Bitcoin Forum

I've seen this mentioned many times here that people 'hedge' their long positions on bitcoins with shorting them on bitcoinica.  It would be interesting to see how widespread is that.

contradictory positions just cancel each other out. If you are betting short in the near term but long in the long term, then you should buy and sell accordingly.

This is usually the case, but it is not always true.

Example:

-Put 1 BTC in a Bitcoinica account.  Buy 5 BTC (so that you are buying with a  5:1 margin).
-Put 1 BTC in a Bitcoinica account.  Sell 5 BTC (so that you are shorting with a 5:1 margin).
-BTC double in price.
-You now have 5 BTC instead of 2 BTC, even though your short and long positions "canceled out".


(Note: This is just an example.  Most of the time, doing this will result in forced liquidations on both accounts.)

...and then Bitcoin drop by 75% liquidating your other position and you are left with 0 bitcoins. You are just moving your risk around and betting on the level of fluctuation.

Well, I think a lot of people here usually use shorting when they refer to selling their own bitcoins with the intention of buying them back later at a lower price. Thus, the discussion gets very confused. If there were an exchange with good enough credibility that allowed loaning bitcoins to other people at a fixed rent in bitcoin, i for one would absolutely use it to let people use my bitcoins for shorting. I wouldnt lend it directly to a random bitcoiner without a collateral that is worth a lot more than the current value of the bitcoins lended though.

I've been thinking about doing this but haven't actually done it yet.

It seems like it would make sense for me since I'm doing arbitrage.  In order to do that I need to keep an inventory of bitcoins.  It would be nice to hedge that inventory with a short position on Bitcoinica so I don't have to worry as much about price declines killing my profits.

What's stopping you?

Nothing really, just that I don't feel like I completely understand all the intricacies of shorting on margin.  I don't invest in anything unless I feel like I have a pretty complete understanding of it.  So it's just a matter of taking the time to figure it out.

The trick with 'hedging' on bitcoinica isn't being long as of buying bitcoins at the same time but rather keep a few bitcoins on there as part of the margin requirement.

This kept me from close calls (as today for example, I was stupid enough to have sold early when the price was near 2.3 and even worse all at once so I ended up with a really bad spread)

However since I have a few bitcoins on there if the price rises further they also increase in worth and keep my position (relatively) safe.
There is no dead certain way in case of a huge rally I'm fucked nevertheless but as it seems the price seems to turn around already  :)

Not if you change that position before that drop.

But if prices go up, your call is liquidated and you lose money, right? I also don't understand shorting very well and bitcoinica's spread is weird...

Yeah, that is the point of shorting. You make money if the price goes down, you lose it if the price goes up. Even if you don't get to the point of being liquidated, you still have losses when the price goes up. Liquidation just means that you are forced to eat your losses on the spot.

Bitcoinica's spread is so big because that is how they make money. It's like a one time interest payment on the loan they give you. It's 1% on either side of the buy/sell prices I think. And there needs to be enough offered on Mt Gox at that price for Bitcoinica to balance its books against, not just a single bitcoin or so.

The thing with the spread on bitcoinica is: You don't trade more than 50btc with a market order. If you do you end up with a even worse spread. (I learned that the hard way...)
Second at times the spread is very small, and there are some periods only lasting about a second where the spread is even negative.

Traded 300. Hard lesson.
100 is max one should use.

I usually have a fundamental mid- or long-term idea when I speculate, and I do my risk management manually, which is admittedly an unnerving task. Still, that way, I have no reason to use such tactics.

If I understand this correctly, this tactic targets speculating on volatility (variance). I couldn't think of a good method to predict that for Bitcoin anyways, other than stating the obvious, namely that it's high.

there is really only  2 options
1 yes
2 no

but  if someone says no, does that mean they don't short bitcoins Or they do short bitcoins but don't keep a long position?

I'm bi-positional!  :D

I currently have 50% liquid, and 50% BTC. If it drops, I get more BTC at a lower price. If it goes up, I sell and wait for it to come down to buy more at a lower price. But, I never use bitcoinica.

Similar tactic for me, though not 50/50 currently. With the rare exception of the bust we just had, I always had (and have now) both BTC and fiat on an exchange, to be prepared for insane swings.

Though I don't exactly sell easily when price rises. I'm a bull at such prices, so as soon as my day-trading volume runs out, I charge a hefty premium for anyone wanting my coins.

Absolutely! I sometimes miss a selling chance because I get greedy I guess!   
I try for 50/50, but sometimes it doesn't work out that way, and I end up 75/25 or even completely one sided (which can be a bad situation).

well, since i have ~20 btc lend to a friend, i have a long position. however, i am daytrading all the time anyway, so i change alot in between. worked out quite well till now, even if the 20 btc should have cut my wins on the last short position i took.

if you are deep into mining, i would really suggest a big shortposition to hedge your coins. this adds stability to your expected ROI and can wisely be used to further push your profits. risk diversification is a essential rule of economics. if you ignore it, you will most likely take it losses.