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I made a mistake today where I shorted BTC on Bitfinex using BTC as collateral. Why is this even possible, I cant figure out why someone would want to do that?

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Shorting is normal trading transaction on real financial markets. Without shorting you would not be able to speculate and profit on price decline. Assume that btc price is 400 USD and you think that the price will go down. By shorting one bitcoin you simply borrow one bitcoin from some lender and sell the bitcoin for 400 USD. If your assumption is correct and price goes down, say to 100 USD, you buy that bitcoin back and return it to the lender. Your profit then is 400 - 100 = 300 USD.

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    Yes, that's how shorting works. The question is why it makes sense to pledge your own bitcoin (instead of dollars or something else) as collateral for the bitcoin you are borrowing. On the face of it, this would seem like a no-op. – Nate Eldredge Nov 11 '14 at 5:57
  • Shorting always includes borrowing some of the bitcoins on the top of those you sold, meaning that you sell your bitcoins and broker always sells some more bitcoins borrowed from the lender, typical ratio is 1:4, one btc ours, 4 btc from the lender. Selling bitcoins without lending bitcoins is not shorting, it only protects your portfolio from loosing its value, but does not generate profit. – Steef Gregor Nov 11 '14 at 12:14
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In well regulated markets (Bitfinex's aim) traders should have the ability to profit from movements in both directions.

Shorting also assists in the formation of price bottoms. The only way a short seller can capitalize after a down move is by buying back the shorted BTC. This has the net effect of creating buyers after a down move which helps bouy the BTC price.

Bitfinex can also adjust its overall risk and generate some additional revenue by lending out BTC's to short sellers.

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    I know what shorting is, the question is about the collateral. – Muis Nov 20 '14 at 11:02
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    By using BTC as collateral instead of USD,EUR etc you can mitigate some of the exchange rate risk. – Eric Kigathi Nov 20 '14 at 20:02

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