Right, but unless you dump that heat _somewhere_ the shielded object will eventually roast itself. I could imagine that you could either bring a large stock of something like frozen Hydrogen and use that for cooling, shunt it into another dimension, since metaphysics appears to be okay in the Cosmic Era, or a highly directional vent. Basically there is one angle at which the object emits infrared strongly. Surface structures would be the easiest since they could vent the head into the ground. Go to Comment
The answer to your question is likely to fall into the category of game system mechanics. The absolute requirement is that the sword's bearer must intentionally wound themselves - not another, regardless of willingness. Unless taken from them, the sword still only works for the bearer. Others grabbing it, or impaled by it, will not transform.
As for how does it know? - magic. The action of wounding oneself with intent in mind is sufficient to invoke the magic. I think the theme of wounding oneself and spilling blood into the water is a far more atmospheric means to invoke it then buttons. If it makes it clearer, then assume that the act of shedding ones own blood with a mental image of becoming a shark is actually a ritual.
As for it being sentient, thats actually not a bad idea if there are not too many such things about. I would see the blade's personality being quite cold and businesslike and preferring the bearer stay a shark.