Course Content
What Is Shorting in the Financial Markets?
There are countless ways to generate profits in the financial markets. Some traders will use technical analysis, while others will invest in companies and projects using fundamental analysis. As such, you, as a trader or investor, also have many different options to create a profitable trading strategy. However, what if the market is going through a prolonged bear market, where prices are continually declining? What can traders do then to maintain a source of income from trading? Shorting the market allows traders to profit off price declines. Entering a short position can also be an excellent way to manage risk and hedge existing holdings against price risk. In this article, we’ll explain what shorting means, how to short Bitcoin on Binance, and learn about the risks of shorting.
What Is Shorting in the Financial Markets?
About Lesson
Typically, shorting will happen with borrowed funds, though not in all cases. If you’re selling some of your spot Bitcoin position at $10,000 with the plans to rebuy it later at $8,000, that’s effectively a short position. However, shorting is also commonly done with borrowed funds. This is why shorting is closely related to margin trading, futures contracts, and other derivatives products. Let’s see how it works.
Let’s say you’re bearish on a financial instrument, such as a stock or a cryptocurrency. You put up the required collateral, borrow a specific amount of that asset, and immediately sell it. Now, you’ve got an open short position. If the market fulfills your expectations and goes lower, you buy back the same amount that you’ve borrowed and pay it back to the lender (with interest). Your profit is the difference between where you initially sold and where you rebought.
Now let’s look at a more concrete example. You borrow 1 BTC and sell it at $8,000. Now you’ve got a 1 BTC short position that you’re paying interest for. The market price of Bitcoin goes down to $6,000. You buy 1 BTC and return that 1 BTC to the lender (usually, the exchange). Your profit, in this case, would be $2,000 (minus the interest payments and fees).