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Academy Beginners Tutorial Article
Bitcoin Derivatives Trading

Shorting Bitcoin — how to profit from BTC bear markets and corrections

2021.06.18 Rick Delaney

An introduction to short-selling with steps for shorting Bitcoin on OKEx 

With its limited supply, protocol-regulated rate of issuance, and generally rising popularity and demand, Bitcoin has — over the decade or so of its existence — managed to outperform typical assets by a large margin. However, this long-term price appreciation has not happened without sharp drops and declines and several bearish phases along the way.

While buying and holding BTC (i.e., longing) has historically been a profitable trade over time, periods of decline also present opportunities for traders willing to sell BTC high and buy it back lower (i.e., shorting).

In this next installment of our beginner's guide to cryptocurrency trading, we introduce the concept of short-selling Bitcoin. The information we present here should be beneficial for traders wanting to expand their available toolset and for those attempting to make money during a sustained bear market. 

We first look at the very basics of taking a position in a market by considering the difference between being long on an asset and being short. Next, we explain the mechanics of shorting with easy-to-follow examples and also introduce some advanced techniques traders use to profit from BTC downturns. 

Moving on, we consider the inherent risks of shorting BTC when compared to taking a long position. With no ceiling on theoretical losses and with profits capped, shorting at the wrong moment can have catastrophic consequences for your portfolio. Finally, for those interested in short-selling BTC, we explain exactly how to short Bitcoin on OKEx.

What does being long or being short mean in a market?

Traders use the terms "long" and "short" to describe positions in a market. If a trader is long on an asset — such as a security, commodity or cryptocurrency — their position will profit if the asset's price increases. When a trader is short, their position profits if its price decreases. 

To be long on an asset can be as simple as buying it with a view of selling it for a higher price later. The ubiquitous expression "buy low, sell high" references a basic long position. However, experienced traders often use the financial instruments and strategies discussed later in this article to maximize their profits. 

Being short on an asset is the opposite. A trader is betting on its price falling. To achieve this, they usually borrow the asset and immediately sell it for the current market price. If the asset's price decreases, they can close their position by repurchasing — known as covering the short — and returning it to the lender, profiting from the price difference. 

While the origins of the terms are unclear, they're universally used today across stock, foreign exchange, commodity and cryptocurrency markets. Therefore, if you're an aspiring trader, you should have a solid understanding of what it means to be long or short on an asset.

Choosing when to short BTC

Clever use of a short-selling strategy allows a trader to make money when the price of BTC is falling. The most obvious time this would be useful is during a Bitcoin bear market, like that of 2018. 

However, skilled traders can make money on regular price drops and corrections during bull markets, too. With technical analysis of past price patterns, experienced traders can determine when a move to the downside looks more likely than appreciation. 

That being said, technical analysis is not an exact science, and prudent traders always seek to hedge positions and practice risk management. While a discussion of risk-management measures is outside the scope of this article, users may find our introductory guide to day trading crypto useful with its trading tips.

How does shorting Bitcoin work?

When you short BTC or any other cryptocurrency, an exchange, such as OKEx, will perform the necessary steps behind the scenes, on your behalf. However, it's important to know these steps and the process for you to understand how shorting BTC works.

When you enter a Bitcoin short position, you first borrow BTC from your exchange and immediately sell it at the current market price. If BTC's price falls while your position is open, it becomes profitable, as you can "cover" the short by buying back the asset at a lower price. The difference between the opening and closing price is your profit.  

For example, sensing the market is overheated, you enter a short position with 1 BTC when the price is exactly $60,000. Over the next week or two, the price falls to $30,000 and you decide to close your position. You repurchase the same amount, 1 BTC, to cover the short, and then return it to the exchange to close the position. 

Your profit from this trade — minus any exchange fees — is $30,000. You originally received $60,000 from the sale of the borrowed BTC and spent $30,000 repurchasing it to repay the debt.  

Although this might sound more complicated than simply buying BTC and hoping to sell it at a higher price, the exchange abstracts the process away from traders. As we explain in the later section about shorting BTC on OKEx, you don't have to manually borrow the BTC, initiate its sale and later return it yourself. Instead, the platform performs these steps for you, making the process of short-selling almost as simple as buying and selling spot BTC. 

Risks when shorting Bitcoin

Shorting BTC is a more advanced trading strategy. When timed well, it can be highly profitable. However, short-selling carries additional risks compared to those associated with taking a long position in a spot market — i.e., buying BTC from an exchange to sell at a profit later. 

When going spot long, your potential downside — or the amount you stand to lose — is capped. Regardless of your price per BTC or the size of your position, you can only lose the capital you initially spent. For example, if you bought 0.1 BTC at $60,000 and the price suddenly went to $0, you could lose a maximum of $6,000. 

Similarly, the upside potential on a spot long position is technically infinite. Presume in the example above that you held your 0.1 BTC for a few years. If, over that time, Bitcoin rose to become a world reserve asset, with 1 BTC hitting $100,000, $1 million or even $10 million, your profit would be 10% of whatever price you eventually sold your position at — minus your initial investment, of course. 

When shorting BTC, the opposite is true. Your potential losses are theoretically infinite and profits are capped. This is because you're betting on the price falling, and the maximum it can fall is 100%. Therefore, the most you stand to gain from a simple short is 100% of your initial position size.

