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.
A decent set of potential encounters, some quite interesting.
I think the entries could have been more decisive. Look at #2 - the orcs could be this, that or the other thing. Perhaps picking just one and adding a might more detail would be less jarring. Then you could use the other potential as another entry.
Some do not really seem like they would create a plume on the horizon, such as deer. I
Also, it jumps around in genre a lot, but seems most comfortable as a western list. I think it would hold together if you picked a genre and stuck with it, though obviously finding enough plumes on the horizon might be difficult. Go to Comment