Risks of shorting
There are a number of risks to consider when taking a short position. One is that the theoretical potential losses from a short position are infinite. Many professional traders have gone bankrupt due to short positions in stocks. If the stock price rises due to some unexpected news, the surge can quickly trap sellers.
Of course, if you read the Binance Academy materials, you know that having a kill point and setting a stop loss is necessary for every trade. But let’s still dwell on these concepts for a better understanding of the issue.
What is your potential loss when you go long on the spot market? They do not exceed your position size. If you have 1 BTC that you bought for $10,000, then the worst case scenario is that the price of Bitcoin will drop to 0 and you will lose your initial investment.
But what happens if you go short Bitcoin on a margin trading platform? In this case, your potential loss is endless, since the potential for price growth is unlimited. However, the price cannot fall below 0 if you open a long position.
So, if you sell a borrowed asset and the price continues to rise, you will continue to incur losses. Of course, this is more of a theoretical risk, since most platforms will liquidate your position before you reach a negative balance. Nevertheless, it is worth remembering. It clearly shows why it is important to keep an eye on margin requirements and always use a stop loss.
Otherwise, standard risk management principles apply to short positions. Protect yourself from potential losses, use stop losses, think about the size of your position, and make sure you understand the risks of liquidation.
How to Short Bitcoin and Other Cryptocurrencies on Binance
So, let's say you want to short Bitcoin or another cryptocurrency on Binance. This can be done in several ways.
How to go short Bitcoin when trading on margin on Binance
First, you can short Bitcoin and altcoins on the Binance margin trading platform:
Open a margin account if you don't already have one.
Go to the Binance Margin Trading Platform.
Select your preferred trading pair, such as BTC/USDT or BTC/BUSD.
Follow the instructions in our margin trading guide or in this video.
How to go short on Binance Futures
You can also short Bitcoin and altcoins on Binance Futures:
Go to Binance Futures.
Choose from perpetual or quarterly futures contracts.
Make sure you understand how the platform works by checking out our Binance Futures guide.
Follow the instructions in this video.
If you want to try out paper trading first, you can head over to the Binance Futures test network. In it you can check how shorting works without risking real money.
How to Short Bitcoin on Binance Options
Alternatively, you can try the Binance Options platform, available for iOS and Android. Options can also be a great way to go short. If you expect the price of Bitcoin to fall, you can buy a put option, which 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. The options platform is available for both iOS and Android.
Activate your Binance Futures account if you haven't already. This action is required to access the options platform on Binance.
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. Be sure to read our options guide for iOS and Android to get all the details you need to know.
Summary
Now you know what a short position is and how it can bring profit to traders. Traders who go short usually have a bearish view of the market. Short positions allow traders to profit from declining prices, and they can do this without holding the asset itself.
If you want to learn more about shorting and other trading methods, check out the complete beginner's guide to cryptocurrency trading.
Still have questions about short positions on Bitcoin and cryptocurrencies? Visit our Q&A platform, Ask Academy, where the Binance community will answer your questions.
