Hedge against BitCoin collapse

[lumierre]

@Topic
If you're afraid of Bitcoin's vulnerabilities then Peercoins could be a good place for cover. PPC is almost invulnerable to a 50% attack and selfish mining. The way Proof-of-Stake blocks are generated encourages randomness in minting coins, especially the 30 day minimum minting time and 90 day coin days cap. I suggest you read more about it and decide for yourself.

I posted (from the Bitcoin stackoverflow Q&A) a hypothetical attack on PPC upthread. I have not verified that.

Please give me the link. I can't find it. I'll show it to some PPC pips.

[AnonyMint]

@Topic
If you're afraid of Bitcoin's vulnerabilities then Peercoins could be a good place for cover. PPC is almost invulnerable to a 50% attack and selfish mining. The way Proof-of-Stake blocks are generated encourages randomness in minting coins, especially the 30 day minimum minting time and 90 day coin days cap. I suggest you read more about it and decide for yourself.

I posted (from the Bitcoin stackoverflow Q&A) a hypothetical attack on PPC upthread. I have not verified that.

Please give me the link. I can't find it. I'll show it to some PPC pips.

http://bitcoin.stackexchange.com/questions/9336/can-anyone-explain-this-vulnerability-in-ppc

[lumierre]

If you had (12/129600) of the current total number of coins in the network and a merchant who accepted funds after 6 confirmations, you could spam 6-12 blocks quickly after waiting three months and try to attempt to double spend like this.  The probability of such an attack succeeding is extremely high, and the cost to the attacker is virtually nothing.  I'm not sure 100% how PPC deals with this.

Coins enter a cooldown where they are prevented from generating a consecutive PoS block when the "coin days" are consumed. This last for 30 days. Additionally, there is a 90 day cap where your coins no longer generate "coin days" even after 90 days. This prevents shocking the minting network from a sudden minting player.

If this was applied to the bitcoin network (which I don't think is possible there), Imagine that a miner successfully solves a block. He is rewarded but his hashing power is then forcefully suppressed for 30 days. Therefore, he would not be able to solve blocks in succession because his hashrate, relative to other miners, decreases as he solves blocks. The network will be more secure because there will be more randomness of whoever solves the blocks. Because of this, PPC is resistant to 50%+ attacks. Even if someone has majority of the coins, when he generates a PoS block with it, his coins enter cooldown (30 days) thus lessening his probability of generating another PoS block while the probability for other people to generate a PoS block increases.

[AnonyMint]

If you had (12/129600) of the current total number of coins in the network and a merchant who accepted funds after 6 confirmations, you could spam 6-12 blocks quickly after waiting three months and try to attempt to double spend like this.  The probability of such an attack succeeding is extremely high, and the cost to the attacker is virtually nothing.  I'm not sure 100% how PPC deals with this.

Coins enter a cooldown where they are prevented from generating a consecutive PoS block when the "coin days" are consumed. This last for 30 days. Additionally, there is a 90 day cap where your coins no longer generate "coin days" even after 90 days. This prevents shocking the minting network from a sudden minting player.

If this was applied to the bitcoin network (which I don't think is possible there), Imagine that a miner successfully solves a block. He is rewarded but his hashing power is then forcefully suppressed for 30 days. Therefore, he would not be able to solve blocks in succession because his hashrate, relative to other miners, decreases as he solves blocks. The network will be more secure because there will be more randomness of whoever solves the blocks. Because of this, PPC is resistant to 50%+ attacks. Even if someone has majority of the coins, when he generates a PoS block with it, his coins enter cooldown (30 days) thus lessening his probability of generating another PoS block while the probability for other people to generate a PoS block increases.

Interesting. I will need to spend more time analyzing. Can't right now.

The inherent flaw of proof-of-stake is that the 3% can never be debased (elaborated in my November posts). Thus it can never be a currency. Thus it has no intrinsic value. Now if you combine it with CPU-only proof-of-work then you have distribution, but then you've lost absolute resistance to 50%+ attack? I think. Need to study that combination more. Will do after I complete some urgent work. I have stated I will support any promising altcoin.

