At first glance, this may appear a negative for Bitcoin - interest charged for holding a long Bitcoin position?
Check your Account Ledger for your first interest payment! Now both USD and BTC have noticeable interest rates.
Yes, more interest is returned by shorting BTC.
Some of the recent drop from the mid-$5/BTC range to the high-$4/BTC level can certainly be attributed to this. How much is uncertain, but it definitely isn't propping up the rate.
Correct me if anything is mistaken...
One of the issues here is that there has recently been insufficient net capital flow from other sources to provide a major push in either direction. In order for capital to flow into
the Bitcoin system, awareness and adoption need to occur. With Bitcoinica offering interest payments for long USD trading positions at a ridiculously high rate, it will catch on sooner rather than later.
Since direct naked shorting is impossible with Bitcoin and would eventually bankrupt the operator offering it, BTC must first be purchased with that newly-deposited USD capital. With some BTC now in the account, it is then possible to open a short BTC/USD position and gain that significant interest spread.
No matter what, some capital will flow into Bitcoin for every USD deposit. This can result in an initial dip, but long-term residual flows will accrue and bolster the exchange rate in Bitcoin's favor. Even if there were a stampede to the exits from Bitcoin, there will be some who can't get out and end up taking sizeable losses, that wealth then remaining within the Bitcoin system.
Most new participants don't take the time to study a market, so it's likely they will lose in the price movements. It's also very possible that some may be drawn into the trading and stay, creating a building momentum for general Bitcoin exposure.
Bitcoinica can only pay interest on balances so long as it can be maintained without bankrupting the outfit, so the high USD payment rate will decline as the exchange rate falls. That's good, because I've been waiting for the $3-4 region to be entered again so I can load up.
Clever work - thanks, Zhou!
Note: the problem is that any KYC compliance negates much of the very purpose for Bitcoin, partially because of relative anonymity and mostly because of American abuse of power