if Zhou ran out of USD reserves yesterday, where did all the USD's come from to allow the longs to sell their btc? an avalanche of new customer deposits?
That makes no sense cypher... Why would they need USD for the longs to sell. the longs liquidate their btc for USD's, no? |
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if Zhou ran out of USD reserves yesterday, where did all the USD's come from to allow the longs to sell their btc? an avalanche of new customer deposits?
if so, why does that sound like a Ponzi?
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Two, steal money (BTC or USD) from the accounts of his customers to allow others to cover.
he just said that the USD accumulated in short sellers accts was already used to buy bitcoins. did i get that right, Zhou? so what do you call that Smickles? Well, we don't really have the second way. Unless Mt. Gox gives us line of credit like real-world exchanges do. But very unlikely. The other option is to have much larger reserves or trade much less. You could have reserves, and when a customer takes a position the funds they supposedly hold are not considered reserves as they are now. Once all the reserves are moved to positions there can be no new positions until you make profits to add to your reserve or some deleverages/closes their position. But for this to work you need X times customer funds, where X is the weighted average leverage factor of all accounts. As it stands now, if it had dipped when the shorts had their USD borrowed by the longs, but not enough to force a sale, and no one sold for whatever reason, bitcoinica would be looking at a loss. Of course it's doubtful all the longs would hold steady, but it is possible they would and you wouldn't have a profit from them to cover you loss due to the shorts you borrowed USD from. this was Ferroh's point. |
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<snip>
right here.
so the shorts borrow bitcoin to sell to the longs and you think that's what I meant? There's a cost to borrowing that bitcoin. But you did get me to question myself there. good job. huh? if you want to short btc, you borrow those btc from someone else on Bitcoinica and sell them to a long for USD's which then get credited to your acct. in order for you to close the position (cover), you need those USD's to buy those btc back from a seller or another short. if those USD's are removed from your acct by Zhou to buy btc from mtgox to sell to other longs, where are the USD's going to come from so you can you cover? |
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This does not do much to explain the common case at bitcoinica, as you conveniently choose scenarios where Bitcoinica always has a higher balance than the customer's trade, (and the customer uses 1:1 margin).
For example:
If Bitcoinica has a $1000 balance, and the customer executes a $1000 trade at 10:1 margin (which Bitcoinica allows), then bitcoinica does not have the funds available to fully equalize this trade against mtgox.
The trade would then require $10000 but bitcoinica only has $1000. If that trade is very profitable, Bitcoinica will have to pay the customer his earnings, or prevent him from liquidating his position until it is either not profitable, or until another customer opens an opposing position.
In all of your scenarios you say "Bitcoinica has lost money! Wrong!". It is in fact very possible for Bitcoinica to lose money -- the fact that you conveniently avoid this scenario is rather suspect.
At this moment, the reserve is larger than top three accounts combined times 10. Your reasoning might be valid at the earlier days, but definitely not now. That's why we may occasionally halt one direction trading when we don't have money. Didn't you know what happened yesterday? if the shorts had USD's in their accts yesterday from their shorting activity, why couldn't you let them use those USD's to cover their positions by buying on gox? You have money in Bitcoinica account doesn't mean it's 100% in reserves, it can be borrowed by someone else to buy/sell Bitcoins. At any point, Bitcoinica is a: - Full reserve in BTC and fractional reserve in USD, or - Full reserve in USD and fractional reserve in BTC. (Yesterday, we had a full reserve in BTC, and a depleted reserve in USD. Users couldn't withdraw USD until the situation was resolved.) This is how hedging exactly works to ensure that we ourselves and our customers are always having almost the same profits (or we call it internally, rate of change of asset value with respect to market price). right here. |
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if the market went to $5 today and you were short yesterday and wanted to cover but couldn't b/c Zhou is under reserved in USD's, your entire acct would have been liquidated.
This will not happen in the future. We will only restrict new positions, not existing positions in the future. see there are problems that you're admitting to. and you're calling me a troll? |
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Two, steal money (BTC or USD) from the accounts of his customers to allow others to cover.
he just said that the USD accumulated in short sellers accts was already used to buy bitcoins. did i get that right, Zhou? so what do you call that Smickles? |
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if the market went to $5 today and you were short yesterday and wanted to cover but couldn't b/c Zhou is under reserved in USD's, your entire acct would have been liquidated.