I outlined what I analyze (my biased opinion and logic) to be the real risks from 50%+ attack and other vulnerabilities of Bitcoin and its proof-of-work clones (Litecoin, etc):

https://bitcointalk.org/index.php?topic=349869.msg3760634#msg3760634
https://bitcointalk.org/index.php?topic=349869.msg3755466#msg3755466

[jballs]

I think there is something very interesting in the bitshares concept. Although I, and I think many other people, would like more of a "vanilla" solution. That is, a straightforward option ( call and put ) contract based on an aggregate strike price on Mtgox, bitstamp and other exchanges. The contract length should be for at least a few months - this is where btclevels.com falls down as the binary contract length is so very short. As bitcoin is unregulated and not traded on an open exchange the option premium should be low.

The price of BTC is so volatile as the currency matures people will absolutely need products like this to mitigate price risk. I am new in taking an active interest in BTC although have been aware of the currency since 2011 after reading a New Yorker article. http://www.newyorker.com/reporting/2011/10/10/111010fa_fact_davis

Personally I am really surprised their is not a product in that hedges bitcoin price risk??  

I am a professional hedging consultant in real life. Mostly for ag and energy futures and options products but currencies and all other intangibles are roughly the same gig. BTC is unique as it has no counterweight (i.e. none of the suggestions in this thread are hedging strategies, most especially buying other altcoins which I guarantee you will follow BTC directly during these high vol phases, and crash in tandem if crash does come)

I'm very interested in creating this product, obviously there is now an acute need for it, and a shitload of newly minted money to drive liquidity.

The short term binary option sites and such are not the viable solution. They are speculative gaming sites (not knocking it I would like to start one of these as well), The product in demand is an OTC style swap market.

Everything you say above is correct except that the premiums would be low because of the unregulated nature. ANything that increases risk increases option premium. The volatility and total vaguery of BTC is why there is nobody from Wall Street jumping in with an OTC solution for option dealing.

My solution is really pretty simple, and ideally would involve partnering with anyone with a few thousand or more BTC they have no interest in parting with. There is a simple metric whereby puts and calls can be counterweighted against a long position, the idea being that you are insuring both sides of a market but in this case with a 12 mile head start given the volatility. Calls would be covered and puts would necessarily be naked, but if you kept a conservative delta you could manage the whole position relatively easily. Anyone who truly believes BTC is going higher in the intermediate term and holds BTC also should absolutely be doing this already. I think the problem being they view it as compounding their downside risk, which is what my metrics can extinguish.

I hope I will get a product to fill this niche to the marketplace in the very near future. If I can't get it done I have no doubt someone will soon enough. Hope it's not the good old boys but I know they are seldom far behind me so... could be.

cheers...

[jballs]

The perfect hedge against bitcoin collapse would be an another cryptocurrency. If the crash begins and enough people would fall into LTC for instance, then a new bubble would start forming there that would attract most of the past BTC investors.

This is 100% wrong. If BTC crashes there will be immediate liquidation of all the rest. Depending on why BTC crashed the effect may not last (i.e. one alternative is safe from whatever crashed BTC), but this is the opposite of an effective hedging strategy.

[AnonyMint]

The perfect hedge against bitcoin collapse would be an another cryptocurrency. If the crash begins and enough people would fall into LTC for instance, then a new bubble would start forming there that would attract most of the past BTC investors.

This is 100% wrong. If BTC crashes there will be immediate liquidation of all the rest. Depending on why BTC crashed the effect may not last (i.e. one alternative is safe from whatever crashed BTC), but this is the opposite of an effective hedging strategy.

This is likely true even for the "antithesis-of-Bitcoin-coin", because the majority of the speculators are ignorant of the technological issues.

However if the "antithesis-of-Bitcoin-coin" ever arrives (is it PPC/Peercoin, see my upthread post?), then the knowledgeable speculators will be buying it on sell-offs. And eventually it will have longer-term counter-trend price to Bitcoin, even though the short-term ripples may mimick Bitcoin on the long-wave counter-trend. Thus there would be a firmer floor on sell-offs than for Bitcoin, if and only if significant wealth understands. That may take some time to develop. In the interim, market action for smaller market cap altcoins is likely to be more volatile.

