Bitcoin Risk Management Offer by Kazu: Benefit from Uptrends, hedge out of Down

[Kazu]

Hello, I'm looking for BTC loans to allow me to short BTC so as to accomplish my hedging strategy. Now, my terms are slightly different than a normal loan, due to the strategy I am attempting. So please read this in full to understand (A) what I am asking (B) why I am asking for it (C) what I will be doing with your Bitcoins when I get them and (D) what risks you face.

My Strategy - Why I need your coins
I am taking advantage of the Bitcoin-denominated accounts available at 1broker. As you can see, I can long BTC there, and if BTC goes up, the BTC I win is worth more than the amount I would lose if BTC goes down. My strategy is to try to minimize risk when attempting this strategy. By using your coins to short at another exchange, I am able to acheive lower exposure to the BTC price. Lets look into this a bit, shall we?

Say I deposit 1 BTC into 1broker, when BTC price is $100.
1) I will take 1 Bitcoin, and sell it at Gox or Bitstamp. I will choose the exchange depending on the circumstances at which I receive your coin. Once I get one or more lenders, I will post daily updates regarding my activity at the exchanges (including 1broker).

2) I will take the Bitcoin I deposited into 1broker, and use it to long BTC at some leverage you specify, such that the total exposure, AFTER LEVERAGE, is equal to the amount i shorted on gox/bitstamp.

3) I will wait for the Bitcoin price to change some amount. This amount depends on leverage and must be at least 25%.

4) Once the price changes by this much, I will close both positions, i.e, rebuy coins with the money at gox, and close the position at Broker1.

5) Since the broker1 is denominated in BTC, should BTC go up 25% at 4 leverage, I will have doubled my money. The 0.25 BTC deposited will now be 0.5 BTC, and I will have to re-buy at gox. $100 / $125 = 0.8. The Bitcoin total has increased to 1.3, where only 1.25 was invested. I pocket the interest, as well as the 0.05 BTC as profit, and return to you your coins IN FULL. If I lost my money at Broker1, then I can re-buy at gox at a rate of $75/BTC, allowing my purchase of 1.333333333 BTC, which I will return to you. I will also have collected some interest at broker1.

6) As a result, by lending to me, you will not receive any set interest rate. Instead, you will protect your BTC from a downward move, while also collecting bonus BTC if the price decreases, effectively allowing you to benefit from a BTC price increase, while remaining relatively unaffected by a BTC decrease, and in fact increasing your BTC holdings.

Risks, Charges & Expenses
1) While this strategy may sound risk-free, there are several risks that may put your investment in danger. The first and most obvious risk is counterparty risk - the risk that broker1 and/or my choice of exchange will steal/lose your coins in some way.
2) The second and perhaps most major risk you face is too large of a deviating exchange rate. Should my choice of exchange deviate far from the volume weighted average (what broker1 uses), your investment may be placed in risk. I will obviously dig out of my own profits to pay you back as promised, but in an extreme scenario, I may be unable to pay you back in full.
3) Only one fee may apply, and this is really not my fee at all, but the exchanges. I currently have a 0.42 Bitstamp exchange fee and a 0.55 Gox exchange fee, which will go down with volume. In a falling market, I will pay back your fees using the broker1 interest payments. However, should this not cover it, you will pay these fees so long as you still are receiving more BTC than you lent to me. In a raising market, these fees are not an issue. I reserve the right to short slightly more than I long in order to protect myself from these fees in a falling market. You will still receive the same amount of BTC in either case.

Get Started!
Please send your loan to 17CrErdvdrw5xWWTeyBsP4g7Zj7FstuSzQ.
Please post on this thread or send me a PM specifying (1) your address, (2) your leverage, (3) any other comments/instructions. In case of two people claiming the same deposit address, I may ask you to send me a signed message proving who you are.

Available leverages are: 1:1 (50% change), 2:1 (33% change), 3:1 (25% change), 4:1 (20% change), 5:1 (15% change).

You will receive your money back plus your profit after the BTC price has changed at least the amount specified depending on your leverage.

Thanks, & contact me if you have any questions.

[dexX7]

It would be interesting to see your previous trading performance. Mind to post your trade history? What is your experience and on which exchange did you trade in the past?

[Jumpy]

I see absolutely no trust feedback for your account. Hopefully you can understand why that would worry an investor.

Also, if you are leveraging one account but not the other, dont you risk a margin call and a bounce? That's why leverage is risky.

