If we take a step back and just look at the arguments on the table, ex-trader's concerns aren't entirely unfounded nor were the answers cryptocyprus provided entirely clarifying.
Deprived says:
How are you planning to hedge against a heavy fall in the BTC/EUR rate? I'm not aware of any cheap high-volume means to do so (other than converting into fiat which would be rather pointless).
Your plan pretty much relies on BTC rising vs EUR. Whilst I'd tend to agree that long-term that seems likely it's also likely that any such rise won't be a steady one but will have the occasional large bubble + collapse.
If BTC happens to be at the top of a bubble when you launch it could be rather a problem for you. Whilst you may hope your own purchases could extend the bubble you can't really base a whole business plan on hoping BTC doesn't have a collapse shortly after you start taking deposits (if it happens later then it isn't such a big problem - after a while only a total collapse of BTC would be a major issue for you).
It's certainly an interesting business model - borrow money denominated in EUR then bet it all on BTC rising. And rather than paying interest for the loans to speculate with, charge them fees for the privilege.
cryptocyprus responds:
We shall be operating our own local index based on several determining factors to prevent bubbles having a detrimental effect on our operations, these bubbles will also provide us with the opportunity to strengthen our own position.
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We also have products planned that will provide part of an gains back to the customer.
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Our local index will determine the price the Bitcoins flowing between our customers when depositing and withdrawing, this will be determined on long averages, our purchase price, how efficiently we can liquidate our own positions to ensure sufficient cash flow to cover larger withdrawals, customer behavioral trends.
If the price drops considerably quickly it will take time to filter through the averages until it reaches the front line, this additional time will enable us to take advantage of trading conditions to strengthen our position.
Deprived responds:
I see a lot of words there but no real meaning.
When someone withdraws their euros there's no "flowing between customers" - you have to sell Bitcoins to recover their euros.
You can pretend on paper that you still have enough BTC to cover euro-denominated deposits (by using an internal exchange-rate that isn't in track with the market) but you can't actually sell your BTC onto the open market at that internal index price.
The scenario I'm looking at is the typical bubble one - think of what happened earlier this year. BTC rose up to $250+ vs USD then collapsed down to $100 very rapidly and stayed there for months (dipping even lower on occasions). If you had 5 million euros on deposit with you and 1 million euros float and BTC halved vs the euro then at best you'd only have 3.5 million euros worth of realisable fiat. i.e. you'd be insolvent.
Pretending BTC was still worth $250 doesn't solve that. And as soon as customers notice and start withdrawing the deficit grows as every withdrawal has to be covered by selling BTC at the real price not some pretend index.
And what does "this additional time will enable us to take advantage of trading conditions to strengthen our position" mean? You claim you'd be unable to even move the BTC around without customers signing transactions - so how can you trade with them?
cyrptocyprus responds:
We shall operate our own reserves for trading both EUR & BTC and not deposits, our strategy will be constantly monitored and adjusted. Not every BTC and Euro will be derived from the public markets and we also have several options on futures. Our strategies will be kept private because we do not want to buy off the back of our own hype, this will be partly unavoidable but we will be doing everything we can to mitigate that risk.
If someone withdraws €5m and other withdrawals that day alone make the total €7m, we will also take deposits that day at the same price point, even if the deposits that day total €5m we will already be in a strong position because we would have the trading benefits of adding that €7m to the market prior to the decrease, increasing the strength of our own reserves.
Another answer somewhere else:
1. We will implement a hedging strategy utilizing our own reserves, this strategy will be constantly changing, we will also be setting the price locally to ensure that sudden falls in price are not realized on the front line immediately. This gives us an opportunity to increase trading activities to strengthen our positions. A good trader(s) will make gains under volatile conditions, irrespective of the direction of the movement. Sorry I cannot provide the exact strategies for different scenarios but doing so would be like playing poker with see through cards.
Another answer
More than 100% of total liabilities in our own reserves wouldn't happen because during any falls we would continue our trading to ensure that we had sufficient Bitcoin to cover the adjustments required. The depth of the market is also a very important factor, its all well and good having a BTC/EUR rate of €1000 if it would only take 10BTC to drop it down to €500.
And his answers to ex-trader:
A "run" on withdrawals would serve only to reduce our liabilities unlike a traditional bank.
We will have both options and futures trading available to us prior to launch (with substantial volume)
We will also be basing our business model on the additional services we shall be offering, ie insurance, international remittance (there are more but I will provide more detail when we have more solid progress).
Yes substantial losses in the value over a long period of time would not be of benefit to anyone neither ourselves or anyone that holds Bitcoin as a store of value, however if we fail our customers can still obtain their own Bitcoin. For these recurring losses to happen it would also pretty much mean an end for Bitcoin too (if they were to happen at this point in time), something I don't foresee happening anytime soon. For everyone who likes doomsday scenarios, if you think your going to wake up tomorrow with Bitcoin valued at 0, it just isn't going to happen because of the fact that if two people agree on a value then it will always be worth something.
There is definitely some gray area, as we are not privvy to all the methods used (competitive edge, as claimed). Whether you believe in them or not, that is up to you.