The real issue, however, is your potential losses. Take the hypothetical scenario we used previously to better demonstrate the potential profitability of longing spot BTC. You open your short by selling 0.1 BTC at $60,000, anticipating a move to the downside. Bullish news events follow, however, and take the price to $1 million. In this scenario, your loss would be the $100,000 required to buy back the 0.1 BTC you owe to the exchange minus the $6,000 you initially received from selling the borrowed Bitcoin. Thus, your overall position would be a loss of $94,000.

Whether or not you are allowed to keep your short trade open until your losses reach such high figures is another question. An exchange will automatically close your short position if your account balance is unable to cover these losses and repurchase the borrowed assets.

Advanced short-selling tools and strategies

Now that you understand the mechanics of short-selling, we can introduce some techniques that skilled traders use to maximize their profits when prices are dropping. While we don't recommend them to novice traders, they are worth understanding — particularly if you want to take your trading to the next level. 

Leverage/margin trading

Margin trading refers to the practice of trading assets using borrowed funds. The margin itself is the difference between the capital that the trader contributes to the position and the total funds borrowed. 

The term leverage is often used in connection with margin trading. It refers to the multiple of your initial capital borrowed from the exchange. For example, if you had $1,000 and wanted to open a long position with 10x leverage, your margin would be $9,000, making a total position of $10,000. 

Traders can also short with leverage. Again, the process is the same as previously described, except that the trader enlarges their position with additional borrowed funds. 

It is important to remember that leverage amplifies both profits and losses. This is why the use of leverage by unskilled traders is not recommended. In highly volatile markets like BTC, a sudden price move can wipe out an over-leveraged position (i.e., a position with a very high ratio of debt when compared to your account balance or equity), which could lead to forced liquidation.

We explain margin and leverage trading in more detail in a dedicated guide to the subject.

Futures, options and perpetual swaps

Shorting is an essential concept for futures, options and perpetual swap traders to understand. Futures, options and perpetual swaps are financial instruments offered by exchanges like OKEx. They enable traders to bet on the future prices of cryptocurrencies.  

When trading futures, a trader must buy or sell the underlying asset at the specified expiry date. Options, by contrast, give the trader the right, but not the obligation — hence, the option — to buy or sell the asset at the expiry date. Finally, perpetual swaps have no expiry date but do require traders to fund profiting positions — i.e., pay the trader on the losing side of the trade to keep the contract open.  

Futures, options and perpetual swap trades can be either long or short, and traders can use leverage to amplify their positions. We explain cryptocurrency futures, options and perpetual swaps in greater detail in a dedicated guide. 

How to short Bitcoin on OKEx

As mentioned, exchanges like OKEx make shorting cryptocurrencies very straightforward. Traders do not need to concern themselves with the borrowing and repaying of assets, as the exchange facilitates it for them. 

To open a BTC short at OKEx, just log in to your trading account and follow these simple steps: 

Step 1: Head to the "Trade" section

Click Trade at the top of the OKEx homepage and choose either "Unified Account Mode" or "Classic Account Mode." The following guidance uses the Unified Account Mode, but the steps will be similar regardless of your choice. 

Step 2: Choose the asset you want to short

If you want to short Bitcoin against USDT, select BTC/USDT from the dropdown list of trading pairs in the top left-hand corner of the screen. 

Step 3: Select the product with which you want to short BTC

When shorting BTC on OKEx, you will need to use the perpetual swap, futures, options or margin products. 

You can choose which product to short with from the menu at the top of the list of trading pairs. 

Step 4: Enter your trade details

For this example, we presume you are trading BTC/USDT perpetual swaps. However, this step will be similar regardless of the actual product with which you are shorting BTC.

First, choose between limit, market and stop order types. Then, enter the price you wish to short from, the desired leverage multiple — choose 1x for no leverage — and the amount of BTC you want to short. 

Finally, double-check the details entered and click the red Open short button. 

Your order will appear in the "Open order" section of the trading dashboard until it is filled. Once filled, you can check your short position under the "Positions" section. 

Step 5: Close your position

When you want to close a position, head to the "Positions" tab. Then, fill in the amount corresponding with the position you want to close. You don't need to exit your position entirely — closing part of it is a good way to lock in profits while still retaining some price exposure. 

Finally, click on the Close button to the right of the open position. You can also choose to close all your positions at the current market price by clicking on the green MKT Close All button.

Closing thoughts — should you short Bitcoin?

Having the option to short Bitcoin gives traders greater flexibility. A skilled trader will often use a mix of both long and short positions to profit from market volatility as well as to hedge and manage risk. Meanwhile, the use of leverage, options, futures and perpetual contracts can bring even greater sophistication to a strategy.

However, with potential profits limited and downside technically infinite, shorting carries more risks than simple spot trading. The use of leverage only compounds these risks, so you are advised to ensure that you fully understand your downside potential before taking short positions — particularly on unpredictable, volatile assets like BTC.

If you're interested in shorting Bitcoin but are concerned about the risk, you can get a much better understanding of it by using OKEx's demo trading account. Under "Assets," click Start demo trading to enter a few test positions to see how they perform. You can later move to real markets when you feel comfortable with your knowledge and skills. 

Ready to start trading cryptocurrency? Join us at OKEx for an industry-leading trading experience. New traders can also receive rewards in BTC and USDT for first deposits, trades and so on.


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LinkedIn: https://www.linkedin.com/company/okex/
Telegram: https://t.me/OKExOfficial_English
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Website: https://www.okex.com

Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involve significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.

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