Shorting or to short is trading parlance for taking a position in something with a view that its price will go down (it is the opposite of going long). Going long is simple, one just has to buy the asset and hold it. Going short is simple conceptually, but it a bit more complicated to execute.
In trading stocks, the most common way to short a stock (profiting if the price goes down) is to have a margin account at a brokerage. A margin account means that brokerage will loan you money or assets. When you have margin activated and short a stock, it might look seamless, but what’s happening behind the scene is that 1) brokerage lends you shares of the stock; 2) you sell them in the market. When you buy them back later (hopefully at a lower price), you return the shares back to the brokerage and keep the profit.
Before we discuss how you can do this in the crypto world, a warning on the dangers of shorting. When you go long, buying an asset at a price, the most you can lose is the entire amount that you’ve paid. This is NOT the case when shorting. When you short, you make money when price drops and lose money when price goes up. The most you can make is 100% of the trade amount (as price goes to zero), but the amount you can lose is UNLIMITED. For example, if you short an altcoin at $1 after it has risen from $0.0001. But instead of dropping in price, the price goes to $100. You now have lost 100x of your trade amount. If you shorted 1000 coins at $1, now you have a loss of $1000 x 100 = $100,000. Of course, most trading venues would have internal triggers that will likely liquidate or close your position before that (as you run out of money in the account). But just a warning conceptually of the danger (safest to always set a stop order to exit the position when it really goes against you).
Now, back to show to do this in the crypto world – several methods:
1) Same as in stocks, you can find an exchange/platform that allows margin (e.g., Binance). They will allow you to borrow various tokens (against collateral that you deposit), which you can then sell, buy back later, and return the tokens.
2) Futures – several exchanges offer futures trading on various tokens. Futures are a form of linear derivative on the underlying token. Futures allows one to easily go short (and long) without the process of borrowing. It is a simpler process but you might have fewer token choices available to you.
3) Options – some exchanges also offer options on tokens. Calls and puts are non-linear derivatives. When you buy a put on a token you are effective going short. However, other factors go into pricing and price movement of a put – time to expiry, volatility, etc. Be sure that you understand them before trading.
4) Contract For Difference (CFD) – is another way, popular in some jurisdictions. It is not legal in the U.S.
Hope this helps anyone new to shorting. Looking forward to comments and good luck trading!