Bitcoin Forum

to attracting more widespread interest from the world of finance.  I personally know people who would like to make multi-thousand dollar bets against bitcoin but can't because shorting has to be set up by a large trusted third party.  The ability to short increases liquidity and moves more money into the bitcoin ecosystem.

Shorting bitcoins is easy straightforward:

1.  Go to some marketplace, whether here (http://forum.bitcoin.org/index.php?board=5.0), on freenode #bitcoin-otc or wherever ;
2.  Convince someone to lend you some bitcoins ;
3.  Sell those bitcoins, for instance on MtGox ;
4.  Wait for bitcoin to crash ;
5.  Buy enough bictoins to repay your debt ;
6.  Profit ;

You try to do that with several thousands of dollars and see how easy it really is. I really don't think any newcomer is going to find someone willing to lend them several hundreds of BTC.

I'm with OP here, for shorting to take off, a large trusted third party would have to set it up. It's the only way to resolve the trust issue.

Basically shorting consists in selling something you don't actually own.  That's why it does make sense if it is economically quite difficult to do so.

You can't sell something you don't own unless you are capable of convincing someone that you will own it in the future.  If you are a nobody, sure it will be difficult, and the more you want to short, the more difficult.   Nothing wrong with that.

Also, if you think there is a market for bitcoin-shorting instruments, what about you offer this kind of financial service ? (instead of just complaining)

Mtgox trades 30000 bitcoins per day, add in the other exchangers, IRC trades... crap, you'd probably need to dump at least 20000 BTC to make it really noticeable.  Probably more like 50k.  That's half-a-million $ right now.  And even with 50k BTC dumped on the market, it's far from certain that the price would substantially drop - interest in bitcoins is increasing at an extraordinary pace.  Multi-thousand dollars, I reckon, wouldn't get you very far.

hur dur.  I'm one person.  Many many many people are probably interested in shorting bitcoin.  These are people willing to bet against us meaning we make EVEN MORE money when it turns out they are wrong.

Bitcoin trading will not be taken seriously until shorting is implemented.

There is nothing to be "implemented".  Basically all you have to do is to borrow bitcoins.  And this is easy.  The simplest way to do that is to issue a bond on biddingpond.   You just have to start with small amounts in order to gain reputation.

Now stop trying to find any more excuses and just do it.

I cannot imagine a worse financial situation than having short bets on bitcoin made over the the past month months.

I don't think any reputation based system will be sufficient to create a real economy.  I would like to set up a BitCoin investment bank that has this type of functionality.  I've thought about a lot of the things you would need in place in order to do this.  People deposit their bitcoins with my site and earn interest (in bitcoins).  I take these and lend them out to speculators hoping to profit on the fall in the bitcoin-USD exchange rate.  They pay a slightly higher interest rate to borrow the bitcoins as I pay to the lenders who deposited them with me.  The difference is the bank's profit and goes to the reserve so I can cover short term swings in deposits and withdrawals.

Person A deposits 100 BTC at an interest rate of 6% per year on June 1st.   One month later their bank account has 100.5 BTC.

Person B borrows those 100 BTC at the rate of 8% per year on the same day.  They immediately sell those bitcoins on the market for USD.  They will owe interest of .6667% per month.  If they cover their short in a month they need to return 100.6667 BTC.

Person A profits .5 BTCs, and they are free to cash out at any time so they lose no flexibility.  They gain in purchasing power if bitcoins increase in value, and conversely lose purchasing power if they decrease.

Person B has to pay .6667 BTC in interest for the loan, so he profits if he is able to buy 100.6667 BTC for less than he originally sold the 100 BTC for.

That's all there really is to a short sale.  You need people who want to deposit bitcoins with a third party (my bank) in exchange for interest.  And then I take these bitcoins and lend them out to people who expect to profit from their decline in value relative to the dollar.  The two major concerns:

When I lend out your bitcoins I no longer have those exact coins.  But bitcoins are fungible, so if you want to withdraw it doesn't matter if I give you your exact coins back, the coins of another depositor, or my own coins in reserve.  I need enough depositors to keep the market liquid, and enough of my own bitcoins in a reserve account to cover deposits and withdrawals.  Keeping 10% of the amount on deposit should be sufficient, as I will require anyone who borrows bitcoins to keep cash deposited at the bank to cover all the bitcoins they borrow.  So I have people depositing both bitcoins and cash.  When I have lots of cash reserves and little bitcoin reserves I use the cash to buy more bitcoins, and vice versa.

