The lack of shorting is a significant barrier

[jspielberg]

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.

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[cypherdoc]

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.

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.

[cypherdoc]

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.

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.

[CautiousFan]

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.

[Vladimir]

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.

[Longmarch]

I personally know people who would like to make multi-thousand dollar bets against bitcoin but can't

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

[Yeti]

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...

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

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

[silversurfer]

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

[bitoption]

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.

[nrd525]

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

[AntiVigilante]

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.

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.

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

[bitoption]

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).

[Adam]

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.

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.

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

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.

[bitoption]

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.

[nrd525]

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).

[cypherdoc]

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.

[Adam]

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.

[cypherdoc]

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.

[ray]

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.

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.

[manuelgar]

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)

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