There was a lengthy discussion on this in the "Economics" section a year or so ago.

How to do the job of options market making reasonably well was never in question; what was in question was whether MP could possibly be doing it if he was being truthful with his public claims never to hedge and never to take a naked position. My initial comment about this elicited a cloud of huffing and puffing from the PR lackey and then from MP, to which I later replied.

However, my original point was not to re-hash the well-known weaknesses of MP's approach, but merely to note the historical context that there had been a BTC vs. USD quasi-options market available for a long time, where by "long time" I mean relative to the minuscule amount of time that BTC itself has existed.

It's more than a year old now, but in an old article called Bitcoin Derivatives, Liquidity and Counterparty Risk, I suggested that a transparent and robust derivatives market would go a long way toward making BTC a viable currency for larger volume real business use.


I agree it would be a net positive.

Of course, there was, famously, a BTC vs. USD quasi-options market available for a very long time, but eventually MP backed out of that offering entirely (February, maybe?). Ironically enough, I had warned that MP's approach to market making was a ticking time bomb, and MP publicly ridiculed that warning -- thereby revealing his profound failure to grasp the details of effective hedging along the way. Lo and behold, just a couple of months later, one encounter with a single trader who did grasp the details of effective hedging sent MP scrambling for cover and finally convinced him to abandon the effort altogether.

There's a new options offering being put together by the BitShrub guys, but I haven't caught up with them in months and so can't comment on whether it's going anywhere. The last I knew, there was no mpbot-style market making, so without the involvement of market makers with deep pockets and a better grasp of the territory than MP, I think it will likely be a steep uphill struggle to generate any kind of volume.

It's easy to tell you're relatively new here, twiifm, so welcome to the forum. A couple of quick clarifications:


On the contrary, there's an easy avenue for misunderstanding here, since "taking both sides" frequently refers to literally taking both sides of a trade -- both buying and selling the same underlying entity, generally with a view to profiting on the spread between the two corresponding prices. If we were talking about arbitrage or about market making, this is exactly the phrase we'd be using. Given that your same post included obviously false statements such as "Since theres no options market for bitcoin theres no hedge", it's probably not hard to see how folks might misunderstand where you were coming from.


On the contrary, as a general point there are plenty of ways to generate returns even with a delta neutral position, although in reality virtually nobody is going to maintain a fully delta hedged position in the Bitcoin space using the currently available services and tools. For everyone with significant experience in options trading, for example, the common candidates are theta and vega. For an example which is specific to the Bitcoin space and futures in particular, see Selling the Froth: A Simple Hedged Forex Strategy for Bitcoin-Denominated Returns.

Therefore, while your suggestion of simply selling BTC when you believe it will drop against fiat is actually a very good strategy, it seems to me entirely wrong to characterise delta neutral hedging as "pointless".


This is an interesting theoretical judgement, but investors who are more concerned with the actual returns that can be achieved will likely do exactly that when the prices suit them. This is analogous to how experienced options investors out there in the real world will route options orders to specific market makers using Level II quotes. In the Bitcoin space, using currently available services, slippage is a fact of life.


I was not recommending them, I was mentioning them as examples.

Of course I have used them, both in the course of managing the original BTC Growth fund, a 2000 BTC hedge fund-style service which operated last year, and a modest successor fund in forex, and in my own private trading.

Strictly speaking, hedging does not mean "taking both sides", it means taking positions which move in opposite directions -- such as in your example of a long position coupled with a short call against the position.

In addition, the list of types of positions which might move opposite to a long position in BTC is not exhausted by options; futures (e.g., ICBIT) and leveraged CFD-style products (e.g., BTC.sx) can perform a similar function.

Regardless of what the specific technical failure might have been, and regardless of whether someone else is going to be able to step in and fix that technical failure for you, it is fairly startling that there doesn't seem to be any hint of an apology in your post or even any acknowledgement of culpability.

Would you agree that ultimately, this has almost nothing to do with the server hardware and everything to do with the decision to store private keys on a web-accessible server that is operated and maintained by somebody else, relying on a backup strategy over which you don't appear to have any direct control or direct involvement? I am not suggesting that it is never a good idea to store private keys on a web-accessible server -- obviously many services could not be operated otherwise. But I would suggest that any decision to do so ought to be undertaken with full awareness of exactly what the h*** is going on with that server, and with an absolute willingness to take full responsibility for it and everything that happens to it. From what I can tell, you have expressed neither familiarity with what is going on nor a willingness to take full responsibility for it.

Am I wrong about that?

Not to go all off-topic, but another alternative is that you could just conclude that with very few exceptions, the entire Bitcoin securities universe is currently populated with junk -- and not even bother.

Otherwise sensible people, who would never touch such junk if it were denominated in dollars or pounds, nonetheless will plough significant chunks of capital into these things if they happen to be denominated in Bitcoin. Otherwise sensible people, who would normally care a great deal about factors like management competence or the logical coherence of a business plan, suddenly become entirely happy to throw a stack of BTC at some guy named Guido (no offense to all the Guido people out there) just because Guido includes words like "venture" or "mining" in a prospectus.

