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My understanding is that a short sell is possible because you can sell positions you don't have and then buy at a later point to cover your position (with the price hopefully being more favorable) to settle the trade.

In an instant settlement system (blockchains are the obvious examples, such as Bitcoin or Ethereum) would it be possible to have perform a short sell? Is there some other means of achieving the same thing?

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Imagine:

  1. I borrow 1 bitcoin from you and agree to pay you back $(1+r)$ bitcoin in a month.
  2. I immediately sell the bitcoin you lent me.
  3. One month from now, I buy $(1+r)$ bitcoin and pay you back.

If I can conduct those transactions, I can short sell bitcoin.

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I feel there's some technical confusion in the original question regarding "Instant Settlement" and BitCoin that's worth clarifying.

Traditional short-selling doesn't occur because of the lack of instant settlement (or the lack there of); it occurs when I create a contractual construct where I agree to enter into a transaction at some point in the future to transfer ownership of something of value to a third party, where I don't currently own the 'something' I am selling.

As an example - I agree to sell you 1 BitCoin for $4,000 in one month. Whether I buy that BitCoin today or not is immaterial - that's purely down to how I choose to hedge my position (or not) - In one month , I will need a BitCoin at that point to transfer to you (with immediate transfer at time of settlement).

When I come to settle;

  • If the price of BitCoin is above USD 4,000 (say, USD 4,500), I'm out of the money and make a loss (as I either am forced to sell a BitCoin I already own for USD 4,000 when I could have sold it for USD 4,500, or I need to buy a BitCoin for USD 4,500 and immediately sell it for USD 4,000 - either way I lose)

  • If the price of BitCoin is below USD 4,000 (say, USD 3,500) then I'm in the money and make a profit (as I either sell a BitCoin I already own for USD 4,000 whereas it's only worth USD 3,500 in the market, or I buy a BitCoin for USD3,500 from the market and immediately sell it for USD 4,000)

The key here is that it's the transfer at time of settlement that is instantaneous with BitCoin, but you and I are still contractually free to set the price we will pay at any amount at any time in the future.

Note that with the potential for smart contracts built into Ethereum and Hyperledger, it's entirely possible in theory to create a smart contract that does exactly the above, committing now to a short sell at some point in the future.

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I guess it could still be done between clients of a same broker. The broker having all their clients’ crypto.

The short selling transaction would be done in the broker’s books.

Example: A broker’s books look like the following:

Andrew has 1 bitcoin

Bernard has 0 bitcoin

Claudia has 0 bitcoin

Andrew’s bitcoin is in the broker’s wallet but if Andrew decided to sell it, the broker would sell the bitcoin on their wallet and increase Andrew’s cash balance.

Then Bernard decides to short bitcoin. He would “borrow” Andrew’s bitcoin to sell it. Claudia buys it.

Then the broker’s books would look like this:

Andrew 1 bitcoin

Bernard -1 bitcoin

Claudia 1 bitcoin

The broker has the same 1 bitcoin in their wallet.

Later, Bernard covers by executing a buy order on another bitcoin stored in another broker’s wallet.

Then the broker would now hold that new bitcoin in their wallet, holding 2 bitcoins in their wallet and their books would look like:

Andrew 1 bitcoin

Bernard 0 bitcoin

Claudia 1 bitcoin

Those 2 bitcoins would be Andrew’s bitcoin and Claudia’s bitcoin and it is now all settled.

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I think you are looking at the wrong direction.

Short selling only happens when agents in between guaranteed to be paid, where the commodity values are within a controllable margin.

1 Bitcoins can fluctuate more than 30% in a day, and the real world currency is subject to the bitcoin merchant payout cut.

Due to bitcoin cartel like exchange medium, there is no incentive (and high risk) to perform short selling.

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