In the crypto market, many people have a love-hate relationship with 'short selling'. They love that it allows them to make money even in a declining market but fear that a small mistake could lead to being directly 'liquidated' by the market. Especially with leveraged contracts, it amplifies the risk, causing many to lose their principal overnight.
But have you ever thought about why it’s so easy for you to get liquidated when shorting? Why does the market always go against you even when you judge the trend correctly? Today, we will discuss the underlying logic of contract short selling and the 'rules of the game' in the simplest way.
What exactly is contract short selling?
In simple terms, short selling means betting that the price will fall. For example, if you think Bitcoin is too high at $30,000 and will definitely fall to $20,000, you can 'borrow' a Bitcoin, sell it in the market at $30,000, and then buy it back when it really falls to $20,000 to return it to the platform; the difference is your profit.
It sounds great, right? But don’t forget, you are borrowing someone else's coin; you must keep bearing the risk without getting liquidated. In the contract market, this risk control is managed by the 'marked price'—that is, it is not the market price you see that determines whether you get liquidated, but an algorithmic price set by the platform, which provides 'market makers' with a lot of operational space.
Use a simple real estate example to clarify the essence of contracts.
What exactly is contract trading? Let's clarify with the example of a house:
Assuming I am a real estate developer, I built a high-end property mainly sold to wealthy person A. A directly bought the whole building from me, purchasing most of the circulating properties.
At this point, the price of the property is determined by me and A, as we are the two parties truly buying and selling the houses. The supply and demand circulating in the market are nearly all between us. How we price it, the whole market follows us.
Now there is a person B, who hasn’t bought a house, but he disapproves of our price and thinks this property is not worth that much. He takes out $1 million and wants to bet against A, betting that the property price will fall. Note: B is not buying a house; he is 'betting' that the property price will drop; he is engaging in derivative trading (contract short selling).
Here’s the problem: B does not affect the real housing price. The real price is determined by me and A, as we control the buying and selling rights of the house. Even if B thinks the house is only worth $1 per square meter, he has no power to change the market circulation price.
In this example:
I am the project party.
A is the market maker/big player.
B is the retail investor entering the market to short.
You say, can B win? As long as A and I work together to control the spot price, B can only be liquidated in the derivatives market.
Why is short selling so difficult?
Ultimately, the essence of short selling is a game against market makers and project parties. But this game is often destined to be unbalanced, and you need to understand the following core points:
1. Low market cap coins = Paradise for manipulators.
In those low market cap and illiquid altcoins, the market makers control costs very low. They only need to slightly move the spot price to drive changes in the marked price of the contract market, easily forcing retail short sellers to 'exit the market'.
You think the market is genuinely rising, but in fact, they are setting a trap at a high point; you think you are shorting at the top, but you are actually just becoming fodder for the market makers.
2. Leverage + Funding Rate = Double Strangulation.
Contracts inherently come with leverage. For example, if you short with 10x leverage, a mere 10% movement against you will lead to liquidation.
Worse is the funding rate. If the entire market is shorting, you still have to pay 'long traders'—even if the market doesn’t change, you will be gradually drained by 'funding rate' due to a long holding period.
3. Market makers pump the price → short positions get liquidated → crazy harvesting.
When there are more short sellers, market makers will deliberately pump the price. They know that a price pump can liquidate a large number of short positions, and when these positions are liquidated, they are either forcibly closed or help 'pump the price' further, creating a vicious cycle.
Just like the real estate example we mentioned earlier, market makers control the spot price, and as long as they want, they can break your short-selling logic at any time.
Is there still a way for retail investors to survive?
Of course, it doesn’t mean you can’t short; you just need to know how to play safely:
1. Try to trade highly liquid mainstream coins.
Coins like BTC and ETH, which have sufficient depth, are relatively harder to manipulate, making short selling more reliable.
2. Pay attention to the capital flow in the contract market.
Funding rates and long-short ratios are the wind indicators of the contract market; don’t blindly open positions against the trend. Learn to watch the order book and the direction of large capital.
3. Leverage must be stable, and positions should be light.
Don’t go ALL IN, and don’t use ultra-high leverage of 20x or 30x; smaller trades are safer. Making money in contracts relies on a sense of rhythm, not on all-in bets.
4. Keep an eye on the linkage between spot and contract.
You are betting on the direction of the spot price, but the contract rules are what slap you in the face. Understanding this point will allow you to see the motives behind the 'surface market'.
In the contract mechanism: all the terms and mechanisms you will encounter.
What steps do ordinary people usually go through in contracts? What professional terms will they encounter? Don’t worry, I’ll walk you through it step by step.
Step 1: Choose a direction—go long or short?
Going Long: Betting on price increase, buying low and selling high;
Short Selling: Betting on price decline, selling first and buying later.
Step 2: Choose the opening method—Market or Limit?
After deciding the direction, you will see two common buttons:
Market Price Opening (Market): Immediate transaction, the system matches you with buy/sell counterparties at the current market's best price, the fastest speed but may have slippage.
Limit Price Opening (Limit): You set the price yourself, wait for others to execute the order; price is controllable but may not get executed.
Step 3: Set the leverage multiple.
Leverage means 'you can use a small amount of money to control a larger position.'
2x leverage: You have 100U, you can buy a position of 200U;
10x leverage: You have 100U, you can open a position of 1000U;
20x or even higher: Risk amplifier; you can earn fast but die fast.
Important reminder: The higher the leverage, the greater the risk of being forcibly closed (liquidated).
Step 4: Margin & Contract Quantity (Opening Amount)
Margin: This is the 'real money' you put into this contract, which the system uses to calculate the liquidation price.
Contract Quantity: Different platforms use USDT or coin margin, representing how much quantity you actually bought.
Step 5: After opening a position, the marked price and liquidation price will appear!
Marked Price: Not the spot price, but a price calculated by the platform using an algorithm, used to determine whether you get liquidated.
Liquidation Price: As soon as the market touches this price, your position will be forcibly closed, and you will exit directly.
Step 6: You will see the funding rate.
This is a very special point in the contract market: the funding rate settles every 8 hours (varies by platform), and sometimes you may incur 'chronic losses' from the funding rate even if you don’t change your position.
Step 7: Setting profit-taking and stop-loss (optional but recommended)
Most platforms provide a 'profit and loss stop' function to avoid emotional trading.
Step 8: Close position—choose the right timing to exit.
Market Price Closing: Sell immediately, fast execution but prone to slippage;
Limit Price Closing: Wait for your set price to execute.
Conclusion - Control your hands, survive.
The crypto market is not an absolutely fair place, especially in the derivatives market where market makers' tricks are endless. You need to understand: going long or short is not merely a technical battle; it is more a psychological war, a capital battle, and a struggle of information asymmetry.
So rather than staring at K-lines every day, fantasizing that you are a market hunter, it is better to first clarify: who are you actually betting against? Are they setting a trap to get you in the market?
Making money has never relied on 'betting in the right direction' but on 'understanding the rules'. Short selling can be very appealing, but if you do not understand the game rules, you will only become a piece of fodder in someone else's game.
