1) The item has to be returned before you refund. Always. Even an eBay moderated dispute this is the case. But this isn't an eBay moderated dispute, they don't even have a record that the item was purchased.
2) Never, ever, ever, ever accept a payment for an eBay item in a separate PayPal transaction. You lose a lot of the protections that you have as a seller (return of the item, for example) when you do so. Since you did in this case, you may be SOL if he decides not to return the item.
3) If he had wanted to do a BIN, all you had to do was cancel the bid and poof! The BIN feature appears again.
4) If there is no money in your account and eBay/PayPal reverses the transaction, your balance will be negative. Although they may not dip into your bank account to obtain the money and correct the balance, they CAN send the account to collections and your account will be locked until the balance is corrected.
eBay is in fact a very safe marketplace, if you play by the rules and don't decide to take your business of the website; or moan and complain when you listed your item with a three-word description then the buyer is unhappy. You may be safe if the payment was sent as just cash and not payment for goods/services, as those payments are not considered reversible.