A short position in crypto means that the holder of the position will profit if the value of the coin declines. This is the opposite of a long position where you profit when the value of the asset increases. Generally short positions are used to protect against or profit from declining asset prices.
In traditional finance, a short sale involves borrowing the asset and selling it on the market with the expectation that the asset's price will decrease. The decrease in price enables the borrower to repurchase at a price that was lower than their initial sale.
Below is a very simplified example of how shorting works using a short-sale.
The price of Ethereum is currently at $200. You decide to borrow one ETH using margin and immediately sell, leaving you with a balance of $200. Now lets say that the price of ETH declined 10% and is now trading at $180. You then buy back the ETH at the reduced price and return it to the borrower. As a result you are left over with $20 that you made in profit.
The biggest risk in short selling is the potential for infinite loss. When you go long on a position, the most you can lose is 100%. While a 100% loss is not fun, your potential loss stops at the initial investment. On the other hand, there is no limit to the price ETH could increase to, making the short sale losses infinite.
It is important to note that short positions are complex and bear high risk. These positions bear an even higher risk in volatile markets which can cause the position-holder to lose their entire position or significantly more than they were expecting. Tokens offering short exposure are only intended for those who understand the risks involved and intend to hold on a short-term basis. Please make sure you read our Educational Section before you consider purchasing.