Naked Short Selling

[Raystonn]

How transparent are Bitcoin exchanges with regards to delivery of BTC being shorted?  Have we looked into the potential for naked short selling, which would involve the allowance of infinite short selling, to the point of selling more BTC than even exists?

http://en.wikipedia.org/wiki/Naked_short_selling

[MatTheCat]

How transparent are Bitcoin exchanges with regards to delivery of BTC being shorted?  Have we looked into the potential for naked short selling, which would involve the allowance of infinite short selling, to the point of selling more BTC than even exists?

http://en.wikipedia.org/wiki/Naked_short_selling

I would bet my bottom dollar that this goes down on Bitfinex. Insiders only of course.

[TERA]

It would be impossible for an exchange to dispense more coins out into the network than it actually owns. Any naked shorting would be with fictional coins that exist only on its own order books, but they would eventually run out of coins that the customers can actually withdraw.

arbitrage forces would fail to drop the price on other exchanges  from that exchange once coins can no longer be withdrawn.

[Dalmar]

I would bet my bottom dollar that this goes down on Bitfinex. Insiders only of course.

Chinese exchanges like Huobi are more likely to be doing this as using BTC exchanges as 'banks'/wallets is more common in China than the West. It must be really tempting for Huobi operators to short sell dormant coins on insider news.

[bitcoinsrus]

Its ok as long as nobody gets hurt

[STT]

Short (over)selling of stocks relies on the settlement procedure so that it is possible to sell large amounts of what you dont own.   Eventually you own up to never owning any and the trade is cancelled, however in a bear raid this works as actual holders see the price fall and sell themselves (or you may just trigger their stoploss orders).   They may sell so much that the naked shorts are able to become buyers at a much lower price, so they never have to own up and can present these shares in settlement some days later

BTC wont work like that, there is no innate leverage or credit given.  Confirmation times are an hour at most ? So I imagine spoofing the system with what you dont own shouldnt be the case, a bear raid in the worst excesses of wall street or wherever is not possible or at least would require extremely abnormal manoeuvres



There is a bucket shop operation that allows naked bitcoin short selling.   However they are not themselves engaged with the network as far I know and Im sure they have a limit to the size allowed.   Ie. They allow a virtual bet on btc price, there have no horse in the race so btc price wont be effected (afaik)

[MatTheCat]

Chinese exchanges like Huobi are more likely to be doing this as using BTC exchanges as 'banks'/wallets is more common in China than the West. It must be really tempting for Huobi operators to short sell dormant coins on insider news.

Bitfinex is in Hong Kong. Chinese, basically.

[windjc]

Chinese exchanges like Huobi are more likely to be doing this as using BTC exchanges as 'banks'/wallets is more common in China than the West. It must be really tempting for Huobi operators to short sell dormant coins on insider news.

Bitfinex is in Hong Kong. Chinese, basically.

No.

[STT]

How many exchanges or sites openly operate on a fractional reserve basis ?  Im guessing this is seen as really bad but perfectly possible its more then one, as it might also be profitable.  Especially if price is falling, it increases gains and if this is happening can we expect a short squeeze like when Porsche took over Volkswagen

[windjc]

I sell short while naked in front of my computer = naked short selling.

I'm actually doing it right now, in case anyone was wondering.

[RoadTrain]

From technical point of view an exchange that allows shorting must limit the amount of short positions to below total BTC ask sum (i.e. physical BTC). So that there's enough liquidity to absorb massive stop-losses/stop-outs in case of volatility.

[MatTheCat]

No.

elaborate.

(it is a snakey exchange at any rate)

How many exchanges or sites openly operate on a fractional reserve basis ?  Im guessing this is seen as really bad but perfectly possible its more then one, as it might also be profitable.  Especially if price is falling, it increases gains and if this is happening can we expect a short squeeze like when Porsche took over Volkswagen

All except Bitstamp I reckon.

Even if the exchange operators don't get any 'smart ideas', I think many of the exchanges have been robbed to some extent by the double spend exploit.

I have had BTC transfers out of Bitfinex after just 1 confirmation on blockchain!

I have had BTC transfers out of BTC-e before a single confirmation on blockchain!

Exactly the 'fast track' behaviour which rendered Gox liable to being robbed by hackers. It was also both those exchanges (the only other two decent sized USD exchanges around) that got the $100 flash crash from like $700. A hack of their systems plain n simple.

This was prior to the Gox hacks being made public knowledge. After that, I had to wait a whole day almost to transfer some BTC away from Bitfinex due those guys being ultra careful with their hot wallet level.

