Bitcoin Lending & Short Selling

[danglybits]

I am interested in feedback from the community on what they would like to see.

Goals:
1) Enable people to lend bitcoins backed by $USD
2) Enable people to lend $USD backed by bitcoins

Proposal:
1) 3rd party holds both the $USD and the BTC and automatically covers the loan when margin runs out.
2) All loans are on Certificate of Desposit type basis with no borrowing short term lending long term.
3) Individual lenders may choose the interest rate and margin requirements.

Expected Results:
1) Bitcoin market becomes more liquid
2) Reduced volatility, price spikes result in short selling, price drops result in covering.
3) Establishing a market interest rate for BTC backed by USD and USD backed by BTC.
4) Finally a way to earn a return on your BTC savings. 

Questions:
1) What interest rates and margin requirements would you offer for lending your BTC or USD?
2) What interest rates and margin requirements would you borrow $USD or BTC?
3) Anyone interested in starting a bounty for such a service?  Perhaps someone trusted by the forum (not me), could hold it?

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[Gabriel Beal]

I think this is a really important step to price stability.  I'd be willing to contribute a small amount towards a bounty.

[shady financier]

Short bitcoin by selling promises to pay the agreed number of bitcoins at a future date. You could sell these promises via paypal so that if you don't honor the agreement, the person that bought your promise will roll their fiat payment to you back via paypal. If bitcoin value goes down, you make a profit. If it goes up, you're fucked.

I believe someone said it was possible to sell bitcoins via ebay, sending a certificate with the sealed private key or some such thing.

[Insuremeplz]

Forgive me for being mostly ignorant on the subject, but I want a way to "gamble" a bit more in the market. I know there's a term for it but basically I want someone else to put up a larger chunk of money, matched with my smaller chunk of money and if the market tanks I lose my money quickly but if it goes up I have more potential for gain. Would this allow me to do that?

[kseistrup]

I believe it's called “leverage”…

[Timo Y]

1) I would only lend to users connected to me via bitcoin-otc wot. My interest rate would depend strongly on my trust connectedness. Thus it would differ on an idividual basis. My rule in the bitcoin ecosystem is: if something must rely on (some) legal system in order to be viable, it's not worth doing.

2) btc i would only borrow at a negative interest rate, personally.

3) can't we use bitcoin-otc for this?

[Sawzall]

We really just need someone to lend BTC in order to be able to sell it short.

[tomcollins]

1) I would only lend to users connected to me via bitcoin-otc wot. My interest rate would depend strongly on my trust connectedness. Thus it would differ on an idividual basis. My rule in the bitcoin ecosystem is: if something must rely on (some) legal system in order to be viable, it's not worth doing.

2) btc i would only borrow at a negative interest rate, personally.

3) can't we use bitcoin-otc for this?

Why would anyone lend at a negative interest rate?  It's not like there is a cost to store bitcoins.

[xf2_org]

Why would anyone lend at a negative interest rate?  It's not like there is a cost to store bitcoins.

There is always a cost.  Ensuring your software is always fresh is a cost.  Designing and implementing a reliable, redundant, encrypted wallet store is a cost.  Keeping hardware and software secure against theft is a cost.  Keeping a P2P node up and running is a cost.

That's a cost that your Average Joe likely does not want.  So, we turn to banks, web-wallets, etc. to handle that for us, giving up some amount of trust and privacy in the process.

[bytemaster]

If this system kept both sides in escrow like I think it should, then it would not need a "legal" system any more than mt. gox needs a legal system.


Individual A has $300 and wants to short BTC. 
Individual B has 100 BTC and wants to stay long, but would not mind lending 100 BTC if he was sure it would be paid back at interest.

A and B both send their 100 BTC and $300 to "Mt. Gox" and inform "Mt. Gox" that B is lending A 100 BTC for 1 month at 5% APR and that A must maintain enough $USD in escrow with Mt. Gox to purchase 30% more BTC than is on loan.   So A receives 100 BTC, sells it to raise $700 which combined with the $300 dollars in escrow yields $1000 backing a 100BTC loan.  If at any time the price to cover 100 BTC exceeds 70% of individual A's $USD balance individual A is forced to cover their position.  So it would be best for individual A to have more than $1000 in escrow incase of quick price spikes which would force them to cover.

In the event that BTC rises so fast that Mt. Gox cannot close the short position before margin runs out then individual B ends up with an unsecured loan to individual A for what ever was unable to be sold.  This is the risk that individual B is being paid interest to take.


Turn the situation around.  Suppose you have 1000 BTC and want to "leverage up" and borrow money to buy another 100 BTC. Someone may lend you $700 so long as you have more than $1000 of BTC as collateral.  If the USD value of your $BTC drops below $1000 you are forced to cover.

So as long as you are willing to trust someone like Mt. Gox then there is very little risk for those who are willing to put up the BTC and $USD collateral necessary to cover their loses in the event the market goes against them.



   

[jed]

I'm pretty sure Mtgox is working on both option trading and margin trading.

[smooth]

Why would anyone lend at a negative interest rate?  It's not like there is a cost to store bitcoins.

There is always a cost.  Ensuring your software is always fresh is a cost.  Designing and implementing a reliable, redundant, encrypted wallet store is a cost.  Keeping hardware and software secure against theft is a cost.  Keeping a P2P node up and running is a cost.

Do you actually need to do those things to store BTC?  I thought you could just send to a new address and recoonect when you want the BTC back.  Sure there is some cost to doing this at the beginning and end, but no cost-for-time, and you'd incur similar beginning-and-end costs if you lent/stored with a third party.

If you also want to use the system to transact while you are storing the BTC, then you aren't really incurring those costs to store, just to use.

[skibum]

What is the status on this? You would think MtGox or someone who wants to become the leader in the market would offer margin accounts and short selling. Or are the legal, regulatory, and/or other obstacles and risks considered too large (for now)?

[hazek]

Read this: http://www.thebitcointrader.com/2013/02/the-latest-on-bitcoin-margin-trading.html

[skibum]

Thanks for the link, hazek. It will be interesting to see how things develop, how long it takes, and how many (and how big) blowups happen along the way. Cheers