I made a mistake today where I shorted BTC on Bitfinex using BTC as collateral. Why is this even possible, I cant figure out why someone would want to do that?
Shorting is normal trading transaction on real financial markets. Without shorting you would not be able to speculate and profit on price decline. Assume that btc price is 400 USD and you think that the price will go down. By shorting one bitcoin you simply borrow one bitcoin from some lender and sell the bitcoin for 400 USD. If your assumption is correct and price goes down, say to 100 USD, you buy that bitcoin back and return it to the lender. Your profit then is 400 - 100 = 300 USD.
In well regulated markets (Bitfinex's aim) traders should have the ability to profit from movements in both directions.
Shorting also assists in the formation of price bottoms. The only way a short seller can capitalize after a down move is by buying back the shorted BTC. This has the net effect of creating buyers after a down move which helps bouy the BTC price.
Bitfinex can also adjust its overall risk and generate some additional revenue by lending out BTC's to short sellers.