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. Therefore, as a trader or investor, you also have many different options to create a profitable trading strategy.
However, what happens if the market goes through a prolonged downtrend, where prices continually decline? So what can traders do to maintain a source of income from trading?
Selling short allows traders to profit from price declines. Going short can also be a great way to manage risk and hedge your holdings against price risk.
In this article, we will explain what short selling means, how to short Bitcoin on Binance, then we will define the risks of short selling.
What is a short sale?
Short selling involves selling an asset in the hope of buying it back later at a lower price. A trader who enters a short position expects the price of the asset to decline, which means they are "bearish" on that asset. So, instead of just holding on to funds and waiting, some traders adopt the short selling strategy to take advantage of an asset's price decline. This is why short selling can also be a good way to preserve capital in the event of a price decline.
Short selling is very common in almost all financial markets, including the stock market, commodities, Forex and cryptocurrencies. Therefore, short sales are widely used by retail investors and professional trading firms, such as hedge funds. Shorting stocks or cryptocurrencies is a common strategy for both short- 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.
How does VAD work?
Typically, short selling is done with borrowed funds, but it is not a requirement. If you sell part of your spot Bitcoin position at $10,000 with the intention of buying it back later at $8,000, that is effectively a short position. However, short selling is commonly done with borrowed funds. This is why short selling is closely related to margin trading, futures and other derivatives. Let's see how it works.
Let's say you're pessimistic about a financial instrument, such as a stock or cryptocurrency. You put up the required collateral, borrow a specific amount of that asset, and sell it immediately. You have just opened an open short position. If the market meets your expectations and falls, you buy back the amount you borrowed and repay it to the lender (with interest). Your gain is the difference between the initial sale price and the buyback 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 for which you are paying interest. Bitcoin price drops to $6,000. You buy back 1 BTC and send that 1 BTC back to the lender (usually, the exchange). In this case, your gain would be $2,000 (minus interest and fees).
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The risks of short selling
There are a number of risks to consider when it comes to taking a short position. One is that in theory the potential loss of a short position is infinite. Countless professional traders have gone bankrupt over the years by being short. If the stock price rises on unexpected news, that rise can quickly “trap” short sellers.
Naturally, if you have spent any time on Binance Academy, you know that it is crucial for every transaction to have an invalidation point and set a Stop-loss. However, let's dig a little deeper into this concept to make sure you understand the problem.
How much is your potential loss when you are long in the spot market? Well, that's the size of your position. If you have 1 BTC that you purchased at $10,000, the worst scenario that could happen is that the price of Bitcoin drops to zero and you lose your initial investment.
However, what happens if you short the bitcoins on a margin trading platform? In this case, your potential for loss is infinite. For what ? Because the potential for the price to rise is infinite. On the other hand, the price cannot be lower than 0 when you are in a long position.
So, if you short a borrowed asset and the price rises again and again, you will continue to incur losses. That said, this is more of a theoretical risk than a practical one, as most platforms will liquidate your position before you reach a negative balance. This point is still worth keeping in mind, as it demonstrates why it is important to keep an eye on margin requirements and always use Stop-Losses.
Other than that, standard risk management principles apply to short selling. Protect yourself, use a Stop-loss, think about sizing 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. You can do this in different ways.
How to short Bitcoin on the Binance margin market?
First, you can short Bitcoin and altcoins on Binance's margin trading platform:
Open a margin account, if you haven't already done so.
Go to the Binance Margin trading platform.
Go to your favorite trading pair, like 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 altcoins on Binance Futures:
Go to Binance Futures.
Choose between perpetual or quarterly futures contracts.
Make sure you understand how the 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 short selling works without risking real funds.
How to short Bitcoin on Binance Options?
Third, you can also try the Binance Options platform which is available for iOS and Android. Option contracts can also be a great way to enter 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 bitcoins at a given price. Here's how to do it:
Download the Binance mobile app. The options platform is available for iOS and Android.
If you haven't already, activate your Binance Futures account. This is necessary 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 risky ways to short Bitcoin and other cryptocurrencies. Be sure to read our options guide for iOS and Android to learn all the information required before you get started.
To conclude
We now know what short positions are, and why traders want to use them. As we have seen, traders who are short generally have a bearish view on the market. Short selling allows traders to profit from price declines without necessarily owning the asset.
If you want to learn more about short selling and many other trading techniques, check out the Complete Guide to Cryptocurrency Trading for Beginners.
Still don't know how to short sell Bitcoin and other cryptocurrencies? Check out our Q&A platform, Ask Academy, where the Binance community will answer your questions.