You probably hear that there are several ways to earn money from Bitcoins. From mining, holding, trading to writing about BTC, and doing micro jobs such as completing a survey. Or you can short on Binance. It is another, less-known way to make a profit with BTC.
What is shorting Bitcoin?
Crypto shorting is the process of selling the cryptocurrency with the hope that when its value falls, you can buy it back at a lower price. This way traders earn the profit of difference in the market price. In other words, it is an investment method to earn money over a digital currency’s price drop.
Buy low and sell high! Basically, you borrow the coins with the commitment to return them sometimes later. Then, you sell the coins at the current market price, knowing that the price will decrease in the near future. And when the price goes down, you buy the coins back and return them to the lender. Now, what you earn as profit is the difference between the selling price and the price at which you bought them back.
On the other hand, the price difference can be a profit or loss. Therefore, you place short positions only when you are sure that the asset price will fall for sure. That is why there is quite a lot of chances of making huge profits in this highly volatile market, especially, in digital currencies such as Bitcoin.
Ways to Short Bitcoin
There are 5 the most famous ways to short BTC:
- Margin Trading
This is one of the most popular ways to short bitcoin. Many cryptocurrency exchanges, including Binance, allow for shorting BTC through margin trading. With margin trades, investors borrow money from a broker for making a trade. When the price will decrease, the borrower can buy back the BTCs and return the exact borrowed amount to the lender and keep the profit earned between the sale and purchase prices.
However, it’s important to remember that there may be a leverage factor, which could either increase your profits or your losses.
Margin trading on Binance is also available.
- Futures Market
Bitcoin like other assets has a futures market. When a buyer agrees to buy an asset with a contract that defines at what price the asset will be sold at a later date, it is called Futures Trade. When you buy the BTC futures contract, you assume a short position (that its price will rise in the future). So, later on, when the price will increase, you can buy BTC at the prefixed price only (as mentioned in the futures contract) which will be less than the current market price. This makes sure that you will earn a good profit on the asset in the future.
However, if you sell a futures contract, it suggests a bearish mindset and a prediction that bitcoin will decline in price. So, when the price will go down in the future, you can sell the coins at the prefixed rate of Bitcoin (as mentioned in the futures contract).
- Binary Options Trading
This is an option contract that enables you to choose between call or put options. A binary options contract allows traders to have the right to buy or sell BTC coins at a particular price and date in the future.
The call option contract enables traders to buy an asset at a future date and the put option allows for selling the asset at future date.
To short BTC, traders execute the put option contract, likely with an escrow account. This states that they will sell BTC at the current price even if the price goes down later on.
Binary options are available through a number of offshore exchanges, but the costs (and risks) are high.
- Prediction Markets
Prediction markets can also be considered when you want to use the short sell approach. These markets allow investors to create an event to make a wager based on the outcome. You could, therefore, predict that bitcoin would decline by a certain margin or percentage, and if anyone takes you up on the bet, you’d stand to profit if it comes to pass.
- Short Selling Bitcoin Assets
This is one of the easiest ways to earn profit by selling BTC coins on the open digital assets market. Traders interested in buying and selling actual BTC could short-sell the coins directly. Crypto owners simply sell off the coins at a price they are comfortable with. They then wait until the asset’s price declines and when it happens they buy back the coins again.
Of course, if the price does not adjust as you expect, you could also either lose money or lose bitcoin assets in the process.
How to short cryptocurrency?
In order to short-sell BTC, you need to connect with a crypto trading platform like Binance where you can place a short sell order. After this, the trading platform sells BTC coins from their own supply on your behalf, so that you will repay them later with the same number of coins. If you place the order of short selling 12 BTCs, you will have to return them exactly 12 BTCs, irrespective of whether the price goes up or down.
If the price of asset declines, it will be easier to buy these 12 coins back. But if the price increases, it will be much expensive. Make sure to read the rules, regulations, and guidelines of the firm and individual from whom you are borrowing the BTC coins.
Short Cryptocurrencies via CFDs – Derivative trading
The drawbacks of traditional short-selling have created a growing interest in derivative products as an alternative method of short-selling bitcoin. Derivatives are financial instruments that take their price from the underlying market, in this case, bitcoin.
With this approach, there is no need for you to borrow coins from a third party, as you are simply speculating on the future direction of the market. A popular derivative is CFDs:
CFDs are an agreement to exchange the difference in the price of a bitcoin from when the position is opened to when it is closed. You would open a position to sell a bitcoin if you believed it was going to decline in price.
