How short Bitcoins works ?

[Technologov]

Certain exchanges, such as Bitcoinica, Coinsetter and others offer the feature to "short sell" Bitcoins.

How does it work ?

Do they work like fractional reserve banking, basically ? i.e. take from longs and give bitcoin-denominated loans to shorts? What if all longs wanna withdraw ? They will force-close short positions of their clients ?

In the traditional world of fiat, in Forex markets, banks lend from each other. But this is impossible with the current climate in Bitcoin. I.e. Mt.Gox will not lend coins to coinsetter, or anyone else.

Ideas ?

-Technologov

[jordan.dev]

Bitfinex allows users to "borrow" coins at an interest rate from their owners, sell them short, and purchase them back later (buy to close in options parlance)

This is similar to the way other securities are sold short, you pay the owner interest on your borrow, and in exchange, hope that the price deprecates so you can buy them cheaper to repay your loan.

Disclosure, I use Bitfinex to trade long/short Bitcoin.

The coins come from other exchange members whom have deposit their coins there, they don't come from other exchanges (though they can be sold and bought on other exchanges on both sides of the market (depending on Bitfinex's availability of USD/BTC with that exchange account).

If a trusted 3rd party of sorts was to allow Bitcoin traders to loan their coins to one another via the BTC network (or for that matter off the block-chain) than it would be easier for people to arbitrage exchanges, and take both sides of the markets - thought right now that's not feasible without trusted 3rd party clearing, margin, etc.