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I'm trying to get my head around how the Inverse Perpetual contacts work. And failing.

From a short position point of view i found information that says i have to borrow BTC. But where am i borrowing the BTC from... is it from the exchange inventory like Binance/Bybit ? So I borrow BTC from the exchange in order to to sell to someone in the order book BID/LONG side ?

Because when i enter a short position, i'm not selling my BTC am I ? If i used 5x leverage for example then the position size might be larger than my BTC holdings so my BTC is just there to cover the margin price i think.

On the flip side, if I wanted to go long then I need to buy. But again, if i have 1 BTC and long with 5x then i need 5 BTC... so do i borrow BTC again directly from the exchange so i can buy from someone in the order book ASK/SHORT side ?

In my head i keep trying to think in USD, which i think is confusing me more. But i don't think USD is ever used in this context ? It's only there as a convenience for people... everything is done in BTC and it's swapped between LONG and SHORT positions ?

Am i on the right tracks here ?

I feel this should be simple but i'm getting confused somewhere. Can someone explain to me like i'm 5 years old please lol.

thank you.

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  • When you short a stock, you borrow the stock sell it and when you close your trade you buy back the stock and return it to the original owner keeping the difference in proceeds (assuming the price went down). It's no different with bitcoin and not really a bitcoin question.
    – m1xolyd1an
    Dec 1 '21 at 4:45
  • So when you long/short BTC on Binance, bybit etc.. you are actually borrowing BTC when you short and USD when you long directly from the exchange ?
    – Flo Woo
    Dec 1 '21 at 7:49
  • No you are borrowing from others who are providing their USD or BTC as funding liquidity. binance.com/en/support/faq/360033525031 && p2pmarketdata.com/blog/how-to-lend-your-crypto-on-binance
    – m1xolyd1an
    Dec 2 '21 at 3:44
  • but who pays their interest ? If i enter a margin order and supposedly borrow from these people, they need paying interest i guess... but a when i enter a margin trade I make periodic payments to either long or short traders depending on the difference from spot and contract prices.
    – Flo Woo
    Dec 2 '21 at 7:24

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