[notme]

I see absolutely no trust feedback for your account. Hopefully you can understand why that would worry an investor.

Also, if you are leveraging one account but not the other, dont you risk a margin call and a bounce? That's why leverage is risky.

Pirate@40 had the highest trust rating around (on bitcoin-otc since the forums didn't have trust at the time).  You are right to be cautious, but don't rely too heavily on "trust ratings".

[empoweoqwj]

There are no risk-free trading strategies. If there were everyone would be doing it, which is of course imposssible. The idea you can even present a trading strategy as "risk free" and try and sound credible is astonishing ....

Good luck with finding suckers to send your their bitcoins, and even better luck to those suckers ever getting anything back.

[Kazu]

I see absolutely no trust feedback for your account. Hopefully you can understand why that would worry an investor.  

Yes, 100% I understand. However, I have clearly outlined every facet of my strategy, and shown how it can be profitable. Why would I scam when I could legitimately make money? Also, not sure, but I have conducted several bets on here in the past, from my old thread, not sure if this would help increase your trust in me any.

Also, if you are leveraging one account but not the other, dont you risk a margin call and a bounce? That's why leverage is risky.

Ok, so I get what your saying, but remember the amount i short is the same as the amount I long... AFTER LEVERAGE (except for the inherent leverage of having a BTC-denominated account).

Look at it this way. Say somebody used 1 BTC in my plan. After leverage, that would mean that the total exposure (again, ignoring inherent exposure of having a BTC-denominated account) is 4. As a result, I'd have to short for 4 on gox. If I don't have the money to short for 4 on gox, I'd have to lower the 1 BTC that I use to buy the 4x leveraged CFD, and use the remaining BTC to add to my pool with which to short.

For simplicity's sake, say I had 5 total BTC to use with leverage of 4. I'd long with 1 x4, and short with all the remaining. If I only had 1 BTC to use with leverage of 4, I'd long with 0.20 x4, and short with all the remaining 0.80.

As a result, if a margin call did happen, I'd still end up making up the BTC so that you still receive more than you lent to me.

1 BTC lent...

output from CFD: 0
output from Gox: $80/$75 = ~1.07

@dex (OMG, ITS THE DEX FROM THE FUTURE???), that example was outdated. I have updated the strategy to allow trading on something like Gox that doesn't supply leverage. The entire reason I need to borrow BTC from you is to GET that leverage.

Your initial balance is 1 BTC, $ 100.

Yes. So, here's how it goes, step by step. Lets just eliminate leverage for this example, for simplicity's sake. From my example above, you can see how its still better than holding your BTC even if you have leverage and a margin call happens, though obviously, in optimal circumstances, a margin call wouldn't occur.

1 BTC split 50/50 gox/broker1 = 0.5 in broker 1 0.5 in gox.

Assume $100 price on both = $50 profit on Gox, 0.5 BTC exposure on Broker1.

If BTC price goes up 50%, that 0.5 BTC on Broker1 turns into 0.75. The $50 from Gox can now buy $50/150 = 0.33333333 BTC. Total is 1.08333333. Better than just hodling your BTC.

If BTC price goes down 50%, that 0.5 BTC on Broker1 turns into 0.25. The $50 from Gox can now buy $50/$50 = 1 BTC. Total is 1.25 BTC. 25% better than just holding your BTC.

[Kazu]

There are no risk-free trading strategies. If there were everyone would be doing it, which is of course imposssible. The idea you can even present a trading strategy as "risk free" and try and sound credible is astonishing ....

Good luck with finding suckers to send your their bitcoins, and even better luck to those suckers ever getting anything back.

I don't appreciate FUD. I wont tolerate it. Please read the OP, and see there is an entire section titled "risks charges and expenses." Then please remove this post and apologize. Thank you.

[Kazu]

From the other thread (the concept is the same, I guess):

(Assuming 1 BTC price is $100).

Step 1: Deposit 1 BTC into Broker1 & Deposit $100 into Plus500
Step 2: Long BTC/USD in Broker1 with 1 BTC & short BTC/USD in Plus500 with $100, hopefully as close to the same price as possible.
Step 3: Wait for BTC price to go up 50% or down 50%.
Step 4: Collect interest from Broker1 while you wait.
Step 5: Close the position in both brokerages after 50% change & Realize that even if interest was 0, you just made money.