[Raystonn]

Short (over)selling of stocks relies on the settlement procedure so that it is possible to sell large amounts of what you dont own.   Eventually you own up to never owning any and the trade is cancelled, however in a bear raid this works as actual holders see the price fall and sell themselves (or you may just trigger their stoploss orders).   They may sell so much that the naked shorts are able to become buyers at a much lower price, so they never have to own up and can present these shares in settlement some days later

BTC wont work like that, there is no innate leverage or credit given.  Confirmation times are an hour at most ? So I imagine spoofing the system with what you dont own shouldnt be the case, a bear raid in the worst excesses of wall street or wherever is not possible or at least would require extremely abnormal manoeuvres



There is a bucket shop operation that allows naked bitcoin short selling.   However they are not themselves engaged with the network as far I know and Im sure they have a limit to the size allowed.   Ie. They allow a virtual bet on btc price, there have no horse in the race so btc price wont be effected (afaik)

AFAIK exchange transactions are all off the blockchain.  Only deposits or withdrawals of BTC would appear on the blockchain. 

[F-bernanke]

AFAIK exchange transactions are all off the blockchain.  Only deposits or withdrawals of BTC would appear on the blockchain. 

Excactly, this is how Gox sold thousands of "goxcoins" to the masses as being BTC.

[erono]

As long as you buy back at the right time just like any speculative investment? How about sell all your holdings at 440 buy back at 350? Anyway bitcoin is 100% pure unadulterated speculation at this point. Anybody that thinks their making an good investment doesnt understand what's happening with bitcoin right here and now.?

[Dalmar]

Bitfinex is in Hong Kong. Chinese, basically.

Their main office is in Hong Kong, but it's run by a bunch of French guys and most of their customers are Westerners. Sort of like Mt.Gox being more 'Western' than 'Asian'..

[Erdogan]

Naked short selling can exist, either in a business gone bad, or in a paper bitcoin construct.

But why would anyone hold a paper representing a number of bitcoins, while it is just as easy to hold the same number of bitcoins?

Due to the ease to hold bitcoins, compared to the non-ease to hold bank quality gold, there is no reason to believe that a paper bitcoin marked of substantial volume should arise.

[leopard2]

Gold is manipulated like that all the time

Way more paper gold is sold than real gold exists, keeps the price down

Sure it can be done with Btc but not on a large scale because no evil central banks are in the BTC game.

Sooner or later there comes the short squeeze, with gold and BTC, anything that cannot be created out of thin air cannot be shorted forever. 

[STT]

They would call that liquidity and it is valid to have paper gold.   Mining operations sell forward their production for gold that does not yet exist, when their bills are here now it allows them to pay now and produce later.   So there is a valid usage to that leverage, same with farmers and their crops and so on.   The problem is when the harvest fails and there is no repayment of paper assets.   This could occur across an entire country leading to systemic failure, this is where the Fed or big gov steps in and says we are the answer

So right now bitcoin exchanges take this place, in theory they provide a service but also they open up this leverage type vulnerability to the bitcoin network.  As accepted large players normally, they can produce abnormal effects especially if corrupted like gox.
Centralise a distributed system and BTC begins to resemble a dollar proxy and I think that means it fails or is forbidden, etc

Only deposits or withdrawals of BTC would appear on the blockchain.

They could only sell the difference between the two though, its not naked short selling more like embezzlement.    It is less extreme then a dollar market still.   If they warn against pools having too much percentage of the network, they should think the same of exchanges and be very wary when they get too large.     I dont believe in fixed regulation but if possible it should be discouraged, a large exchange could split itself up by country or some sort of fire break where each section has its own accounting and liability.

  If nothing else its a good idea for security not to store everything in one basket, localbitcoins was hacked recently but I read they did have access sectioned off.  So I think its good practise if every large operation maybe continued as a holding company but split every subsidiary it can into smaller separated parts.  Of course that partly goes against economies of scale, etc

[MatTheCat]

But why would anyone hold a paper representing a number of bitcoins, while it is just as easy to hold the same number of bitcoins?

Most Bitcoiners are speculators, many of them traders. Most traders keep their Bitcoins not in a cold wallet, but with an exchange. I know that I do/have done.

How many BTC were kept in Gox wallets? They accounted for something like 1 million BTC, stated that they had just 2000 BTC, then 'found' some 200'000 BTC, leaving some 800K 'missing' BTC.

In short, there are a lot of BTC that are entrusted to exchanges which gives the less scrupulous exchanges the opportunity to play around and sell Bitcoins they don't have looking to 'repurchase' at much lower prices in order to make a profit and rebalance the books. Same idea as the goldsmith who issues more gold coin receipts than he has on deposit safe in the knowledge that depositors never come and claim their physical gold all at once. If I can think of it, and vast profits can be made doing it, and their is no oversight of any Bitcoin exchanges, you can bet your balls that it goes on....especially on the Chinese exchanges that are clear market makers.