I am assuming the "antithesis-of-Bitcoin-coin" would have a different model of coin supply such that it had a non-ponzi-bubble (in my opinion Bitcoin = no intrinsic value as a currency) long-term valuation.

[AnonyMint]

My solution is really pretty simple, and ideally would involve partnering with anyone with a few thousand or more BTC they have no interest in parting with. There is a simple metric whereby puts and calls can be counterweighted against a long position, the idea being that you are insuring both sides of a market but in this case with a 12 mile head start given the volatility. Calls would be covered and puts would necessarily be naked, but if you kept a conservative delta you could manage the whole position relatively easily. Anyone who truly believes BTC is going higher in the intermediate term and holds BTC also should absolutely be doing this already. I think the problem being they view it as compounding their downside risk, which is what my metrics can extinguish.

I hope you quants factor in the market cap growing 12X per annum.

It seems the call options are already built-in to the underlying Bitcoin asset. Why would a long-term holder risk it?

Also it seems to me the long-term holder needs a way to exit with puts, selling out to n00bs who want leverage on something which is already leveraged to infinity (no intrinsic value in my opinion).

In short, how do you hedge a ponzi-bubble? You can't unless you make friends with the government.

[chmod755]

Too lazy to read all this - bought more precious metals.

[BitcoinTraderFX]

It's been said earlier that for a hedge to function to work, and actually save you, it MUST go up WHEN bitcoin goes down.

Metals have a seeming correlation, but it's not tied. So if bitcoin were to collapse, it's not likely gold would suddenly shoot up during the same moments.

If you want to use metals, then consider buying options on the futures contract (any futures brokerage can do it.)

It would function as a in "Insurance Policy" that would pay if metals suddenly went up. But as I said the correlation is not tied at a fundamental level.

As for forex brokerages offering bitcoin, be cautious. They are betting against you, so in a large move, there is a lower likelyhood that you would be able to get your money out.

Just be cautious.

Exchange fees are low enough that you can afford to move your positions to protect yourself. If you were trading stocks or futures, the commissions would kill you. Not so in Bitcoin.

: )

cj

[chmod755]

Metals have a seeming correlation, but it's not tied. So if bitcoin were to collapse, it's not likely gold would suddenly shoot up during the same moments.

Of course it's not "tied on a fundamental level", but precious metals are the winner if other financial assets are failing - that's why we've seen them going up during the financial crisis.

Otherwise you'd have to bet a certain amount of money against Bitcoin (and also be sure that the other party is reliable) in which case you can also lose.

[BitcoinTraderFX]

Sorry @chmod755, what I meant was that they are not tied directly in "action" at 1:1, or 1:something.  So if bitcoin dropped 10%, you wouldn't see a correlated% rise in gold necessarily.

There are two kinds of risk hedging (at a very basic level). There is dollar for dollar risk. I have $100,000 invested in bitcoin. If it drops $50,000 I want to cover that $50,000 with something else. So I still end up with $100,000 in cash value no matter what happens.

Then there is investment hedging (or portfolio diversification). Then gold is somewhat diverse, although going down at the moment. So I was referring to the dollar for dollar type of hedging. For that...

So it's hard to form a true risk-hedge dollar for dollar through calculation with gold.

So a fuzzy hedge would be (and I mean really fuzzy) would be to buy a way out of the money call on gold. So it would be really cheap. Let's say $50. Then if there were a fall in bitcoin, and assume that money flows into gold, then the $50 call might be worth $200, offsetting the fall in bitcoin.

In the future there will be options and futures contracts for bitcoin. Then you could do $:$ risk hedging.

ie. People do this in futures and stocks all the time. You just calculate the offsetting positions, and what premium is needed to cover that offsetting position. It ensures portfolio stability. ie. Buy apple stock 1 month before product announcement, buy a put option to cover it. Great product, apple stock goes up, make a fortune. Bad product, apple stock goes down, put option pays off, no big net loss.

Too many cross used terms bandied about. Fundamental, hedge, yada, yada, yada. My apologies.

: )

cj