Reason:
If I long BTC/USD in Broker1, and BTC goes to $150, you made 1*5*0.5 = 2.5 BTC = $375.
If BTC goes down to $50, you lost 1*5*0.5  = 2.5 BTC = $125.
If I short BTC/USD in Plus500 and BTC goes down to $50, you made $100*5*0.5 = $250 = 5 BTC
If BTC goes up to $150, you lost BTC $100*5*0.5 = $250 = ~1.7 BTC.
If BTC goes down, you make 2.5 BTC
If BTC goes up, you make 0.8 BTC

Long scenario alone:

Balance $ 100, leveraged x 5 => $ 400 lend.

Leaves you with a balance of 500 $.

You buy 5 BTC.

You sell at $ 150, results in $ 750.

You pay back $ 400. Final balance: $ 350.


Short scenario alone:

Balance 1 BTC, leveraged x 5 => 4 BTC lend.

Leaves you with a balance of 5 BTC:

You enter a short position, which means you sell 5 BTC for $ 500.

You buy back at $ 50, results in 10 BTC.

You pay back 4 BTC. Final balance: 6 BTC.


When you do both scenarios at the same time, your final balance would be:

Long scenario: $ 350, 1 BTC lost

Short scenario: 6 BTC, $ 100 lost


Is that correct till now?

Short answer: No. See my post regarding your post. Only my post is before your post. God knows why.
Also, regarding your post (the old one) you said I would lose everything, in a flat market? Not true. I wouldn't lose anything, and can wait forever until the market moves again. Literally all I'd be doing in the interim is collecting interest. If for some reason I needed to close, I'd just lose the transaction fees (and still make some back if the market changed at all).

[dexX7]

Check out this thread, if you're interested. Same strategy:

https://bitcointalk.org/index.php?topic=181584.0


The problem with leveraged positions in both directions are sideward movements.

I deleted both posts due to non-relevance.


Edit:

Also, regarding your post (the old one) you said I would lose everything, in a flat market? Not true. I wouldn't lose anything, and can wait forever until the market moves again.

No, I said you would lose everything if you leverage and the market goes sidewards and both of your positions would be forced to close.

[Kazu]

Check out this thread, if you're interested. Same strategy:

https://bitcointalk.org/index.php?topic=181584.0


The problem with leveraged positions in both directions are sideward movements.

I deleted both posts due to non-relevance.

Ok this is not the same thing, other than both involve rebalancing.

His bot is best when the market sawtooths. With mine, that doesn't really matter, in fact such action could slow down profit (unless the sawtooth was REALLY BIG).

His entire strategy is based around the idea of maintaining 50:50. This means if price goes down, and back up again, he minimizes exposure to BTC, and potentially can re-obtain BTC at a lower price.

Mine is different. Mine takes advantage of one BTC-denominated account for trading BTC, i.e, The 1BTC (or however much) I risk is worth more if BTC goes up, and worth less if BTC goes down.

[Kazu]

No, I said you would lose everything if you leverage and the market goes sidewards and both of your positions would be forced to close.

Sorry but  I dont think you understand.

I open up a leveraged 4x 1 BTC position on broker1.

Nothing happens.

BTC price is same. How much have I lost if I decide to close the position? The spread.

Same thing goes for Gox. I just leveraged and the market went sidewards and I closed both positions. And I didn't lose anything but spread/commission.

[dexX7]

I open up a leveraged 4x 1 BTC position on broker1.

Nothing happens.

BTC price is same. How much have I lost if I decide to close the position? The spread.

Same thing goes for Gox. I just leveraged and the market went sidewards and I closed both positions. And I didn't lose anything but spread/commission.

I'm not talking about no movement, but movement which doesn't reach your target area, but triggers margin calls.


Anyway. Can you provide a trade history or backtests?

[Kazu]

I open up a leveraged 4x 1 BTC position on broker1.

Nothing happens.

BTC price is same. How much have I lost if I decide to close the position? The spread.

Same thing goes for Gox. I just leveraged and the market went sidewards and I closed both positions. And I didn't lose anything but spread/commission.

I'm not talking about no movement, but movement which doesn't reach your target area, but triggers margin calls.

As I said earlier, I'd have a equal amount in Gox equal to the exposure AFTER leverage.

Also, if I didn't make this clear, I'd put a sell limit order on Gox equal to the margin call.