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And that's why the trade on Bitcoinica doesn't go through before they hedged the position on Mtgox. The situation you're describing simply isn't possible. They try to hedge for 4$. When that isn't possible due to whatever situation you can come up with, and the price falls to 3,80, that's the price the costumer is going to get. Unfair? That's the risk of market orders. If the customer used a limit order instead, which he should if he cares about the risk, and places the limit order at 4$, the trade simply wouldn't go through, because Bitcoinica is unable to hedge at 4$ as the price already fell to 3,80$.
this part can't be correct. the way i understand it is that the customer gets his order executed before Zhou has a chance to hedge on mtgox. this is why the spreads are higher on Bitcoinica to acct for slippage or his increased risk of letting you fill first. example: if mtgox bid:ask is $4:$4.10 then Bitcoinica might be $3.80:$4.30 thus you, as a customer of Bitcoinica, can short at the ask of $3.80 with a limit order and you will get it filled immediately. the $0.20 difference is what Zhou's algorithm has figured to be a safe cushion to give him time to hedge on mtgox and sell his btc at or somewhere btwn $3.80 and $4 so he doesn't lose money. in your example, you state that even if you short at the ask price of $3.80 it won't be filled until and if Zhou is able to sell a corresponding amt of btc on mtgox at $3.80. if that was the case then his spreads should never be higher than mtgox's since he doesn't assume any risk. correct me if i'm wrong. Well, the system hedges right after the order execution, and that's why we call it "guaranteed liquidity". And also, the system has to figure out whether it's necessary to hedge at all. Bitcoinica is not a Mt. Gox interface because we want to be as independent as possible. We don't have to ensure profits and accuracy on every single trade. But much more than 99% of the time, we can hedge at exact prices that we aim to. If we can ensure these: - Slippage is highly concentrated in a few seconds of a day - Customers' orders are distributed across all times We have virtually no risk. The market doesn't slip every 5 seconds. And during most of the violent moves previously, we received no or only a few orders. The high volume was always generated after the violent moves. Your theory of "hedging erosion" never happens in our experience. During 9/11, we lost about $10 due to slippage when the price suddenly spikes 50%. And we made 100x back later. It's peanut right? A clear-minded person won't question the business model of the one of the most successful Bitcoin businesses ever. ah, so i was right and Mushoz's example is wrong. he thinks customer orders don't get filled until you've already hedged. there IS risk when you let the customer go first. and now you admit that you might not even hedge. there's alot of judgement that goes into those algorithms that could be wrong in a violent market. Zhou, how do you respond to Ferroh's argument above? |
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no i don't so i am trying to understand. i'm not talking about market orders, i'm asking about limit short orders that try to hit the bid exactly.
Wait a sec. You've been slinging all this (let's just politely say) mud about bitcoinica and you haven't even used the service? You have a funny way of trying to understand things. hey, i don't have to trade on Bitcoinica to bring up valid concerns that nobody seems to want to address. first of all, i short sell all the time with Fidelity and i've never been prevented from covering my shorts. this is unheard of. Zhou also admits that longs may not be able to sell if everyone gets short. second, a market maker/brokerage/whatever Zhou wants to call himself should never be giving out trading advice to ppl here on the forum. what about all the longs on Bitcoinica who weren't logged in yesterday when he advised selling? third i haven't heard a response to Ferroh's argument above fourth, if the customers get executed first before Zhou has a chance to hedge that does indeed put Bitcoinica and customers at some risk depending on how fast mtgox is moving. |
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i'm waiting for an answer...who gets executed first?
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And that's why the trade on Bitcoinica doesn't go through before they hedged the position on Mtgox. The situation you're describing simply isn't possible. They try to hedge for 4$. When that isn't possible due to whatever situation you can come up with, and the price falls to 3,80, that's the price the costumer is going to get. Unfair? That's the risk of market orders. If the customer used a limit order instead, which he should if he cares about the risk, and places the limit order at 4$, the trade simply wouldn't go through, because Bitcoinica is unable to hedge at 4$ as the price already fell to 3,80$.