However, there are still two parties involved – the trader and the broker. At the end of the contract, the two parties exchange the difference between the price of the cryptocurrency at the time they entered into the contract and the price of the cryptocurrency at the end.
Essentially, the trader is paying the difference between the opening and closing price of the cryptocurrency they are trading. The simplicity of entering and exiting positions, compared to other trading vehicles, is just another reason why short-selling cryptocurrency CFDs is very popular.
Can you short on Binance?
Is Binance short selling possible? Yes, it is. The top crypto exchange has launched its margin trading platform back in the summer of 2019.
Margin trading allows exchange account holders to use their existing balances as collateral to open both long and short positions on crypto assets. It comes with a specialized Margin Wallet, from which funds can be moved to the primary Binance Wallet without fees.
How to short on Binance?
And here I am going to share the step-by-step guide on how you can short bitcoin on Binance.
Create an account
It will take you about 10 minutes total to register your Binance account. Provide your email and password and put on two-factor authentication (2FA) if desired. Account verification is optional.
And you can already make some money at this stage even before you start trading. Sounds interesting? We encourage using our referral link to create your account. In this case, you will get a 20% kickback that will be automatically applied to your account. And that’s not all. You will also get a 45% discount for all your trading fees. It seems to me like a good chance to seize.
Deposit your Exchange wallet
Make sure you have some BTC or USDT in your regular Binance wallet. Each of them can be used for margin trading.
Keep in mind that Binance basically gives you two separate wallets that act like separate entities:
- Regular exchange-wallet for use without margin
- Margin-wallet which can be used for margin trading.
Deposit your Margin-wallet
Go to your Margin-wallet to transfer your funds from your Exchange-wallet.
Analyze the market
Analyze the market through charts and indicators. For crypto beginners, we recommend the “Basic Exchange” window, as it is easier to navigate through. Binance charts offer tools that can help you determine price trends.
Select trading pair and create a short order
Time to enter a short. Now go to the Margin trading-page to select the asset you want to trade. Next to the pairings, Binance will show you how high the maximum leverage is that can be used for margin trading this specific pairing.
Borrow extra coins via margin
After you selected the trading pair (e.g. BTC/ADA) you wish to short, pick ‘Borrow’ at the Sell-side of the trading window. The trading window will show you the amount of ADA you can borrow, which is calculated by the amount of BTC you have on your ‘Margin’-wallet and the chosen leverage.
Sell all your BTC coins
Close the Order. Once you see BTC price dropped hard enough compared to a paired coin, you click “Close order” to get it out of the market.
Take into account Binance fees if you are not using BNB (Binance coins) as they take away a portion of your profits. They range from 0.012% to 0.10%, depending on the volume of the order and the verification tier you have achieved.
Buy BTC coins back
You wait until price drops and buy cheaper bitcoin with your newly bought crypto (e.g. ADA coins). In order to do this, return to the trading window and enter the correct data for the new order. Normally, you want to buy back at a lower price-point for profit.
Close the loan and keep your profit
Go back to the Margin-wallet and repay the borrowed BTC. Click the Borrow/Repay button next to the asset of which you want to close the position.
Important! For margin trading, you will borrow funds that need to be repaid. That’s why you pay interest (fees) for margin trading. The more you borrow and the longer you borrow the asset, the higher the fees will be.
Is Binance a good exchange for shorting?
Binance is one of the biggest exchanges available all over the world where you can pick up between the long and short selling. And here are a few reasons why it is worth using for short trading and not only:
- Offers hundreds of crypto pairs to trade on
- Low trading fee which is about 0.012% – 0.10% only
- You don’t need to go through the verification process if you don’t want to (it is optional for crypto-to-crypto operations).
- You don’t need to pay a fee to deposit your money. It is free.
The risks of shorting Bitcoin
The first thing you should realize is that short-selling any asset is a high-risk transaction.
When shorting on Binance or any other platform your losses could extend far beyond your initial investment, something that is very important to consider, especially with Bitcoin.
Only invest if you are very confident that prices will drop, and if you have money to cover your losses if investments rise. Make sure you watch prices closely and cut your losses if prices start to rise too quickly.
As with any investment, learning how to short-sell Bitcoin is not a walk in the park. It takes research and some willingness to take the risk. Most financial advisors would equate it with gambling.
Just make sure that you invest in Binance shorting not more than you can afford to lose. As there is always such a risk.