Margin Trading

[sturle]

I wouldn't have to ID you.
Say:
You deposit X BTC.
You open a position for Y BTC/USD. 
BTC/USD goes down a little so your position is only worth (Y-X).
I liquidate your position.
Now mtgox has (Y-X) + X which = Y which is the amount of the loan.

The exchange hasn't lost anything so I don't need to know who you are.

I get how it works when there enough bids at the right prices. But how is this guaranteed?

The bid will be put automagically by Mt. Gox whenever someone do this kid of trading.  The price isn't going to fall below that bid until everything has been bought at that price by someone.  If the price stops there or rises again, no problem.

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[ribuck]

The bid will be put automagically by Mt. Gox whenever someone do this kid of trading.  The price isn't going to fall below that bid until everything has been bought at that price by someone.

That's not foolproof. If there is a big bubble and it bursts, there could be no buyers ever at the liquidation price. But that's a commercial risk that MtGox will need to decide.

I will be very surprised if we ever see margin trading at big ratios like 100 to 1.

Personally, I wouldn't trade on margin because I like to buy after prices drop, rather than being forced to sell at the low price. Sure, the successful margin trader more than makes up for it when prices rise, but not everyone is successful.

For those who don't trade on margin, the existence of margin trading tends to exaggerate the peaks and troughs of the market. When prices are rising, it greatly increases the number of BTC that can be bought, causing the price to rise further. When prices are falling fast enough to force liquidations, it greatly increases the number of BTC that are being sold, which depresses the price further. I don't mind this, because it gives me more opportunity to buy very low and sell very high.

[jgarzik]

For those who don't trade on margin, the existence of margin trading tends to exaggerate the peaks and troughs of the market. When prices are rising, it greatly increases the number of BTC that can be bought, causing the price to rise further. When prices are falling fast enough to force liquidations, it greatly increases the number of BTC that are being sold, which depresses the price further. I don't mind this, because it gives me more opportunity to buy very low and sell very high.

I think that's the rub:  margin trading dramatically increases volatility.

[FreeMoney]

For those who don't trade on margin, the existence of margin trading tends to exaggerate the peaks and troughs of the market. When prices are rising, it greatly increases the number of BTC that can be bought, causing the price to rise further. When prices are falling fast enough to force liquidations, it greatly increases the number of BTC that are being sold, which depresses the price further. I don't mind this, because it gives me more opportunity to buy very low and sell very high.

I think that's the rub:  margin trading dramatically increases volatility.

I see cases where it obviously does. But if someone wants to make a bet that bitcoin will hold above the .15 level they can offer twice as much support if they double up, right? So now it's less likely to drop below .15, but if it gets below .08 it blows out even more. It seems if people's bets and leverage are not correlated it should roughly even out. But I don't know.

[TTBit]

If you are taking votes, I'd vote 'no' because I think there will be a default at some point, especially if you are thinking 100:1. My guess would be 3:2 ratio would be a good place to start margin.

Suggestion: Post cash on hand and total bitcoins available versus margin cash and btc. This extra info would help a lot, seeing there are an actual 30,000 coins with 200,000 outstanding.

[mpkomara]

 mtgox could not successfully liquidate all accounts with a margin call in a bursting of even a small bubble at 3:2 margining. one should place heavy default premium on mtgox trades (and consider trying to force a default) if he started margining this early in the game.

[joe]

Since mtgox also runs the market, risk can be avoided by prioritizing the clearing of transactions such that buys to satisfy a margin call always go first; and credit is only extended if there is enough collateral for an ask that is already in the system.

The other thing that will finally come into play here is interest rates, so mtgox account holders will now get paid an interest rate for their positive balance.

[kiba]

Since mtgox also runs the market, risk can be avoided by prioritizing the clearing of transactions such that buys to satisfy a margin call always go first; and credit is only extended if there is enough collateral for an ask that is already in the system.

The other thing that will finally come into play here is interest rates, so mtgox account holders will now get paid an interest rate for their positive balance.

Sound like fractional reserve banking.

[MrFlibble]

The bid will be put automagically by Mt. Gox whenever someone do this kid of trading.  The price isn't going to fall below that bid until everything has been bought at that price by someone.

That's not foolproof. If there is a big bubble and it bursts, [...]

If the market is volatile, third parties may spread their BTC purchase offers thinly down to quite low prices...  making it more likely there is insufficient depth to cover the trader's loss?

At this point we are beyond my economicsfu, but...  if the broker holds some of the trader's USD, is he not better covered for drop in the BTC price?  Compared to holding some BTC and trying to sell them in time to avoid loss?

Could someone post a worked example perhaps?  Including profit, loss and disastrous loss modes?

[Grant]

Why not, but i fear the high volatility could lead to a lot of trouble. I found it interesting, would certainly try for a few bucks.

But what i'd find much more interesting is if i could trade PUT/CALL options on bitcoin/usd. I see much more usefullness with option trading than margin trading.

[S3052]

Agree that options would be a great enabler for more trading.

[mtgox]

Both options and margin trading are on the to do list.

[ptd]

Could someone post a worked example perhaps?  Including profit, loss and disastrous loss modes?

We will suppose that BTC has deflated to 1 BTC/USD

Suppose someone buys 10 BTC at 2:1 margin, it costs him $5 and mtgox pays the other $5. The $10 dollars is then sold at 1 BTC/USD. Then one of four things can happen:

* The order is fulfilled, mtgox takes a higher percentage of the transaction than normal because he provided margin (but not 50/50 because he took a lot less risk than the trader)
* The price of BTC in USD falls so mtgox automatically sells the order at the current market price, takes the money for his stake and passes the rest on to the buyer (who makes a loss)
* The price of BTC in USD can fall so fast that mtgox is not able to regain his lost capital (this is the only way that mtgox can lose money)

Mtgox has to sent his margin to a level that prevent the third point happening.

[FreeMoney]

Could someone post a worked example perhaps?  Including profit, loss and disastrous loss modes?

We will suppose that BTC has deflated to 1 BTC/USD

Suppose someone buys 10 BTC at 2:1 margin, it costs him $5 and mtgox pays the other $5. The $10 dollars is then sold at 1 BTC/USD. Then one of four things can happen:

* The order is fulfilled, mtgox takes a higher percentage of the transaction than normal because he provided margin (but not 50/50 because he took a lot less risk than the trader)
* The price of BTC in USD falls so mtgox automatically sells the order at the current market price, takes the money for his stake and passes the rest on to the buyer (who makes a loss)
* The price of BTC in USD can fall so fast that mtgox is not able to regain his lost capital (this is the only way that mtgox can lose money)

Mtgox has to sent his margin to a level that prevent the third point happening.

Yes, exactly.

And on the point of "falling fast" people should realize that price is not a continuous function. It only exists where there are offers and that means that price can fall through any level instantaneously. So it isn't solved by MtGox giving them priority. The important thing is regular depositors funds aren't used for this without their consent thinking that a large enough swing can't happen or something.