The second problem is what is to stop the speculator from borrowing the bitcoins, selling them for cash, and disappearing without repaying the loan?  The only way I can see to do this is to require them to deposit cash in excess of the bitcoins they deposited.  Let's say they borrow 100 BTC, worth $1000 today.  I could require them to deposit $1200 with me until they repay the bitcoins.  Furthermore, they would need to maintain a cash balance in their account with my bank of at least 10% more than the current exchange rate.  This excess would be required because when the value of bitcoins rises, let's say to $13, now they owe $1300 worth of bitcoins and only have $1200 in their account with my bank. This brings us back to the original problem of what if they just decide to disappear, now owing more than they deposited?  This is why we would require them to maintain a cash balance of 10% over the amount of their loan at all times.

In my above example they deposited $1200 and owe 100 bitcoins.  If bitcoins rise to $11 each and they did not deposit any more money to cover this they now owe effectively $1100 ($11 x 100) and have a required balance of $1210 ($1100 x 110%).  Since they failed to cover this required balance I take their $1200 balance and buy back on the market place 100 bitcoins for $1100 to cover their short position for them.  They now have $100 in their account and owe nothing.

I think these restrictions address most of the problems with the theory on how this will operate.  I just need to know how to get the software in place to manage these types of transactions and get accounts with payment processors to allow people to get money in and out.  Any suggestions for this or any ideas about things I have overlooked would be appreciated.

Bitcoin/$ parity can go up as much as we want, but... at some point, it will become a bubble and therefore it will burst. It can take a long time (maybe months, maybe years, maybe decades) to burst (longer even because we can't short), but it's pure economics.

no need to reinvent the wheel, research how this is done in normal markets.

Yeah, I gave up on the idea of doing it myself pretty quickly.  This is the essence of how it is done in real financial markets though.  Investment banks have custody of shares of stock that they hold for their customers and can freely loan them out to others.  They would of course have to return them to their original owners on demand, but shares of stock are fungible so they have a large pool to draw from.  And the loaning isn't an issue because they would only loan shares to people who had assets with the bank to use as collateral for the loan, so if you never paid it back they could force you to liquidate your holdings.

I'll loan you Bitcoins to short.  But I'm probably going to want your house as collateral.

Ha!  You missed a couple of key steps in the security shorting process.

First is the shorting pool at the clearing house.  Say you want to short a stock.  Your broker borrows them from a pool and gives them to you.  You then sell them to someone.  That buyer has no idea that they just received borrowed stocks, and they think they own them.  So, the buyer's broker holds them, and makes them available to the pool so that the next guy can borrow them again.  (Side note: shares include voting rights, and now at least two people think they are allowed to vote, and all but one of them is wrong.)

Second is that the pool is totally unnecessary, since a broker can just fail to deliver (FTD) the shares.  They are supposed to settle all trades by day T+10, but for most brokerages, there is no rush, because:

Third is that there is almost never a downside for letting a transaction go into FTD status.  No jail time.  No fines.  Rarely a sternly worded letter.

This has nothing to do with Bitcoin though, which is totally unregulated in any case.

Shorting could be setup by a broker or market maker, who must own enough BTC and USD.
If you have an account balance of $1000 and short 50BTC at $10, prices would be allowed to climb to $20 before you get a margin call and your position is forcibly closed.

Shorting of BTC should be pretty easy to implement and quite effective for a market maker with a huge supply of bitcoins accumulated from fees and from the accounts of people who have deposited but not listed their coins for sale yet.  Then you could charge interest for a loan that effectively costs you nothing.

And now that I think about it the most logical thing to do would be never even give the borrower the bitcoins.  And they could probably afford to short with much more leverage than I originally thought.  In your example you shouldn't need anywhere near $1000 to short 50BTCs. They could probably do it with as little as $100.  You as the banker could borrow these from a depositor or use your own supply and sell them at the current market price right away.  There is no need to ever deliver the coins to the person borrowing them, because they need to keep the proceeds with you for security anyway.  Now they have the $500 from the sale and the $100 they put in for a total of $600 in assets with a liability of 50x whatever the going rate of BTC is (plus interest/transaction fees).  The value of the account would go negative with a BTC price of $12 or more, so you wouldn't need to call in the margin until there are no listings on the market with ask prices of $12 or less.

With how quickly transactions can be completed and how open the information on bid/ask spreads look it seems like someone could make a killing on this by making tons of highly leveraged small bets against bitcoins.

Edit: The more I think about it the more I think maybe this wouldn't be good for the economy.  Naked short selling with unlimited leverage and perfect information on supply and demand?  It might just be asking to be exploited. The path to legitimacy is probably more through increasing the use of bitcoins as a means of exchange for value added goods and services, rather than for value sucking financial derivatives.  I must be pretty fickle... in the span of three hours I went from wanting to start a service to wanting to prevent it from happening.

naked short selling is fraudulent.  it's up to the individual exchange that implements this to run it correctly.  if people choose to deal with a party that implements fraud they can expect to lose their money/coins.

I read somewhere that Mt. Gox was looking into margin trading. Maybe they will also add a shorting feature? They're pretty much the closest thing we have here to a trusted party.

