If you have questions about the terminology or other issues involved in the complaint, please ask. I may not express myself very clearly but I am trying to reduce the number of people scammed by icbit.
A big part of their scam involves pretending that you, the trader, lose money because you do not know enough about trading. The site uses trading terminology improperly in a silly attempt to do this.
You can search this site bitcointalk.org for the terms backwardation and contango to find a group of users who defend icbit. Unfortunately for those users they are using those two words in a way no genuine trader would use them. Before you 'invest', please spend a while on legitimate futures sites getting a sense of what backwardation and contango are and how those words are used. Then please search on this site and look at the way those words are used by a group of very similar people who all post in support of icbit.
Please ask questions if you are not too familiar with derivatives and need something clarified.
The purpose of this post is to expose the practices at icbit. Note: You can read a better description of how the scam is run at
http://polimedia.us/trilema/2012/icbitse-the-bucket-shop/If you plan to send money to icbit please read this and look at the screenshots before you send them money.
Most of this post won't be intelligible to people who haven't traded at icbit, so if you just want an example of what they are doing scroll down to the first comment under this post.
The clearing price of contracts. Every 12 hours the last single trade is used to clear or adjust all contract positions.
Because clearing price affects how much btc you have, as well as how much margin you need, manipulating this number will either give a person extra funds for the next 12 hours or remove funds. This is important later in this post, but basically if a person is short and they manipulate the price down it will a) put a squeeze on the people the manipulation went against, often forcing sales. If there are no buyers the people who were on the bad side of the manipulation are force to sell very cheap. The person who manipulated then buys these very cheap contracts and because they were bought at an unnaturally low level, the manipulator gets all of the clearing profit when they return to a normal price. This gives the manipulator even more funds to do the same.
It is very common for there to be one single trade of one contract around 11:59:59 to push the price.
http://bitcoinistan.com/spot1.jpg This is equivalent to moving the spot price of bitcoin. So what happens on icbit is that the clearing, the spot price, is shifted sometimes dozens of dollars over a few sessions without any comparable move in bitcoin itself. A person can go from a positive balance, well above margin with extra btc directly into default without bitcoin moving at all. Once the default happens and the person's position has been transferred to someone else the clearing price is usually pushed back up a little, in preparation for the next "investor" who buys a substantial position in one of the contracts offered.
That is bad enough, but it gets worse.
This unusual practice could be stopped easily, simply by using the session average as the clearing price. The issue has been raised a number of times, everyone who has been on the site more than several weeks figures out what is going on. So the question becomes why does icbit continue to do something that lends itself to obvious abuse? The two possibilities are either a) they tolerate the abuse because it churns sales, generates commissions, or b) they are themselves profiting from their "mistake", using their access to client accounts i.e., their knowledge of how much btc each person has etc to make their own trades that allow them to buy contracts cheaply.
The easiest way to establish whether this is going on would be to look for evidence that trades appear to make use of information that only management has, such as how much btc is available for purchases in specific accounts. etc. To clarify that point, suppose a person would benefit by offering to sell an ounce of gold for $20. They do not want to actually sell an ounce of gold at that price, it would make no sense, but suppose they just wanted some benefit from making the offer, without actually selling. One safe way would be to make the offer to a target group whose financial particulars you knew would prevent a sale. If you know nobody in a room has more than $90 then it is safe to offer an ounce of gold for $100. You get whatever benefit the offer provides without having to worry about the actual sale.
Background
The first thing that needs to be clarified is the value of a futures contract. If you buy one btc today the price may be $100. If today you wanted to buy rights to a bitcoin at some time in the future you would pay a premium for that.
For example, simplifying a bit, you might buy rights to a bitcoin one month from now for $110. Of course you get no benefit from putting down $110, but with margin you could put down say 10%, thus spending $110 to get rights to 10 bitcoin in one month. If you wanted to go out two months the price might be $120 etc.
There are formulas people use to calculate premiums for derivatives and one of the obvious variables is volatility. A utility stock might have ranged between $19 and $20 over the past 20 years. There is low volatility so the premium would be low. To buy shares 1 year in the future the base price plus premium might be $21.00.
Bitcoin of course is somewhat more volatile than a utility stock so in a natural market the premium, the extra amount over spot you must pay, will be high. Nevertheless at icbit when traders are squeezed the price often goes to spot or even below spot.
Obviously one dollar above spot is an absurd price and, by itself, suggests a problem with the exchange. Usually it is called a liquidity issue, and superficially that is true. But here is another aspect of icbit that should cause concern. Whenever these unusual prices are mentioned there are a few traders who will pop up and mention arbitrage or something similar as the explanation.
Arbitrage in this case means buying on one exchange to sell on another. The problem here is that it makes no sense as an explanation. It is simply a fancy word being used to distract anyone who is suspicious of what is going on. Is arbitrage useful in bitcoin? Of course. Can a person use arbitrage to make money between exchanges? Of course. Does arbitrage explain how a bitcoin contract can be priced below spot, or even within $20 of spot? Of course not. It's silly. Another explanation used occasionally is the notion that someone wants to offer others a "good price". In other words someone sells a contract down to ridiculous levels not to squeeze out a trader but to "offer a good price" to other traders. See image of chat log for one example.
http://www.bitcoinistan.com/chat1.jpgThis leads to the actual mechanism of the squeeze used at icbit.
Anyone who has been on the site has watched it happen again and again.
1) Clearing is manipulated down over consecutive sessions. Traders unaware of what is going on will suddenly see that their account is negative and they must either transfer in btc, or sell.
The usual response is to transfer in funds, since most people in that position suddenly see the opportunity to buy contracts that have become very cheap. Most people will not figure out yet that the "cheapness" is actually a deliberate event, not a market change, it has nothing to do with bitcoin.
Once this process is started it continues until one or more traders have been sheared. This you notice as a flurry of large sales followed by things settling toward normal again. If a trader does not sell as expected the position is liquidated by the website operators.
The last day that I traded I made some comments about the manipulation
http://www.bitcoinistan.com/chg.jpg and
http://www.nonprof.com/bitcoinistan.com/chat1.jpg and the website owners did not liquidate my position, instead, an unusual position was opened by someone to force my contracts into default.
http://www.nonprof.com/bitcoinistan.com/unlikely.jpg Looking at the other trades before and after that it is highly likely that the person who pushed down the clearing to 107.01 and then offered to sell 102 at 107.0 knew what my positions were and knew the status of my margin. The squeeze was so precise, in a market with low volume and low open interest, that it is maybe 99.99% sure.
The time prior to that I had 70 contracts that were purchased at up to $80 above spot, a price that seemed reasonable for a far future margined bitcoin derivative, but which were squeezed out of me for within 2 dollars of spot. The website owners sold more than necessary of my contracts at this absurdly low price so I was left well into positive territory, and with btc to spare, but now I had to buy contracts at a far higher price than the website owners had sold them at. Also, notice that my account was fine, then the price was pushed down to where there was a supposed necessity to sell contracts very cheaply, but then once my contracts were sold at the artificial price the contract price rebounded.
http://bitcoinistan.com/first.jpgJust look at the evidence. Points that are not clear are explained in comments below.
