Contents
the introduction
What is short selling?
How does short selling work?
Short selling risks
How to Short Sell Bitcoin and Cryptocurrencies on Binance
How to short sell Bitcoin on Binance
How to short sell bitcoin on Binance futures platform
How to short sell Bitcoin on Binance Options
Concluding thoughts
the introduction
There are countless ways to make profits in the financial markets. Some traders use technical analysis, while others invest in companies and projects using fundamental analysis. Thus, whether you are a trader or an investor, you have many different options to develop a profitable trading strategy.
But what if the market is going through a long downturn in which prices are constantly declining? What can traders do to maintain a source of income from trading?
Short selling allows traders to make profits from falling prices. Entering into a short position can also be a great way to manage risk and hedge existing balances of price risk.
In this article we'll explain what short selling is, how to short sell Bitcoin on Binance, and learn about the risks of short selling.
What is short selling?
Short selling means selling an asset with the hope of repurchasing it later at a lower price. A trader who enters a sell trade expects the price of the asset to fall, which means he expects a downward trend for that asset. So instead of holding and waiting, some traders adopt a short selling strategy as a way to make profits from a falling asset price, which is why short selling may be a good way to preserve capital during a price decline.
Short selling is a popular strategy in almost any financial market, including stocks, commodities, Forex, and cryptocurrencies. Hence, individual investors and professional trading firms, such as hedge funds, widely use the short selling strategy. The strategy of short selling stocks or cryptocurrencies is popular with both short-term and long-term traders.
The opposite of short trades is long trades, where a trader buys an asset in the hope of later selling it at a higher price.
How does short selling work?
Short selling is usually done with borrowed money, but this does not necessarily happen in all cases. If you sell part of your spot Bitcoin trade at $10,000 with the intention of buying it back later at $8,000, that's a sell trade. However, short selling often occurs with borrowed funds, which is why short selling is closely linked to leveraged trading, futures, and other derivatives products. We will see below how it works.
Let's say you expect a downward trend for a specific financial instrument, such as a stock or a digital currency. You provide the required security, borrow a specific portion of that asset, and then sell it immediately. You now have an open sell position. If the market meets your expectations and takes a downward trend, you buy back the same portion you borrowed and return it to the lender (with interest), and your profit is the difference between the initial sale price and the repurchase price.
Let's consider a clearer example: You borrowed 1 Bitcoin and sold it at $8,000. Now you have a short position of 1 Bitcoin paying interest. The market price of Bitcoin has fallen to $6,000. You buy 1 Bitcoin and pay the 1 Bitcoin back to the lender (usually the trading platform). ), so your profit in this case is $2,000 (minus interest payments and fees).
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Short selling risks
There are a number of risks you need to consider when entering into a sell trade. One of these risks is that the potential loss on a short trade is theoretically unlimited, and countless professional traders have gone bankrupt over the years on short stock trades. If the stock price rises as a result of some unexpected news, this extreme rise could trap short sellers.
If you read Binance Academy articles, you will naturally know that setting a break-out point and setting a stop-loss price is essential for every trade. But let's talk about this concept anyway because understanding it well may be useful to you.
How much can you lose when you enter long positions in the spot market? Well, this is determined by the size of your position, if you have one Bitcoin that you bought at $10,000, the worst that could happen is that the price of Bitcoin collapses to 0 and you lose your initial investment.
But what if you are short selling Bitcoin on a put trading platform? In this case, there is no limit to the downside probability, why? Because the possibility of the price rising is also unlimited. But, in contrast, the price cannot fall below 0 in long trades.
So if you short sell a borrowed asset and its price rises and continues to rise, you will continue to suffer losses. However, this risk is more theoretical than practical, since most platforms will liquidate your deal before it reaches a negative balance, but it is necessary to always keep this in mind because it shows you why it is important to pay attention to borrowing trading conditions and always use a stop loss order.
Other than that, standard risk management principles apply to short selling as well. Always consider options and worst case scenarios, use a stop loss order, consider position sizing and make sure you understand liquidation risk.
How to Short Sell Bitcoin and Cryptocurrencies on Binance
For example, let's say you want to short sell Bitcoin or any other cryptocurrency on Binance, you can do so in several different ways.
How to short sell Bitcoin on Binance
First, you can short sell Bitcoin and altcoins on Binance:
Open a loan trading account if you do not already have one.
Go to the Binance platform for leveraged trading.
Go to your favorite trading pair in the market such as BTC/USDT or BTC/BUSD.
Follow the instructions in the Port Trading Guide or in this video.
How to short sell bitcoin on Binance futures platform
You can also short sell Bitcoin and altcoins on the Binance futures platform:
Go to the Binance futures platform.
Choose between perpetual or quarterly futures contracts.
Make sure you understand how the platform works by reading the Binance Futures User Guide.
Follow the instructions in this video.
If you want to try out paper (demo) trading first, you can go to the Binance Futures Demo Network. This way, you can experience how short selling works without risking real money.
How to short sell Bitcoin on Binance Options
Third, you can also try Binance Options platform available for iOS and Android. Options contracts can also be a great way to enter a short trade. If you expect the price of Bitcoin to fall, you can buy put or call options, which give 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 and the options platform is available for iOS and Android.
Activate your account on the Binance futures platform if you have not already activated it. This is a necessary step 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 sell Bitcoin and digital currencies. Be sure to read the Options Guide for iOS and Android for all the required details before you get started.
Concluding thoughts
We now know what it means to enter a short trade, and why traders might want to do so. As we have seen, traders who enter short trades usually expect a downward trend in the market. Short selling allows traders to profit from falling prices, and they can do so without necessarily owning the asset.
If you want to learn more about short selling and many other trading techniques, check out our Comprehensive Guide to Cryptocurrency Trading for Beginners.
Still need more clarification on how to short sell Bitcoin and other cryptocurrencies? You can refer to our Q&A platform, Ask Academy, where the Binance community answers your questions.