Or maybe one of the other exchanges will beat them to it and steal their business?

Beautiful logic! Breaking the problem down to it's fundamentals.

I anticipate Gox will allow short selling once margin trading is widely opened up.

I am also launching an options trading site (hopefully tomorrow the web interface goes live); you could buy puts from bitcoin bulls, god knows there are plenty of those. Just convince them to come to the site starting tomorrow. I'll post a note here when it's live.

I don't see lack of shorting as the problem... the problem is artificially low supply (by hoarding) and high demand (by media hysteria).

Lets face it. The early BTC adopters have the option to be the market makers here.  Some guy is sitting on 400,000+ bitcoins (see bitcoin report).  If just one individual started providing supply by selling large blocks (10,000?) over the next couple of weeks it might help let supply catch up with demand.

I was thinking if there was anyone in a position to setup shorting... someone with that kind of BTC resources could easily put up 50K or 100K btc.

how naive.  have u noticed the amount of money flowing into btc lately?  there's plenty of trading going on.  and shorts would have been killed.  btw, i'm a short seller over in the real stock mkt and u have to have a large capable intermediary which isn't mtgox.

nice in theory but almost impossible to implement.  if the price of btc rises to the pt of consuming their reserve you will be faced with a dilemma; sell it right now so i take no losses or do i just wait a bit until it comes back down?  you won't be able to keep calling up the short seller and asking for more reserves esp. those that will refuse to do so.  and the way btc has been spurting up in price at key levels you will be caught trying to buy btc back at a higher price than break even.  and this scenario will happen daily if you ever were to get enough customers.  the problem is you have no recourse to find and prosecute the short seller in a court of law.  you fail to see that with a nefarious short seller who refuses to post timely margin reserves, the risk then becomes yours, not his.

I'm setting up a very basic short with a friend of mine.  I'm loaning him 5.75 BTC (actually, the dollar equivalent...he doesn't trust BTC at all).  He's agreed to give me 5.75 BTC in 1 year.  We've made a written contract stating this.  Maybe I'm missing something, but seems easy.  Shorting is not hard.  The hard thing seems to be willing buyers and sellers to find each other, which is where the intermediate exchange comes in.

You would be much better off if you've made such a deal with your enemy.

Seems if they have such resources they would be able to manage something.  Or maybe they aren't clever enough.

Does nobody see the irony in this? A decentralized currency with a centralized shorting intermediary?!
I like how people still think in "real-world"-terms when it comes to Bitcoins. "Oh, there is a rally into Bitcoins! What's the ISIN, so I can add it to my portfolio?"
Did somebody say "Oh, MP3... right... you will be able to put more songs on a CD or even a Mini-CD, but the records will still be sold in stores" or "Blogging... sure, some day they might even get printed in a newspaper so everyone can read what they are saying"?

I don't think "Give them (outsiders) the opportunity to sell short so we all (insiders) can make even more money!" is what Bitcoin is or should be all about. But that's just my 0.02 BTC...

LOL! True that. Friendship and money don't mix!

I think short sellers know more about market manipulation than about the fundamental value of a Bitcoin.

People who are long always complain about short selling, and in fact, shorting has a long and storied legal history.

In general it is considered that the ability to provide downward pressure on prices by 'nonbelievers'  generally aids price-accuracy to underling value.

I certainly think that it would be nice if shorts could get in this game, and would guess that there would be less short-term fluctuation in prices.

I might be interested in a small short of the market. If we could figure out the trust/margin issues.

I'm sorry but red flags went off at 10%. Fractional Reserve Coins?

nrd52, I'm about to release v2.1 of the options market which will let you short using options. https://bitoption.org

(But, wait 12 hours).

Well that's how banks work.  If you kept 100% of the money on deposit in reserve you couldn't make any money to pay interest to depositors.  But it doesn't matter because there is no way I would be able to setup something like that anyway.  Way too involved for such a small piece of the market.  I'm sure the exchanges will be the only ones who can handle stuff like this.

It's up, short away. (Or post enticing long trades.. Or hedge out your risk by making awesome offers on puts, your call!)

https://bitoption.org


Currently 1200 USD in options with bids waiting to get picked up.

I'm new to options markets.

Could you explain how to do a short on bitoptions.org?

For instance, say I wanted to short 10 bitcoins on a one year contract.  So I'd want to have all my money in USD, and at the end of the year I'd buy the bitcoins (hopefully for cheaper) and give them to the other person who bought the contract.

I'm also unclear as to how anyone could cover this contract (since bitcoin could go up to a billion).

mtgox should never allow shorting of BTC denominated in USD terms b/c a JPM could respond to unlimited margin calls on shorting losses with unlimited USD's handed over to them by FerBanke.  this permanent BTC short would hang over the BTC market like a dark cloud preventing any further BTC price rise or even worse, crashing it.

