ELI5: Short Selling - Explained!

1. Alice borrows 1 BTC from Bob under contract
2. Alice now has 1 BTC asset and promise to pay Bob 1 BTC
3. Alice sells 1 BTC to Carol for fiat
4. Alice now has fiat and a promise to pay Bob 1 BTC

If Alice is lucky:

1. The BTC price crashes
2. Alice uses the fiat to buy 1 BTC at a low price
3. Alice now has 1 BTC asset, 1 BTC promise to pay Bob, and some leftover fiat
4. Alice repays Bob the 1 BTC making good on the contract
5. Alice keeps the leftover fiat.

If Alice is unlucky:

1. The BTC price soars
2. Bob gets concerned about Alice's ability to pay him back his 1 BTC
3. Bob 'margin calls' Alice under the terms of the contract
4. Alice is forced to buy the 1 BTC at the higher price.
5. Alice now has 1 BTC, a promise to pay Bob 1 BTC and less fiat then when she started
6. Alice repays Bob the 1 BTC making good on the contract
7. Alice is left with less fiat than when she started.