Do you know that the average crypto trader only uses 10% of the potential of the numerous trading methods he is familiar with? Throughout their trading careers, the majority of traders only use one trading technique. As a result, 95% of traders fail to make any profit over time.
A competent trader, on the other hand, may profit in the market regardless of market conditions. He has various well-designed trading tactics at his disposal that enable him to profit. It makes no difference if the market is in a Bull or Bear market.
Short selling is one such approach that can be utilized to profit in a downtrend.
Note: Now is the time for me to be completely honest. This article is solely for educational purposes. Short selling is extremely dangerous, and you could lose all of your money. If you don’t have enough expertise, experience, or money to lose, don’t do it.
What is Bitcoin Short Selling, and how does it work?
Short selling is simply the act of selling an asset without really owning it. It allows you to profit even when the market is down.
There is one basic guideline to follow in order to profit from any trade: Buy Low and Sell High. The only distinction is that in the short-selling process, you sell first and then buy later.
A trader believes that the future price of an asset will be lower than the current price.
Bitcoin, for example, is currently trading at USD 34,000, and I predict it to drop to USD 30,000 within the next week. In this situation, I can short sell bitcoin for USD 34,000 today and repurchase it for USD 30,000 at the end of the week. So, with this exercise, I’d be able to make a profit of USD 4,000 per Bitcoin.
How to Short Sell Bitcoin Bitcoin or Other Cryptocurrencies?
Short selling an asset can be accomplished in a variety of ways. However, I’d like to talk about the following two basic methods:
Margin Trading allows you to short sell bitcoin.
Futures Trading allows you to short sell bitcoin.
So, let’s start with an example of the Binance Margin Trading Method. Create a Binance account right now if you don’t already have one.
Margin Trading: How to Short Sell Bitcoin on Binance
To sell Bitcoin (without owning it) through short selling through margin trading, you must first borrow it from the exchange. Furthermore, once the market price of Bitcoin has fallen, you would repurchase the Bitcoin and refund your loan, plus interest.
I’ll attempt to short some Bitcoin to help you comprehend the operation.
I’ll need to take four simple steps to do this:
Borrow BTC in the first stage.
Sell BTC on the second stage.
Stage 3: Invest in Bitcoin (BTC).
Stage 4: Repayment of BTC (with interest)
So, let’s take a closer look.
To place a short trade, go into your Binance account and follow the steps below.
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 – To borrow money, you must first deposit collateral into your margin account. To do so, go to your spot wallet’s transfer page and transfer funds to your margin wallet.
- Step 4 – You must now borrow and sell Bitcoin after depositing the collateral. With a single action, both of these stages would be completed.
Select the order type (Limit, Market, or Stop Limit)
In the sale window, make sure the “Borrow” option is selected.
Enter the quantity of bitcoins you want to borrow and sell.
Select “Margin Sell BTC” from the drop-down menu.
This completes Stages 1 and 2 (borrowing BTC and selling BTC).
Now we’ll move on to Stages 3 and 4. When the price of BTC drops, you’ll have to buy back the BTC you sold to repay your loan, plus 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 acquired, and your loan (together with interest) will be automatically repaid from the BTC purchased.
This is how you use margin trading to short sell Bitcoin. Another common way to short sell Bitcoin is through futures trading. Let’s look at how this approach can be implemented.
How to Short Sell Bitcoin on ByBit through Futures Trading
You are not actually trading in an asset when you short sell through a futures contract; instead, you are merely wagering on an asset. A futures contract is a derivative instrument that closely resembles the price of the underlying asset.
I’m going to short sell BTCUSDT contracts on ByBit to learn how to short using futures contracts.
So, let’s take a step by step look at the process.
- 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
Your short sell order will be placed along with the take profit and stop loss trigger prices in this manner. This means that if one of these two prices is reached, your position will be instantly closed.
Now that we’ve covered the two most common techniques for short-selling Bitcoin, let’s talk about the risks of doing so.
Risks of Short Selling
There is no limit to the loss you will have to bear if the price of the underlying asset does not decline as expected.
If you deposit $1,000 in a typical transaction, your maximum loss will also be $1,000. Short-selling, on the other hand, carries the risk of losing your whole account balance.
Additionally, if you took a leveraged position while short selling, your position will be liquidated as soon as your margin falls below the statutory maintenance margin level.
As a result, you should always use the stop loss option to limit these risks to some level.
Conclusion: Short Sell Bitcoin
Short-selling, while dangerous, can be a profitable technique if done correctly. During a bad market, most traders keep their funds inactive, which can be used to hone the art of short selling.
I hope you now have a better understanding of how a short-selling bitcoin strategy works and that you will use it to benefit when the time comes.
Please keep in mind that short selling and leverage trading are extremely dangerous, and you could lose all of your money. As a result, only employ these tactics if you have the necessary knowledge and experience.
Also, please keep in mind that I am not a financial expert and that this is not financial advice. Before you invest or trade, do your homework.
Please share this post with your friends and coworkers and let me know what you think in the comments area. For more articles like these, sign up for our newsletter.
Every investing and trading decision entails risk, so do your homework before making a decision.