Short selling

Short selling means profiting when an asset's price goes down. You borrow the asset, sell it at the current price, and later buy it back to return what you owe. If the price fell in between, you keep the difference. If it rose, you pay that difference out of your own pocket.

In crypto, shorts rarely work through a traditional broker. Most people open a short on a perpetual futures market, where you post margin and the contract tracks the token's price without you ever holding the token. The other route is borrowing a token from a lending protocol and selling it on a DEX, then repurchasing it to repay the loan. Perpetual shorts also pay or receive a funding rate, so holding one can cost money when the market is crowded on your side.

The risk is lopsided compared with buying. A long position can lose at most what you put in, but a short's loss has no ceiling because a price can keep rising. Leveraged shorts get liquidated when the price moves against you far enough, and those forced buybacks can push the price up even further. That chain reaction is called a short squeeze, and it can send a thinly traded token sharply higher in minutes.

For anyone watching small tokens, the practical point is that most of them cannot be shorted at all. Perpetual markets usually exist only for larger, established assets, and borrowing a low-liquidity token is often impossible or ruinously expensive. Where a short market does exist, check the liquidation price, the funding rate, the fees, and which oracle the venue uses to set prices, since thin markets produce wicks that wipe out positions. Also remember that a token with transfer restrictions or a heavy sell tax can make repaying a borrowed position difficult.

Short interest and funding rates are also useful signals even if you never short anything. Very negative funding or a lot of open shorts means traders are leaning bearish, which can mean either a real problem with the token or fuel for a squeeze.