Introduction
There are countless ways to generate profits in the financial markets. Some traders will use technical analysis, while others will invest in companies and projects using fundamental analysis. As such, you, as a trader or investor, also have many different options to create a profitable trading strategy.
However, what if the market is going through a prolonged bear market, where prices are continually declining? What can traders do then to maintain a source of income from trading?
Shorting the market allows traders to profit off price declines. Entering a short position can also be an excellent way to manage risk and hedge existing holdings against price risk.
In this article, weโll explain what shorting means, how to short Bitcoin on Binance, and learn about the risks of shorting.
What is shorting?
Shorting (or short selling) means selling an asset in the hopes of rebuying it later at a lower price. A trader who enters a short position expects the assetโs price to decrease, meaning that they are โbearishโ on that asset. So instead of just holding and waiting, some traders adopt the short selling strategy as a way to profit off an assetโs price decline. This is why short selling can also be a good way to preserve capital during price declines.
Shorting is very common in essentially any financial market, including the stock market, commodities, Forex, and cryptocurrency. As such, short sales 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 a trader buys an asset in the hopes of selling it later at a higher price.ย
How does shorting work?
Typically, shorting will happen with borrowed funds, though not in all cases. If youโre selling some of your spot Bitcoin position at $10,000 with the plans to rebuy it later at $8,000, thatโs effectively a short position. However, shorting is also commonly done with borrowed funds. This is why shorting is closely related to margin trading, futures contracts, and other derivatives products. Letโs see how it works.
Letโs say youโre bearish on a financial instrument, such as a stock or a cryptocurrency. You put up the required collateral, borrow a specific amount of that asset, and immediately sell it. Now, youโve got an open short position. If the market fulfills your expectations and goes lower, you buy back the same amount that youโve borrowed and pay it back to the lender (with interest). Your profit is the difference between where you initially sold and where you rebought.
Now letโs look at a more concrete example. You borrow 1 BTC and sell it at $8,000. Now youโve got a 1 BTC short position that youโre paying interest for. The market price of Bitcoin goes down to $6,000. You buy 1 BTC and return that 1 BTC to the lender (usually, the exchange). Your profit, in this case, would be $2,000 (minus the interest payments and fees).
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The risks of shorting
There are a number of risks to consider when it comes to entering a short position. One of them is that, in theory, the potential loss on a short position is infinite. Countless professional traders have gone bankrupt over the years while being short a stock. If the stock price increases thanks to some unexpected news, the spike up can quickly โtrapโ short sellers.
Naturally, if youโve been reading Binance Academy, you know that having an invalidation point and setting a stop-loss is crucial for every trade. However, letโs still talk about this concept because it may be helpful to understand.
How much is your potential loss when going long on the spot market? Well, itโs the size of your position. If youโve got 1 BTC that youโve bought at $10,000, the absolute worst case that can happen is that the Bitcoin price falls to 0, and youโve lost your initial investment.ย
However, what if youโre shorting Bitcoin on a margin trading platform? In this case, your potential downside is infinite. Why? Because the potential upside for price is infinite. In contrast, the price canโt go lower than 0 when youโre long.
So, if youโre shorting a borrowed asset and the price increases and keeps going up, youโll keep incurring losses. With that said, this is more of a theoretical risk than a practical one, as most platforms will liquidate your position before youโd arrive at a negative balance. Even so, itโs worth keeping in mind, as it shows you why itโs always paramount to keep an eye on margin requirements, and to always use a stop-loss.
Other than that, standard risk management principles apply to shorting. Protect your downside, use a stop-loss, think about position sizing, and make sure you understand the risks of liquidation.
How to short Bitcoin and cryptocurrencies on Binance
So, letโs say youโd like to short Bitcoin or another cryptocurrency on Binance. You could do so in a few different ways.
How to short Bitcoin on Binance Margin Trading
Firstly, you could short Bitcoin and altcoins on the Binance Margin Trading platform:
Open a margin account, if you havenโt already.
Go to the Binance Margin Trading platform.
Go to your preferred market pair, such as BTC/USDT or BTC/BUSD.
Follow the instructions in our margin trading guide or in this video.
How to short Bitcoin on Binance Futures
You could also short Bitcoin and altcoins on Binance Futures:
Go to Binance Futures.
Make sure you understand how the platform works by reading our Binance Futures guide.
Follow the instructions in this video.
If youโd like to try out paper trading first, you can go to the Binance Futures testnet. This way, you can test how shorting works without risking real funds.
How to short Bitcoin on Binance Options
Thirdly, you could also try the Binance Options platform thatโs available for iOS and Android. Options contracts can also be an excellent way to enter a short position. If you expect the price of Bitcoin to go down, you could buy put options. These give you the right, but not the obligation, to sell Bitcoin at a certain price. Hereโs how to do it:
Download the Binance mobile app. The options platform is available for both iOS and Android.
If you havenโt already, activate your Binance Futures account. This is needed to access the options platform on Binance.
Follow the instructions on this page.
Itโs worth noting that this is one of the most difficult and high-risk ways to short Bitcoin and cryptocurrencies. Be sure to read our options guide for iOS and Android to know all the required details before you start.
Closing thoughts
Now we know what entering a short position is, and why traders would want to do so. As weโve seen, traders who are in a short position usually have a bearish outlook on the market. Short selling allows traders to profit off price declines, and they can do it without necessarily holding the asset.
If youโd like to learn more about shorting and many other trading techniques, check out A Complete Guide to Cryptocurrency Trading for Beginners.