Do you know that an average crypto trader does not even use 10% of the potential of various trading strategies he knows? Most of the traders only follow one trading strategy throughout their trading journey. Thus, 95% of traders fail to make any profit over a long period.
However, a professional trader can make money in the market irrespective of the market situation. He is equipped with several well-designed trading strategies that allow him to make a profit. It does not matter whether the market is in a Bull or Bear.
One such strategy is Short Selling which can be used to make money in a Downtrend.
Note: Let me be very candid now. This post is for educational purposes only. Short selling is highly risky, and you may lose all your funds. Do not try this unless you have sufficient knowledge, experience, and funds to lose.
So now, as I have covered my risk, I would be able to speak freely about the risk, rewards, and methods of short selling.
What is Bitcoin Short Selling?
Short selling is simply a way to sell an asset when you do not own it. It enables you to make money even in a downtrend.
In order to earn profit from any trade, there is one simple rule, Buy Low and Sell High. The only difference with the short-selling process is that you are selling first and buying later.
Here, a trader expects that an asset’s future price will be lower than its current price.
For Example, Bitcoin is trading today at USD 34,000, and I expect it to go down to USD 30,000 within this week. In this case, I can short sell bitcoin today @ USD 34,000 and repurchase it at the end of the week @ USD 30,000. So, I would be able to make a profit of USD 4,000 per Bitcoin with this exercise.
How to Short Sell Bitcoin or Altcoins?
There are several methods through which you can short sell an asset. However, I would be discussing the following two simple ways:
- Short Sell Bitcoin through Margin Trading
- Short Sell Bitcoin through Futures Trading
How to Short sell Bitcoin on Binance through Margin Trading
If you like to learn by watching videos, watch the below tutorial:
Short selling through margin trading means that to sell Bitcoin (without owning it) you first need to borrow it from the exchange. Further, once the price of Bitcoin has decreased in the market, you would repurchase the Bitcoin and repay your loan along with interest.
To make you understand the procedure easily, I will try and short some Bitcoin.
For this, I need to follow four simple stages:
- Stage 1 – Borrow BTC
- Stage 2 – Sell BTC
- Stage 3 – Purchase BTC
- Stage 4 – Repay BTC (with interest)
So, let’s have a look.
Once you are on your Binance Account, follow the below step to make a short trade.
Stage 1 and 2 – Borrow and Sell BTC
- Step 1 – Click on “trade” and then click on “classic”
- Step 2 – On the trade screen, choose “cross” or “isolated” margin. I will select cross margin.
- Step 3 – In order to borrow funds, you first need to transfer collateral to your margin account. For this, click on transfer and transfer funds from your spot wallet to your margin wallet.
- Step 4 – Now as you have deposited the collateral, you need to borrow and sell Bitcoin. Both these stages would be completed with a single action.
- Choose the type of order (Limit, Market, or Stop Limit)
- Make sure the “Borrow” option is selected in the sell window
- Enter the amount of BTC to be borrowed and sold
- Click on “Margin Sell BTC”
This completes your Stage 1 and Stage 2, i.e., borrow BTC and sell BTC.
Let us move on to Stage 3 and Stage 4. Once the price of BTC falls, you need to buy back the BTC that you have sold to repay your loan along with interest.
Stage 3 and 4 – Repurchase and Repay BTC
- Step 5 – To check the total amount you owe, click on the Borrow button, and a window would open. Click on repay button to find the total amount you owe to Binance.
- Step 6 – Now, you need to understand that I need to buy back and repay my loan. My total loan (including interest) is 0.00030001 BTC. To square off the loan, I will buy a bit more than this. So, let us buy 0.00031 BTC.
- Select type of order
- Make sure the “Repay” option is selected
- Enter the amount of BTC to be bought
- Click on “Buy BTC”
The BTC will be purchased, and your loan will be automatically repaid (along with interest) from the purchased BTC.
This is how you short sell Bitcoin using margin trading. There is another popular option to short sell Bitcoin, i.e., futures trading. Let us understand how this method can be followed.
How to Short Sell Bitcoin on ByBit through Futures Trading
Short selling through a futures contract means that you are not actually trading in an asset but simply betting on an asset. A futures contract is a derivative instrument that mimics the price of its underlying asset.
To understand the procedure of shorting through Futures Contract, I will short sell BTCUSDT contracts on ByBit.
So, let’s understand the process step-by-step.
If you would like to learn by watching the video, here you go:
- Step 1 – Once you Login to your ByBit account, transfer funds to your Derivatives Wallet
- Click on your email ID on the top right
- Click on “assets”
- Click on “Derivatives Account”
- Deposit the funds you want to trade with from your spot or other wallets
- Step 2 – Choose the derivatives contract you want to trade
- Click on “Derivatives”
- Choose “Type of Contract” – “USDT Perpetual” (Choose contracts as per your discretion)
- Choose “Trading Pair” – “BTCUSDT” (Choose contracts as per your discretion)
- Step 3 – Enter Order Details
- Choose Open Window
- Choose Margin – Isolated or Cross – (Isolated)
- Choose Leverage – up to 100x – (1x)
- Choose Type of Order (Limit, Market, Conditional) – (Limit)
- Choose “Order Price” – ($29,850)
- Choose “Order Quantity” – (0.001 BTC)
- Select “Sell Short with TP/SL”
- Mention Take Profit trigger price – Should be lower than the order price – ($29,000)
- Mention Stop Loss trigger price – Should be higher than the order price – ($30,500)
- Click on the “Open Short” button
This way, your short sell order will be placed along with the trigger price for taking profit and stop loss. This means if any of these two prices is triggered, your position will be closed automatically.
Now, as we have understood the two most popular methods of short-selling Bitcoin, let us address the risk of the short-selling procedure.
Risks of Short Selling
If the price of the subjected asset does not fall as per your expectations, there is no limit to the loss that you would have to bear.
When you make a traditional trade, suppose you invest $1,000, your maximum loss would be $1,000. But in short-selling, the potential loss could be your entire account balance.
Further, if you have taken a leveraged position during short selling, your position will be closed as soon as your margin goes below the required limit of maintenance margin.
Thus, to mitigate these risks to an extent, you should always use the stop loss feature.
Conclusion: Short Sell Bitcoin
Although risky, short-selling is a valuable strategy if appropriately applied. Most traders keep their funds idle during a bear market that can be used to perfect the art of short selling.
I hope you were able to have an idea of how a short-selling bitcoin strategy works and when time is right, you will use this strategy to make profits.
Please note that short selling and leverage trading is highly risky, and you may lose all your funds. Therefore, do not use these strategies unless you have sufficient knowledge and experience.
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