There are many interesting ways to trade crypto to turn a profit. A really popular strategy that takes advantage of crypto price fluctuation is Bitcoin shorting or crypto shorting.
To put it plainly, crypto shorting or shorting the crypto market allows traders to generate profits based on crypto price drops. Entering a short position can also be a great way to hedge existing assets against price risks. Shorting gives way to large profits and is rather simple.
Keep reading our shorting guide to find out more on how to generate hefty profits from the short market feature on Binance.
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Beginner’s Guide to Shorting
Crypto shorting or short selling means selling a token or asset with an intention to buy it back after a price drop. Users enter a short position with the hope that the asset they’re selling will soon drop in price. The price volatility of Bitcoin and other major currencies make shorting a common trading strategy for these assets.
Shorting is also a great alternative to holding assets. Instead of holding an asset for a longer period, traders can utilize the short-selling trading strategy to generate profits by selling at a higher price and buying the same asset back at a lower price. Short selling crypto is one of the best ways to preserve funds when prices are declining. Long positions are the opposite of short positions. In these types of trades, users purchase an asset at a lower price with hopes to sell it later for a higher price.
Short-selling stocks, commodities, or cryptocurrencies are popular trading strategies for both long-term traders and short-term traders. Financial markets like the Forex and stock markets have been using the shorting strategy even before cryptocurrencies existed. Shorting is very popular among retail investors and trading firms like hedge funds.
How Bitcoin Shorting Works
The most popular way of shorting is by using borrowed assets but this is not always the case as you can also short sell your own crypto. Shorting is very closely affiliated with margin trading, futures contracts, and other crypto derivatives trading methods.
For example, a user can borrow 1 BTC token from Binance and sell it for $10.000. The user now has a short position for 1 BTC token that they have to pay interest on. In the meantime, the market price of Bitcoin goes down to $7,000. Users then buy that BTC for $7000 and return it to the initial lender, i.e the exchange. Now the users have netted a profit of $3000 minus the interest and trading fees they’ve paid already. This depends on how much time passed between the transactions. Simple as that!
Short Bitcoin on the Binance Exchange
Shorting Bitcoin is rather simple on the Binance exchange. If you don’t have an account, you should start with that. Binance is a centralized exchange and requires a KYC verification for using advanced features such as margins and futures trades, and to take out loans.
Once the account has been verified, find the Futures Markets tab in the dashboard. This can be found under the Derivatives menu. In order to short trade on Binance, you need to deposit USDT or BUSD. You can transfer the stablecoin of choice into your Futures wallet, located in the Futures tab.
Afterward, set your futures margin mode and leverage. There are two choices for margins on Binance – cross margin or isolated margin. Cross margins are considered riskier as users can lose their entire wallet balance as well as their margin in case of liquidation. Isolated margin is the safer method as only the margin or the costs of opening a short position are at risk. Beginners should choose the isolated margin if they want to play it safer.
The next step is to choose the leverage. You can choose leverage of up to 125x on Binance. We’ll use an example with 10x to avoid miscalculating large figures. Also, the higher the leverage, the higher the risk, so think twice before going for the highest leverages.
The leverage math is simple. If you have 200 Tether coins and want to use 10x leverage, you’ll end up with 2000 Tether coins. You have more chances to generate profits when you work with 2000 USDT compared to 200 USDT. If the prices aren’t going in your favor, then you just lose the initial margin of 200 Tether. This is called the liquidation price.
The Risks of Shorting
There are a lot of factors to consider before opening a short position. The potential loss on a short position is basically infinite. There have been cases where professional traders have gone bust attempting to short sell stocks or crypto. A large fluctuation in prices in an upwards momentum can quickly trap short-sellers, especially if they are short-selling loaned assets.
Stop-loss orders are your best friends when trading with derivatives. These orders automatically check whether your investment is going the wrong way, and liquidate your position at the market price to prevent further loss.
Shorting crypto is considered an advanced form of trading. Users are advised to learn a lot about cryptocurrency orders, derivatives features, and other must-know trading services before trying to take part in derivatives. Binance has you covered in terms of crypto education with their educational platform Binance Academy.
Frequently Asked Questions
Can you short without leverage on Binance?
Of course! This is the preferred method for beginners. Users can enter a short position with their own bitcoins without having to borrow additional assets from the platform. This can result in lower profits but at least your losses are limited if it all goes wrong.
Can you short Dogecoin on Binance?
Yes! Users can short other cryptocurrencies besides Bitcoin, such as Dogecoin, Ethereum, Litecoin, and other crypto assets.
What are the alternatives to Binance for shorting?
Does Binance have a mobile app?
Yes! Binance offers a great mobile app that can be downloaded for free on Android and iOS devices.
A Few Words Before You Go…
Derivatives trades such as margin trading, futures trading, and shorting are very popular among investors today. But a word of advice to beginners: if you’re just starting at crypto, these types of trading can easily overwhelm you and even empty your wallet. If you’re looking to short crypto, the best way to start is with a low-value cryptocurrency such as Dogecoin just to get the feel of the market movements. When you feel ready, you can start investing in some more valuable tokens that will bring you greater returns.