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? Have you ever been to Bitcoinica's home page even? We display publicly how much we hedge during the last 24 hours. Some orders are matched internally. Yes, we take risk, but I did a lot of experiment to simulate the worse situations possible. If you were a partner you would see a screenshot of BTC/USD rocketing to $9648.84556 when I tried to make things funny. We execute orders in 50 BTC blocks. We always update prices globally for every 50 BTC executed. The maximum we can lose is 50 BTC times amount of slippage. |
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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. First, this problem has been resolved and will be prevented in the future. I have already explained how everything works and why there's a problem. I don't have access to money markets like Fidelity and I heavily rely on customer deposits to maintain reserves. Second, I didn't advise anything. I said it was an opportunity to long squeeze, because everyone with capital knows and I just want to address the possibility. Apparently it didn't happened. I have plenty of Bitcoins and advise people to sell? If I have sold myself I can make a lot of evil profits, but instead I just want to be transparent so I shared everything. Third, I posted already. Fourth, please calculate the average 5-second move of Mt. Gox during the day. It's almost zero. We don't shoot 10,000 BTC buy orders when prices are spiking to infinity. The maximum we have done is like 50, 100 or 150 BTC, except for the forced liquidations which are confirmed risks already. |
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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. |
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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? Obviously the money has been used up to purchase Bitcoins for the longs. 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). |
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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.
The reserve is the total of all customer deposits plus 50% of our historical profits. It's simply impossible to trade beyond Bitcoinica's means. Also, don't worry about profitability for us. We have been very profitable. If you want to argue against this fact, then continue trolling... |
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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?
Solution to the slippage problem: Rule #1: Always consider market depth, not last price. At 0 second, Bitcoinica shows a price of $4, at the same time, Mt. Gox price is rising to $4.5. A customer sends a market buy order. At 1 second, Bitcoinica gets a new price based on algorithm, gives a price of $4.55. At 1.01 second, Bitcoinica hedged and executed the order. This ensures that no one is able to take advantage of sudden price movements. Price first, trade later. If there's no adverse selection problem (deliberate attempt to cheat when opportunities arrive), trades are evenly distributed across the timeframe, and chances of further slippage is minimal. Rule #2: Bitcoinica processes 50 ฿ at a time. No customer can take advantage of buying 10,000 Bitcoins and then enjoy the massive slippage on Bitcoinica. Also, we have the thing called API, and we don't plug the Yubikey in the server. For shorting issues, you don't understand Bitcoinica at all. What Bitcoinica did over the months was dumping a few thousands coins, buying back, and dumping again, and buying back,... Bitcoinica can never short unless someone bought some coins and sent to us at the first place. Bitcoinica don't create paper assets to short the market. We just provide a pool of resources to Bitcoiners to borrow by placing either currency as collateral. Thank you for your imagination. If I were you, I would stop polluting the thread that helps people to really understand. |
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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? |
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If the price ever gets to parity again and there is the right market in place, I would think you would see an explosion in the use of bitcoins.
Why would the price itself (as opposed to maybe it's steadyness) have an effect on peoples decision to use bitcoin? It doesn't matter if you buy 1 BTC for $10 and then use 1 BTC to buy gardening supplies as opposed to buying 10 BTC for $10 to get the same amount of gardening supplies. What you say sounds to me like: "we need to inflate the money supply to support a growing economy", which is total bullshit. Any amount of money can support any size of economy as long as divisibilty of the money is given (which is clearly the case for bitcoin). Demand for "money" (don't confuse with demand for wealth, which always exists), in the sense that people need more liquid buying power to be able to do more substantial transactions whenever they please, will automatically lead to lower price levels (of goods and services), because people will reduce their demand for goods (save some money) or even sell goods (acquire some money). This mechanism (essentially a feedback loop that regulates the price of money) allowed the gold standard (essentially limited amount of money) to be so successful in supporting a growing economy at various times and in various places throughout history. Fact: Any amount of money can support any size of economy. Fallacy: Any change in money supply can support any growth of economy. |
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Op great explanation. However: Advice to Zhoutong
Please give people that have open short positions higher priority on buying BTC. It is simply unacceptable people were unable to liquidate their positions for several hours because of USD liquidity problems. Stop allowing more long positions _before_ you run out of USD, so that there's enough USD left for people with shorts to liquidate them.