OTOH, if mtgox demands margin calls to be reserved with BTC, thats a different story and could be an opportunity to crush any short seller, JPM included.

At this point it would cost tens of millions to seriously disrupt the bitcoin economy, and while the big banks obviously have the capital to do it and it may be in their interest, I just can't see anyone convincing them of BitCoin being a threat.  Mammoth corporations seem to be slow to move on things like this.  The only ones who would be able to put that kind of money in are hedge funds, and they will probably try to profit on a huge run up in price first.  If we start seeing multi million dollar trades I'd be worried, but for now it looks like all individuals so far.

banks work in terms of billions, no sweat.  the majority of bitcoiners think the gov't/banks will try to make a move sometime in the future to shut us down.  shorting us to oblivion is the most obvious way.  the only way they could do this is to convince one of us to play in their sandbox by setting up an exchange allowing short selling denominated in USD.  look how they've capped gold and silver.

So you have a contract! What happens if in one year BTC is declared illegal in your country? Or if bitcoin is at $10K and your friend just doesn't have that kind of dough? I think you would have been better off no matter what happens by taking that amount of cash and just buying 5.75 BTC for yourself instead of giving it to your friend.

Well that is what credit is all about, selling money you don´t have in exchange for other goods.

What do you mean by "how they've capped gold and silver"?

They have and will trade gold certificates against themselves to bring the prices down. These people we're breastfed by the Microsoft Excel Clippy.

MtGox or any other exchange cannot offer shorting more than their own BTC supply allows. As this is limited, there can be no unlimited shorting, and once the short is placed, the price pressure is over.

That doesn't mean it couldn't be significant in the short term. It's not too far fetched that somebody with enough USD finds a way to short 100000 BTC, which would bring the price way down.

Hi,
I'm new to bitcoin but have done a lot of reading in this forum and on other sites. I have to say that I totally agree with the ones that complain about the lack of shorting. One of the main points why there are bubbles on this world are the short-sale constraints that obviously exist. And although politicians sometimes like to make us think that all the short-sellers are bad and should be forbidden, the opposite is the case. If the price of bitcoin would be overvalued, there is no good way of driving the value back to its fundamental value without the option to short. Just think of the American housing bubble: prices kept rising and rising. Although some people felt something is wrong, they couldn't do much because there was (almost) no way to short mortgages/MBS/ABS!  ;)

Let's see what the future brings and whether any exchange will offer a shorting option.

You can short right now on bitoption.org; just buy calls in the 0.2 - 0.5 strike price.

For more explanation, here's the long version:

@nrd52, shorting BTC -- the simplest way right now would be to buy a call for say (if you're super-short) 0.5 strike in (say) 6 months.

Let's say you bid on 1,000 of the calls at 0.5 BTC strike. Then, any time in the next 6 months, if you like, you may exercise the calls: you'll deliver 500 BTC, and receive 1,000 USD.  (.5 BTC for 1 contract of USD).

Right now, this is a terrible deal. But, if Bitcoins fall to being worth 5 cents, then you can go buy $25 worth of them, and exchange those BTC for $1,000. Sweet.

The opposite side of this has to want to leave their 1,000 USD out there for six months (for now, soon they'll be able to resell their obligation). Thus they must get enough cash out of the deal that they're comfortable.

Let's say you want to offer them roughly 20% annual return on their dollar to get them to make this (you hope) totally stupid trade. Then you would offer roughly 10% to them, or, today, $100 / 6 BTC. Since you are buying 1,000 contracts, you're going to offer 6 / 1000 = .006 per contract.

So, this adds up to .5 strike, 12-9-2011 expire, bid .006 .

This is a short trade, and I would expect that there will be longs who would like this trade very much, especially with a $2USD/BTC exchange rate. As soon as USD/BTC goes a little under $2, you will be able to make your money back, then some.

You could widen your ability to make money by offering at say .2 strike (US $5/BTC) and keeping the rest the same.

Hope this helps!

Update, the market has flipped currencies to make everything easier to understand.

You now pay in USD for a BTC option.

So, you are super-short: buy a naked put.

You buy a $2 put for $.02. If BTC drops to $1, then you will make (net) about $.98 per option.

You are super long: buy a naked call.

You buy a $100 call for $.02 if BTC goes to 125, you made $24.98 per call.

naked shorts...why would I participate in fraud?

We're starting to see a little volume for end of 2011 trades right now. Mostly longs are placing bets, looks like, or low-volatility types.

https://bitoption.org/?closedate=2011-12-29

thanks for the update regarding shorts, bitoption. will take a look at it the next days..

A put is the right to sell something. You can bet against a thing by buying that right, but waiting to buy the thing. You never have to deliver, you never promised to deliver.