this part can't be correct. the way i understand it is that the customer gets his order executed before Zhou has a chance to hedge on mtgox. this is why the spreads are higher on Bitcoinica to acct for slippage or his increased risk of letting you fill first. example: if mtgox bid:ask is $4:$4.10 then Bitcoinica might be $3.80:$4.30 thus you, as a customer of Bitcoinica, can short at the ask of $3.80 with a limit order and you will get it filled immediately. the $0.20 difference is what Zhou's algorithm has figured to be a safe cushion to give him time to hedge on mtgox and sell his btc at or somewhere btwn $3.80 and $4 so he doesn't lose money. in your example, you state that even if you short at the ask price of $3.80 it won't be filled until and if Zhou is able to sell a corresponding amt of btc on mtgox at $3.80. if that was the case then his spreads should never be higher than mtgox's since he doesn't assume any risk. correct me if i'm wrong. you don't actually use bitcoinica, do you? if there is rapid price change, and you use a market order, you might not actually get that number which is displayed. Just another reason why you shouldn't use market orders. no i don't so i am trying to understand. i'm not talking about market orders, i'm asking about limit short orders that try to hit the bid exactly. |
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And that's why the trade on Bitcoinica doesn't go through before they hedged the position on Mtgox. The situation you're describing simply isn't possible. They try to hedge for 4$. When that isn't possible due to whatever situation you can come up with, and the price falls to 3,80, that's the price the costumer is going to get. Unfair? That's the risk of market orders. If the customer used a limit order instead, which he should if he cares about the risk, and places the limit order at 4$, the trade simply wouldn't go through, because Bitcoinica is unable to hedge at 4$ as the price already fell to 3,80$.
this part can't be correct. the way i understand it is that the customer gets his order executed before Zhou has a chance to hedge on mtgox. this is why the spreads are higher on Bitcoinica to acct for slippage or his increased risk of doing it this way. example: if mtgox bid:ask is $4:$4.10 then Bitcoinica might be $3.80:$4.30 thus you, as a customer of Bitcoinica, can short at the ask of $3.80 with a limit order and you will get it filled immediately. the $0.20 difference is what Zhou's algorithm has figured to be a safe cushion to give him time to hedge on mtgox and sell his btc at or somewhere btwn $3.80 and $4 so he doesn't lose money. in your example, you state that even if you short at the ask price of $3.80 it won't be filled until and if Zhou is able to sell a corresponding amt of btc on mtgox at $3.80. if that was the case then his spreads should never be higher than mtgox's since he doesn't assume any risk. correct me if i'm wrong. They have those spreads to protect against slippage when people get forced liquidated. When there's a sudden movement, a lot of positions might have to be liquidated. If they can't hedge against those liquidations they _still_ have to liquidate those positions, because they are forced after all. That's what the spread is for. (And for profit of course) so you are sure Zhou fills the sell hedge on mtgox first before he fills your short order? that doesn't make alot of sense. why display an bid price at all if thats the case? |
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And that's why the trade on Bitcoinica doesn't go through before they hedged the position on Mtgox. The situation you're describing simply isn't possible. They try to hedge for 4$. When that isn't possible due to whatever situation you can come up with, and the price falls to 3,80, that's the price the costumer is going to get. Unfair? That's the risk of market orders. If the customer used a limit order instead, which he should if he cares about the risk, and places the limit order at 4$, the trade simply wouldn't go through, because Bitcoinica is unable to hedge at 4$ as the price already fell to 3,80$.
this part can't be correct. the way i understand it is that the customer gets his order executed before Zhou has a chance to hedge on mtgox. this is why the spreads are higher on Bitcoinica to acct for slippage or his increased risk of letting you fill first. example: if mtgox bid:ask is $4:$4.10 then Bitcoinica might be $3.80:$4.30 thus you, as a customer of Bitcoinica, can short at the ask of $3.80 with a limit order and you will get it filled immediately. the $0.20 difference is what Zhou's algorithm has figured to be a safe cushion to give him time to hedge on mtgox and sell his btc at or somewhere btwn $3.80 and $4 so he doesn't lose money. in your example, you state that even if you short at the ask price of $3.80 it won't be filled until and if Zhou is able to sell a corresponding amt of btc on mtgox at $3.80. if that was the case then his spreads should never be higher than mtgox's since he doesn't assume any risk. correct me if i'm wrong. |
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This does not do much to explain the common case at bitcoinica, as you conveniently choose scenarios where Bitcoinica always has a higher balance than the customer's trade, (and the customer uses 1:1 margin).
For example:
If Bitcoinica has a $1000 balance, and the customer executes a $1000 trade at 10:1 margin (which Bitcoinica allows), then bitcoinica does not have the funds available to fully equalize this trade against mtgox.
The trade would then require $10000 but bitcoinica only has $1000. If that trade is very profitable, Bitcoinica will have to pay the customer his earnings, or prevent him from liquidating his position until it is either not profitable, or until another customer opens an opposing position.
In all of your scenarios you say "Bitcoinica has lost money! Wrong!". It is in fact very possible for Bitcoinica to lose money -- the fact that you conveniently avoid this scenario is rather suspect.
