I'm still unclear about how this works. You said earlier the shares of the ETF have to be 20% backed by bitcoins? So if there's 50,000 BTC in the ETFs coffers, it means the would've issued 250,000 shares for the trading games into the market. While this seems bad in and of itself (inflation of bitcoin M2 or whatever you might call it if you count in the shares of the ETF) it still seems there is a limit to the malicious short-selling. This leads to another question: you said the shares have to actually be borrowed in order to short-sell. What if all shares are in the hands of Joe Normal institutional investors and they are reluctant to lend? Is their consent needed for the lending of shares or will the Winklevoss just lend shares owned by others to the short-seller?
At the risk of interjecting in a question that may have been directed at NewLiberty... The ETF is 100% backed by Bitcoins, it's just that the ratio is set up so that 1 share = .2 BTC initially. But the fund's Net Asset Value per share is always the Net Asset Value divided by the number of shares outstanding; there aren't any extras floating around that aren't backed by real Bitcoins. And yes, by definition ordinary short selling requires that shares be borrowed before they can sold. It doesn't matter whether the short seller puts up dollars for collateral, or a goat, or his great aunt; it is still shares which are being borrowed. The special situation of naked short selling is an edge case, where share have not been borrowed first. (I think it's important to distinguish those two very very distinctly, because otherwise an argument that begins talking about ordinary short selling can then wind up dipping into the properties of naked short selling before reverting to ordinary short selling again and emerging at the other end with an argument that seems plausible but which is entirely unsound.) Last but not least, an ETF itself normally isn't in a position to lend shares to anyone else; it can issue new ones in exchange for the underlying, or it can retire old ones and cough up the underlying, but it doesn't hold any that can be lent.
It might also be worth noting that in investment terms, in most situations except really exceptional ones, a significant amount of short interest (i.e., the proportion of the shares outstanding which are currently sold short) is actually a bullish indicator, since the short interest provides a 'cushion' against falls in value and tends to accelerate increases in value. The level of short interest is, in effect, latent additional demand which must at some point be met when the short sellers eventually have to cover their positions by re-purchasing whatever it is that has been sold short. When price falls significantly, some short sellers will be there to take profits and act as buyers. When the price rises significantly, some short sellers will be there to cut their losses and act as buyers (this is the 'short squeeze', when short sellers must either buy at higher prices or stomach larger and larger losses). Either way, short sellers become eventual buyers. The reason I mention this is that except for very rare cases, short selling is both entirely healthy and temporary and is not something which in and of itself is negative for the market.