Is a load of.... unless you're advocating the same in a reverse situation. Otherwise this is just fucking up a market that already has issues. Yes, that is correct. People with long positions should also get priority on selling. Thanks for the advice, I'll edit the post in a moment. When I actually implement it, I will definitely consider both directions. Our redflag can be triggered when we are out of BTC too. |
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Hi Zhoutong, could you let us partially cash out profit from our position? Currently, we have to liquidate our position to make the profit move into USD balance, I would like to buy real BTCs using my profit balance.  All your unrealized profits are automatically leveraged again for trading. Your tradable balance should already include the profits. Maybe he wants to withdraw some of the profit to his wallet outside Bitcoinica. Sorry for my misunderstanding. If you have profits to support your position, technically you can already use the Exchange or withdraw feature to do whatever you want, just like the real USD balance. However, the limit is your actual USD balance, as it can't be negative. Unfortunately but we don't offer the service to let you withdraw more USD than what you have. |
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Thank you so much for taking time to write this long post to explain how Bitcoinica works. Please PM me your Bitcoin address or Bitcoinica username so that I can send you a 3.14159265 BTC bounty. I really appreciate your effort!
I will take your advice and start tweaking the circuit breaker algorithm today. It was triggered several times before, but at very minor scale and mainly due to excessive withdrawals instead of major trading activities like today. In the future, we will implement two levels of restrictions: no-opening (soft buy/sell redflag) and no-closing (hard buy/sell redflag), and leave some gap between them depending on total amount of open positions.
Your advice really makes sense because we may have forced liquidations when the market is moving, and we have to leave some reserve for them to happen as well.
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Hi Zhoutong, could you let us partially cash out profit from our position? Currently, we have to liquidate our position to make the profit move into USD balance, I would like to buy real BTCs using my profit balance. All your unrealized profits are automatically leveraged again for trading. Your tradable balance should already include the profits. |
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I believe that one must use key/secret authentication in order to withdraw.
Bitcoinica has an account with Yubikey, and we had to set up another account for automated Mt. Gox code withdrawals till recently.
Now we are using key/secret authentication to process withdrawals from our main account directly.
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As I understand it, you will not use the BTC belonging to long positions to allow shorts to cover themselves but you will allow the USD belonging to the short positions to allow longs to cover themselves. If this is incorrect, please explain where I went wrong. If it is correct, it is an unresolved issue.
Longs will need BTC reserves to cover themselves because they are essentially selling to cover. Ok, so if I have a long position, and most others go short, I can get stuck in my position like the shorts got stuck today. At least you offer an equal opportunity screw job. Yes, the opportunity of screwing up is programmed to be equal. |
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We are talking about running out of USD reserves.
that means you're broke. Nah, it just means existing shorts are screwed unless they get out (which they probably can't all do) and no one with half a brain will go short until this is fixed. We'll be back to no shorting and we'll bubble again unless they can come up with the USD reserves to cover all shorts. I have removed all my funds from Bitcoinica until this is sorted out. This is a temporary issue and we have already resolved this. As I understand it, you will not use the BTC belonging to long positions to allow shorts to cover themselves but you will allow the USD belonging to the short positions to allow longs to cover themselves. If this is incorrect, please explain where I went wrong. If it is correct, it is an unresolved issue. Longs will need BTC reserves to cover themselves because they are essentially selling to cover. |
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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. |
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We are talking about running out of USD reserves.
