Quote from: S3052 on March 16, 2013, 09:32:52 AM

(if I understand your post well)

I think this is an issue that is going to see an increase in the number of times it comes up. The question to start out with is ... what is your functional currency?

When I buy bullion, in most practical instances I need to convert the metal back to my functional currency to spend the value from them. So even though silver rounds could be used in commerce in some instances, they wouldn't be my functional currency.

Bitcoins now are what I consider to be my functional currency. Because my spending comes from bitcoins (either directly if I can use bitcoins to pay for my purchase, or indirectly if I need to convert coins to dollars and make my purchase that way), then I might consider buying dollars for investment purposes as being one of my investment options. When buying dollars I'm essentially going short on a currency (bitcoins) that I will return to after I close my investment position (when I sell my dollars, and obtain the proceeds from that transaction in bitcoins ... which are my functional currency.)

But someone else who doesn't see bitcoins as the functional currency then wouldn't have the same viewpoint that holding a different currency (dollars in this instance) is a way to short bitcoin.

It would be the same as if someone would assert that I today am shorting the Japanese yen (simply because I don't have any). Of course since I don't plan to hold any yen regardless if the yen's value goes up or down means I am not short the yen. My purchasing power of my bitcoins versus yen might have changed, but I didn't profit from a move either up or down in the value of the yen.

As far as methods for shorting bitcoin, I just had read that EToro plans to support BTC in one or more currency pairs. So there are more methods coming.

Right now, if you are looking to short, the BUJ3 futures contract on ICBIT is probably the most attractive method right now. There are no ASK orders below $54.5. That contract settles Apr 15, 2013. So that means the BTC/USD doesn't even need to go down from today's level and you could still make money shorting it that way. So let's say you put up an ASK for 100 BUH3 at a price of $54. You would need to deposit about 4 BTC to make that offer (there is up to ~30X leverage available for the BUJ3 at this level). Then let's say on April 15th at 20:00 UTC settlement at the 24 hour weighted average at Mt. Gox is $50.00. You would gain 0.88 BTC after fees, on your 4 BTC investment in that short position, and the exchange rate didn't even need to drop.

The problem with using leverage at that level (30X) though is that even a small move the wrong way can cause you to get a margin call, and there's not a whole lot of liquidity. When that happens you are at best able to buy back at a level above BTC/USD market price but if there aren't other ASKs that you can buy from (as there is a limited trading range) you could see your position end up being liquidated and depending on the liquidation price your entire balance of your account (4 BTC in that example) could go to zero.

You could use less leverage so that if there is volatility but still believe that on April 15th the exchange rate will be below the current ASK, then you would still be able to weather it out. At 25X leverage where you sold 100 BUH3 at $54 with only 4 BTC in your account then if it hit into the low $60s you would be completely wiped out. But deposit 8 BTC instead of just 4 BTC to sell that 100 BUH3 contracts (at $54), giving you about 12.5X leverage and you could weather a spike of the BUH3 up to the $70s without seeing a margin call but then as long as BTC/USD settles at $53.67 or lower on April 15th you've still made money. If it drops -- say to where the BTC/USD settles at $45 on April 15th then you'ld make 3.1 BTC on that 8.0 BTC investment.

[These computations were made with only a rough calculation as to where the margin call comes into play.]