At this moment, the reserve is larger than top three accounts combined times 10. Your reasoning might be valid at the earlier days, but definitely not now. That's why we may occasionally halt one direction trading when we don't have money. Didn't you know what happened yesterday? if the shorts had USD's in their accts yesterday from their shorting activity, why couldn't you let them use those USD's to cover their positions by buying on gox? |
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You might want to mention fees on the 'wallet' page. I was aware of fees and yet couldn't find it.
i can't even find the FAQ link he posted above. |
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I will say that during our meetup last night in Orlando, BitcoinSpinner was the best mobile wallet.
A new person hot girl showed up at the meeting (NOT a techie by any means), and within 1 minute she had the app on her phone, and I sent her $20 worth of bitcoins in exchange for $20 cash.
The incoming deposit showed instantly on her phone as pending, and was credited in about 5 minutes.
She was able to pay her check at Whiskey Dicks using the app, and the speed at which she was able to scan and send was good.
More importantly, the speed on the back-end of BitcoinSpinner was most impressive. Once the send was confirmed in the UI, the coins were actually sent on the bitcoin network and received by Bit-Pay in about 1 second. This compares to a typical 3-5 second process time to do a withdrawal from the MtGox Mobile Wallet.
Keep up the good work, and whatever you do to the UI, don't delay the back end processing. You have the best wallet on the market for that.
LOL! this is so hot on multiple levels!  |
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the other scenario Mushoz's simplistic argument ignores is what i've been calling slippage.
the grossest example of this is when Zhou lost his Yubikey and thus his connection to gox. for example:
let say you sell or short 5 BTC at Bitcoinica for $4 in a downtrending market like we had a coupla months back. he loses his connection to gox for whatever reason. in the meantime the price decreases further to $3.80. he then sells 5 BTC @ $3.80 only recovering $19 instead of $20. this begins to erode his USD balance or reserves. now we begin to understand where all the USD went.
even assuming he has his maximum connectivity in place, the fact that he's one step removed from gox still results in slippage as he can never execute (hedge) at the same price as his customers did on his site. multiply that by thousands of orders each week.
now you will argue his algorithm takes this into acct through the spread. i argue its impossible to predict the violent swings and ignores the fact that there is constant complaining from customers to reduce that spread and thus his protection. it appears that he may in fact not have been charging enough via the spread given what has happened.
Ferroh: assuming that Bitcoinica does indeed acct for 1/3-1/2 of gox's trading, what do you think about leveraged shorting and its effect on the USD/BTC price? it seems to me that it has caused an asymmetric artificial overshoot to the downside but will not contribute to an overshoot to the upside due to his lack of USD reserve to continuously feed an upward spiral.
on the way down, when there were few to no buyers, he was able to easily step in as a market maker with his USD reserves to buy up the selling/shorting pressure b/c the price was so low. this may not work to the same degree with higher prices to the upside though as we're witnessing.
in this sense Bitcoinica has been destructive to the price and perhaps arguably to the economy. am i missing something?
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if i were to have designed Bitcoinica from the beginning, i probably would have only allowed funding in USD's upon which you could then buy, sell, or short bitcoin just like regular brokerages do with their paper assets.
by allowing btc to leverage up more btc, its almost like building a derivatives tower on paper. the volatility kills you and the demand for USD is just too great.
Any broker allows you to short EUR/USD with USD. EDIT: Remember, everything is relative, including volatility. If BTC/USD is volatile, both BTC and USD are volatile. Longing BTC with BTC (or shorting USD with BTC) and shorting BTC with USD (or longing USD with USD) are essentially the same in terms of financial risk and volatility. by allowing btc to leverage up more btc, its almost like building a derivatives tower on paper. I can't believe that you have any financial experience. This is exactly how leverage works. In security trading, you use purchased securities as collateral to borrow more capital to purchase more. Or maybe you're saying that Bitcoin is paper. Anyway, we have been running for more than 3 months, and actual risk is minimal. The out-of-reserve redflag has been implemented long ago, and today is the first time that it's triggered in a large scale. Even 9/11 was completely fine for Bitcoinica. as much as some of us wish Bitcoin to be money, at this point, it is still a speculative asset. so allowing investors to use Bitcoin as collateral to leverage up 10:1 is irresponsible given the volatility and reeks of what the primary dealers did at the peak of 2007. at the time, they were using bonds of all sorts, junk, subprime, FNM bonds, mortgage bonds, UST's, as "money" to provide collateral for their overnite trades. how'd that turn out? |
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Zhou has already told us that his USD reserves amounted to somewhere around $100-200K IIRC. correct me if i'm wrong about this.
this is peanuts compared to where the customer balances are i would bet so Ferroh is correct.
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