that means you're broke. Nah, it just means existing shorts are screwed unless they get out (which they probably can't all do) and no one with half a brain will go short until this is fixed. We'll be back to no shorting and we'll bubble again unless they can come up with the USD reserves to cover all shorts. I have removed all my funds from Bitcoinica until this is sorted out. Zhou claims that when ppl buy or sell btc on bitcoinica he just buys or sells for them on mtgox and collects the fees on the pass through. what did he do when all the shorts shorted btc on bitcoinica since mtgox doesn't allow shorting? sounds to me he exposed himself by actually buying the shorted btc with his USD reserves? Alright, your words proved to me that you didn't understand Bitcoinica since day seven (not day one). Users can deposit both USD and BTC into their Bitcoinica accounts. You can short BTC with USD, and you can also long BTC with BTC (or short USD with BTC). There's never a net short on Bitcoinica. If no one is holding any Bitcoins, you simply can't short sell. Short selling is a feature of Bitcoinica as a result of margin trading. cypherdoc has wasted so much of his time debating a possibility that can't exist. |
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We are talking about running out of USD reserves.
that means you're broke. Nah, it just means existing shorts are screwed unless they get out (which they probably can't all do) and no one with half a brain will go short until this is fixed. We'll be back to no shorting and we'll bubble again unless they can come up with the USD reserves to cover all shorts. I have removed all my funds from Bitcoinica until this is sorted out. This is a temporary issue and we have already resolved this. |
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When Bitcoinica customers buy Bitcoins, we will hedge on Mt. Gox to buy for them, and they will have positions.
i think this is where the problem lies. when the market goes straight up, the delay btwn when your customers buy and when you hedge on mtgox puts you into a losing position. We delay the execution of all orders by 1-2 seconds. When the orders are executed, we always have the latest price. if this were the case, you wouldn't be having reserve problems with btc and you'd let those buys and short cover orders through. if you had 10,000 in stock you'd always have 10,000 in stock with perfect execution and hedging. but you don't so there is slippage somewhere that you're telling us. If someone put in a long position for 10K BTC at $3.50 and Bitcoinica bought 10K BTC at $3.50, as long as no one is putting in a short position to counter that they will not sell the 10K BTC that they purchased. The reason they were liquid before is because lots of people were taking up contrary positions, but if everyone starts going the other way then they would stop allowing people to go long until/unless they get more actual USD with which to buy additional BTC. Now, that doesn't explain why someone who took a short couldn't liquidate at a loss, which is the more confusing/problematic issue at hand. If Bitcoinica is out of USD because everyone goes long and I come along and put in a short at $4.30 or whatever, then if I chose to liquidate that short at a loss right after taking the position there's no reason to not allow that. If you liquidate your short position, you are still buying. It's the same as opening a long position. Practically, this is a problem, and I don't really know how real world brokerages resolve this problem. I only know that some forex brokers actually trade against their clients. well at least you admit, Zhou. they co-locate onto the exchange to limit slippage. This has nothing to do with slippage. We are talking about running out of USD reserves. |
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When Bitcoinica customers buy Bitcoins, we will hedge on Mt. Gox to buy for them, and they will have positions.
i think this is where the problem lies. when the market goes straight up, the delay btwn when your customers buy and when you hedge on mtgox puts you into a losing position. We delay the execution of all orders by 1-2 seconds. When the orders are executed, we always have the latest price. if this were the case, you wouldn't be having reserve problems with btc and you'd let those buys and short cover orders through. if you had 10,000 in stock you'd always have 10,000 in stock with perfect execution and hedging. but you don't so there is slippage somewhere that you're telling us. If someone put in a long position for 10K BTC at $3.50 and Bitcoinica bought 10K BTC at $3.50, as long as no one is putting in a short position to counter that they will not sell the 10K BTC that they purchased. The reason they were liquid before is because lots of people were taking up contrary positions, but if everyone starts going the other way then they would stop allowing people to go long until/unless they get more actual USD with which to buy additional BTC. Now, that doesn't explain why someone who took a short couldn't liquidate at a loss, which is the more confusing/problematic issue at hand. If Bitcoinica is out of USD because everyone goes long and I come along and put in a short at $4.30 or whatever, then if I chose to liquidate that short at a loss right after taking the position there's no reason to not allow that. If you liquidate your short position, you are still buying. It's the same as opening a long position. Practically, this is a problem, and I don't really know how real world brokerages resolve this problem. I only know that some forex brokers actually trade against their clients. |
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