Once again:

1 BTC invested x4 leverage. Total exposure AFTER leverage: 4

So 4 more BTC sold at gox. Total exposure AFTER leverage: Also 4.

Ok so there is leverage here, and you say there's going to be movement to go to a margin call. This means that I gotta lose all 1 BTC invested in the CFD, I.e, 25% drop in price, right?

This makes a total loss in the CFD. However, I still have the 4 BTC I sold at gox, for $400 in total. Price is going down to $75 due to the 25% drop in price, so 400/75 = 5.33333 BTC. Which is more than my original 5, so I have successfully outperformed a buy-and-hold strategy by almost 7%, even in case of margin call.

[Jumpy]

The OP either does not understand margin calls or is ignoring them.

Lets ignore fees and spreads (since you already are doing so). If the market goes south on your leveraged position, you will get called and your position is closed. According to your strategy, that's fine because your opposite position will cover the losses right?? WRONG.

The other market is probably not going to be showing the exact same market value for BTC.

You are probably not quick enough to manually sell your position at the exact moment your margin is called.

The APIs don't exist for you to automatically follow this process. Even if they did, they still wouldn't be fast enough.

If the course of the market reverses after your call, you lose money. Your investors lose money.

Finally, kindly add a fourth item to your risks that includes the possibility that you realize your folly and abscond with your (blind) investors' money. I apologize to the community at large for bumping this post while disproving the OP's false understanding of zero risk.

[notme]

The OP either does not understand margin calls or is ignoring them.

Lets ignore fees and spreads (since you already are doing so). If the market goes south on your leveraged position, you will get called and your position is closed. According to your strategy, that's fine because your opposite position will cover the losses right?? WRONG.

The other market is probably not going to be showing the exact same market value for BTC.

You are probably not quick enough to manually sell your position at the exact moment your margin is called.

The APIs don't exist for you to automatically follow this process. Even if they did, they still wouldn't be fast enough.

If the course of the market reverses after your call, you lose money. Your investors lose money.

Finally, kindly add a fourth item to your risks that includes the possibility that you realize your folly and abscond with your (blind) investors' money. I apologize to the community at large for bumping this post while disproving the OP's false understanding of zero risk.

This.  If you get forced closed and then the market reverses before you can make your trade you (and your lender) will be fucked.

[Jumpy]

The OP either does not understand margin calls or is ignoring them.

Lets ignore fees and spreads (since you already are doing so). If the market goes south on your leveraged position, you will get called and your position is closed. According to your strategy, that's fine because your opposite position will cover the losses right?? WRONG.

The other market is probably not going to be showing the exact same market value for BTC.

You are probably not quick enough to manually sell your position at the exact moment your margin is called.

The APIs don't exist for you to automatically follow this process. Even if they did, they still wouldn't be fast enough.

If the course of the market reverses after your call, you lose money. Your investors lose money.

Finally, kindly add a fourth item to your risks that includes the possibility that you realize your folly and abscond with your (blind) investors' money. I apologize to the community at large for bumping this post while disproving the OP's false understanding of zero risk.

This.  If you get forced closed and then the market reverses before you can make your trade you (and your lender) will be fucked.

It feels good to be validated by a Hero Member. Tip of the hat to you sir.

[Kazu]

Anyway. Can you provide a trade history or backtests?

Yes, lets get right down to the meat of the matter

Unfortunately I found out about this strategy just earlier this day. However I -have- done backtests, and can do more if you wish. Also, im assuming closing orders on both exchanges at the exact same time.

I'm going to be selecting exactly 1 month ago to begin the strategy, with a leverage of 4, using Bitstamp (since Gox has acted weird during the interim, I'd likely use Bitstamp today to complete this strategy anyway).

Assuming 5 BTC:

$88.78 on 1broker
$88 on Bitstamp

SHORT Bitstamp  (4 BTC)
LONG 1broker (1 BTC)

Assuming 0.5% fees on Bitstamp = $350.24

So a margin call would have happened on the dip. VERY close to not happening. But it did on ~July 6, 21:00, so, buy on Bitstamp. I'm getting 66.34 for that day. More than 5.25 BTC, after fees.

Assuming instantaneous rebalancing & restart of strategy (not reinvesting profit), we now have 66.57 on 1broker. At this point, we'd have a nice range to choose our exit point, but say we just kept 25% to keep our total upside & total downside potential the same, at the end of the day, first close above 25% change (just because its easy to get from the charts).  Take profit on the 10th @ 84.83. ~27% profit = 1.09 BTC as profit. Total of 2.09 BTC on that exchange. Bitstamp needs to buy in at 86.19 on that date. $265.36 on Bitstamp, which is 3.06 after fees. 5.15 BTC, or 0.15 BTC profit.

