Short selling on a crypto derivatives exchange is a strategy used to profit from a decline in an asset's price. Unlike traditional shorting, which involves borrowing an asset to sell it, derivative shorting involves entering a contract that increases in value as the underlying asset's price falls.
- When you short on a derivatives exchange, you are not borrowing the actual cryptocurrency. Instead, you are opening a futures or perpetual swap contract that obligates you to sell the asset at a future price.
- Opening a Short Position: You initiate a "sell" order on a derivatives contract. This means you are agreeing to sell the underlying asset at the current market price at some point in the future.
Profiting from a Price Drop: If the market price falls, you can later "buy" back the same contract at this new, lower price to close your position. The difference between your higher selling price and your lower buying price is your profit.
This process of selling high first and buying low later is the inverse of a traditional long trade.
With derivatives you short by selling a perp or dated future. PnL increases as price falls. Watch funding on perps and your maintenance margin.