If, instead of treating their BTC like play money and throwing it into this kind of junk, folks just took a portion of their available dollars and invested that capital into random selections from the S&P 500, they would likely do much, much better.

Sorry, in case you didn't click for fear it was more of that silliness -- it was actually a link to my earlier post in this same thread, noting the ludicrous financials that were provided with the original listing. Given those initially ludicrous financials, it's hardly surprising now to see what has become of it.

See here. 

Touché. At a certain point, it became blazingly clear that TradeFortress's operation did not have the capital to cover potential withdrawals; I alluded to this publicly when TF first floated the idea to start clearing out his "investment" fund via Inputs.io, only to be brushed off, naturally.

As for Ukyo.Loan, I had originally been an aggressive buyer on behalf of the BTC Growth fund, eventually holding nearly 12% of the entire thing; but once it became very clear that the operation was headed south, I took the fund out of that position swiftly and entirely.


Neo was not worth touching with a barge pole: regardless of whether it was actually intended as an outright scam, it was a transparently atrocious business plan. IMHO, no experienced investor would have gone near it in the fiat world, yet in Bitcoin land many folks seem willing to overlook all manner of flashing red lights that would otherwise be deal-killers.

The main private offerings mentioned on the BTC Growth website are all closed for the time being. (See my comments toward the end of the first "froth" article for some notes on why.)

I'm not averse to working individually with folks who might want to get in touch directly, but this isn't a major focus at the moment.

ICBIT just rolled out a major site redesign, so the trouble you experienced may have been related to that. As I speculated in the original article, however, a major source of risk for the strategy I outlined remains the exchange itself.

I'm afraid I don't have any other numbers to share with regard to highs or lows or averages, but I do think the going rates for futures are worth paying attention to every so often; sometimes the market is willing to be fairly accommodating.

Nothing would stop you from locking in this rate, and this would be a straightforward strategy for someone calculating their position's value specifically in fiat terms. For someone calculating their position's value in BTC terms, however, they might be concerned to avoid erosion in their BTC holdings should BTC rise significantly against fiat -- thus the strategy of coupling the futures position with an additional long position in BTC.

It all depends on aims and risk tolerance.


You don't. However, I was drawing the original article out of a bag of tools I had used in fund management, where it would rarely be appropriate to sink all of a fund's capital into a single strategy.

The position is fully hedged, so the futures are balanced by a leveraged long position in Bitcoin. This is what enables the strategy to remain profitable in Bitcoin terms across such a wide range of changes in the exchange rate versus USD.

However, you're exactly right that futures lock in the rate, so a non-hedged position made entirely of futures would have done exactly that, as noted in this paragraph toward the end of the article:

Just a quick follow-up for anyone who might be interested...

Today I published a one-month followup to the article I mentioned above, noting that the strategy has returned 14% during the last month.

Just a quick follow-up for anyone who might be interested...

Back before this thread was polluted by MPOE-PR trying to find her bearings, I mentioned my "Selling the Froth" article which explained a simple hedging strategy for generating Bitcoin-denominated returns without needing to take a directional view on Bitcoin versus fiat. Today I published a one-month followup to that article, noting that the strategy has returned 14% during the last month.

As with many commodity ETFs, it's only "Authorized Participants" who are able to create and redeem units, rather than we mere mortals.

No problem at all. My suggestion to verify the text clipping directly sent you down the wrong path because GPG/PGP needs to be fed a single stream of characters, and it will validate based on that single stream of characters. If you feed it something with extra gubbins in it -- especially something like a text clipping file, where the actual data are stored in the resource fork/extended attributes -- then it may not even be able to find the signature in the first place, let alone verify it. It's somewhat analogous to trying to validate a Bitcoin signature of a piece of text by looking at a piece of HTML which will display the text: yes, the original text is in there, but the signature is only valid for the text itself, not for the text + HTML gubbins.

Egad, right you are! There's a limitation created by the file type, which I didn't pick up on. The ".textClipping" file type supports formatted text, which means it does not contain just the text you selected in your browser, but also extra information for formatting, such as the boldfacing. GPG will cough on that.

If you instead save the text to be checked to an ordinary text file (e.g., paste into Text Edit, set as plain text, and save) rather than trying to validate directly on the ".textClipping" file, then at last you'll be good to go.

As a fellow Mac guy, I can drop in a quick note here.

For validating files in general, you can just right click on the file in question and choose "OpenPGP: Validate" from the "Services" menu. That's it, with no need to launch GPG Keychain Access, except to grab the key in the first place. So, in this particular case, you can select the body of the post in your web browser -- everything from "-----BEGIN PGP SIGNED MESSAGE-----" to "-----END PGP SIGNATURE-----" and drag that to the desktop, which will create a text clipping document. Right click on that newly created document, select validate, and you're good to go.

(Of course, the "Services" menu is available globally and so will provide encryption-related services wherever they're relevant and supported by GPG; I just mention file-specific validation because it's quick and handy and avoids potential flakiness when using it within some apps.)