Again new rebalance & restart of strategy (not reinvesting profit), we now have $344.76 at Bitstamp. Assuming we need 25% change to take profit, we would still have the positions open. Assuming we closed them right now, we'd have: ~1.68 BTC at 1broker, and the $344.76 buys 3.55 @ 96.56. Total of 5.23.

Position 1: +0.25 BTC on 5 BTC over ~4 days.
Position 2: +0.15 BTC on 5 BTC over ~4 days.
Position 3: +0.23 BTC on 5 BTC over ~23 days.

Total profit: 0.63 BTC on 5 BTC over 1 month. Thats almost 13% profit. Not bad? This is not counting interest on Broker1 as I cant find any history of that.

[Kazu]

The OP either does not understand margin calls or is ignoring them.

Lets ignore fees and spreads (since you already are doing so). If the market goes south on your leveraged position, you will get called and your position is closed. According to your strategy, that's fine because your opposite position will cover the losses right?? WRONG.

The other market is probably not going to be showing the exact same market value for BTC.

You are probably not quick enough to manually sell your position at the exact moment your margin is called.

The APIs don't exist for you to automatically follow this process. Even if they did, they still wouldn't be fast enough.

If the course of the market reverses after your call, you lose money. Your investors lose money.

Finally, kindly add a fourth item to your risks that includes the possibility that you realize your folly and abscond with your (blind) investors' money. I apologize to the community at large for bumping this post while disproving the OP's false understanding of zero risk.

The second and perhaps most major risk you face is too large of a deviating exchange rate

In order for your scenario to take place, the following would have to happen:

-> 25% drop in broker1 exchange rate.
-> No 25% drop in the Bitstamp/gox exchange rate (not just at the same time, actually, never).
-> A large bounce up off whatever drop Bitstamp DID have.
-> Me not being at the computer to see the thing happen.

25% would thus have to be literally the EXACT bottom, AND there would have to be an immediate correction. Yes, then losses would occur, which is why I mentioned it in the first place. A way of mitigating this loss would be to put a slightly earlier take profit on the Bitstamp account, like 24% or 23%.

Also, WHY do people keep on saying no risk? I never said this was 0 risk. So stop saying I did.

[Kazu]

Also, obviously, if you are afraid of margin calls triggering the above, then you can try with less or 0 leverage. Allocate 2.5/2.5 in each exchange, and if you're wanting to catch 25% moves, then watch price for 25%+ moves manually. Worst case scenario? You miss one such case and are forced to wait until another 25%+ move happens.

[Kazu]

I have created the following chart comparing the various implementations of my strategy.



(Please ignore the random dollar signs that show up occasionally.)
This does take into account fees. I'm just treating the broker1 fee as 0.7%, Bitstamp of 0.5%, both of which actually overestimates their real fees.

The % move column shows how long you are going to wait before closing both positions. Note that in the real world, if I did trade, I wouldn't hit the % move on the dot, maybe I'd get a 26% move or a 24% move, which would affect the performance (a slightly bigger move would increase performance by a fraction of a percent, a slightly smaller move would decrease performance by a fraction of a percent).

Again this is assuming that the two prices have the same % move. If the Bitstamp price moved downward slightly more than the volume weighted average, and the volume weighted average moved downward by 25%, I'd make a fraction of a percent more than I otherwise would have. If the Bitstamp price moves downward slightly less than the volume weighted average, and the average moved downward by 25%, I'd make a fraction of a percent less than I otherwise would have. Note that if the same percent moves happen, but at different prices (for example, Bitstamp goes from $95/BTC to $71.25, while the volume weighted average moved from $100 to $75), the profit would remain unaffected.

In any case, clearly a larger % move strategy would maximize profitability in a highly trending market, while a smaller % move strategy would maximize profitability in a range trading market (so long as that range is big enough to cover the % move in at least one direction).

A smaller % move strategy cares less if the Bitcoin price moves up or down, though in all cases you will make many more Bitcoins if the price goes down.

A larger levered strategy will in general make more money no matter the % move you choose. This increased profitability is offset by larger exposure to deviating exchange rates.