Topic: The lack of shorting is a significant barrier - page 2. (Read 6496 times)
I might be interested in a small short of the market. If we could figure out the trust/margin issues.
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.
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.
I think short sellers know more about market manipulation than about the fundamental value of a Bitcoin.
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!
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
I anticipate Gox will allow short selling once margin trading is widely opened up.
I am also launching an options trading site (hopefully tomorrow the web interface goes live); you could buy puts from bitcoin bulls, god knows there are plenty of those. Just convince them to come to the site starting tomorrow. I'll post a note here when it's live.
I am also launching an options trading site (hopefully tomorrow the web interface goes live); you could buy puts from bitcoin bulls, god knows there are plenty of those. Just convince them to come to the site starting tomorrow. I'll post a note here when it's live.
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.
Beautiful logic! Breaking the problem down to it's fundamentals.
I read somewhere that Mt. Gox was looking into margin trading. Maybe they will also add a shorting feature? They're pretty much the closest thing we have here to a trusted party.
Or maybe one of the other exchanges will beat them to it and steal their business?
Or maybe one of the other exchanges will beat them to it and steal their business?
naked short selling is fraudulent. it's up to the individual exchange that implements this to run it correctly. if people choose to deal with a party that implements fraud they can expect to lose their money/coins.
This has nothing to do with Bitcoin though, which is totally unregulated in any case.
Shorting could be setup by a broker or market maker, who must own enough BTC and USD.
If you have an account balance of $1000 and short 50BTC at $10, prices would be allowed to climb to $20 before you get a margin call and your position is forcibly closed.
Shorting could be setup by a broker or market maker, who must own enough BTC and USD.
If you have an account balance of $1000 and short 50BTC at $10, prices would be allowed to climb to $20 before you get a margin call and your position is forcibly closed.
Shorting of BTC should be pretty easy to implement and quite effective for a market maker with a huge supply of bitcoins accumulated from fees and from the accounts of people who have deposited but not listed their coins for sale yet. Then you could charge interest for a loan that effectively costs you nothing.
And now that I think about it the most logical thing to do would be never even give the borrower the bitcoins. And they could probably afford to short with much more leverage than I originally thought. In your example you shouldn't need anywhere near $1000 to short 50BTCs. They could probably do it with as little as $100. You as the banker could borrow these from a depositor or use your own supply and sell them at the current market price right away. There is no need to ever deliver the coins to the person borrowing them, because they need to keep the proceeds with you for security anyway. Now they have the $500 from the sale and the $100 they put in for a total of $600 in assets with a liability of 50x whatever the going rate of BTC is (plus interest/transaction fees). The value of the account would go negative with a BTC price of $12 or more, so you wouldn't need to call in the margin until there are no listings on the market with ask prices of $12 or less.
With how quickly transactions can be completed and how open the information on bid/ask spreads look it seems like someone could make a killing on this by making tons of highly leveraged small bets against bitcoins.
Edit: The more I think about it the more I think maybe this wouldn't be good for the economy. Naked short selling with unlimited leverage and perfect information on supply and demand? It might just be asking to be exploited. The path to legitimacy is probably more through increasing the use of bitcoins as a means of exchange for value added goods and services, rather than for value sucking financial derivatives. I must be pretty fickle... in the span of three hours I went from wanting to start a service to wanting to prevent it from happening.
no need to reinvent the wheel, research how this is done in normal markets.
Yeah, I gave up on the idea of doing it myself pretty quickly. This is the essence of how it is done in real financial markets though. Investment banks have custody of shares of stock that they hold for their customers and can freely loan them out to others. They would of course have to return them to their original owners on demand, but shares of stock are fungible so they have a large pool to draw from. And the loaning isn't an issue because they would only loan shares to people who had assets with the bank to use as collateral for the loan, so if you never paid it back they could force you to liquidate your holdings.
Ha! You missed a couple of key steps in the security shorting process.
First is the shorting pool at the clearing house. Say you want to short a stock. Your broker borrows them from a pool and gives them to you. You then sell them to someone. That buyer has no idea that they just received borrowed stocks, and they think they own them. So, the buyer's broker holds them, and makes them available to the pool so that the next guy can borrow them again. (Side note: shares include voting rights, and now at least two people think they are allowed to vote, and all but one of them is wrong.)
Second is that the pool is totally unnecessary, since a broker can just fail to deliver (FTD) the shares. They are supposed to settle all trades by day T+10, but for most brokerages, there is no rush, because:
Third is that there is almost never a downside for letting a transaction go into FTD status. No jail time. No fines. Rarely a sternly worded letter.
This has nothing to do with Bitcoin though, which is totally unregulated in any case.
Shorting could be setup by a broker or market maker, who must own enough BTC and USD.
If you have an account balance of $1000 and short 50BTC at $10, prices would be allowed to climb to $20 before you get a margin call and your position is forcibly closed.
no need to reinvent the wheel, research how this is done in normal markets.
Yeah, I gave up on the idea of doing it myself pretty quickly. This is the essence of how it is done in real financial markets though. Investment banks have custody of shares of stock that they hold for their customers and can freely loan them out to others. They would of course have to return them to their original owners on demand, but shares of stock are fungible so they have a large pool to draw from. And the loaning isn't an issue because they would only loan shares to people who had assets with the bank to use as collateral for the loan, so if you never paid it back they could force you to liquidate your holdings.
Ha! You missed a couple of key steps in the security shorting process.
First is the shorting pool at the clearing house. Say you want to short a stock. Your broker borrows them from a pool and gives them to you. You then sell them to someone. That buyer has no idea that they just received borrowed stocks, and they think they own them. So, the buyer's broker holds them, and makes them available to the pool so that the next guy can borrow them again. (Side note: shares include voting rights, and now at least two people think they are allowed to vote, and all but one of them is wrong.)
Second is that the pool is totally unnecessary, since a broker can just fail to deliver (FTD) the shares. They are supposed to settle all trades by day T+10, but for most brokerages, there is no rush, because:
Third is that there is almost never a downside for letting a transaction go into FTD status. No jail time. No fines. Rarely a sternly worded letter.
I'll loan you Bitcoins to short. But I'm probably going to want your house as collateral.
no need to reinvent the wheel, research how this is done in normal markets.
Yeah, I gave up on the idea of doing it myself pretty quickly. This is the essence of how it is done in real financial markets though. Investment banks have custody of shares of stock that they hold for their customers and can freely loan them out to others. They would of course have to return them to their original owners on demand, but shares of stock are fungible so they have a large pool to draw from. And the loaning isn't an issue because they would only loan shares to people who had assets with the bank to use as collateral for the loan, so if you never paid it back they could force you to liquidate your holdings.
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