Developing a low-fee trading site

[halvoraarud]

Thought I could plant an interesting idea to you. 
I believe there is a serious market for a low-cost Bitcoin trading application.  Here is the design:

* You create a average price by pulling feeds from Mt.Gox, Bitstamp, for instance.
* Then you allow people to bet on the price development by entering into contracts.
* These contracts has, for instance, 5 min, 10 min, 15 min, 30 min, 1 hour duration.
* You pair the "gamers" against each other, one betting up and one down and distribute Bitcoins, depending on how it goes.

Example:
AVG(MtGox and Bitstamp) = 500 USD/BTC

A bet 10 BTC on price moves up in 1 hour.
B bet 7 BTC on price moves down in 1 hour.

From these two, you can make a 7 BTC large contract.  The contract should have gearing, say 3X.  So, if price is 550 after one hour, you give 10% * 3 * 7 = 2.1 BTC to person A, from B. The rest is returned.

The advantages of this is that it is possible to daytrade bitcoin prices at a VERY low fee.  Remember that Bitstamp and Mt.Gox charge 0,2 - 0,5% fee per transaction.  This is a lot of money.  No cash needs to be involved.

Thought I should give you my thought, as I'm a little to busy to implement this by my self.

best regards
HA

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[Sarchar]

Why not just go straight option-style?

Assuming the current price is 500$:

Player A offers contract: I will give you 1 BTC if the price closes above 550$ one week from now.  The cost to accept this deal is 0.1 BTC.  

Other players can buy this contract by paying the 0.1 BTC cost of the contract.  If bought, Player A puts 1 BTC in a multisig escrow (or an "oracle" transaction). Player A gets his 1 BTC back (and is ahead by 0.1 BTC) if price stays below 550$, otherwise the 1 BTC goes to the other player.  In this case, Player A is down 0.9 BTC and the other player up 0.9 BTC.

This is a "call" option. You can do the same thing to the downside: these are "put" options.

You can also take this one step further and make these contracts tradeable and let the market value the contracts.  That is, suppose Player A sold the contract for 0.1 BTC while Bitcoin price was 500$, and now the price has risen to 525$.  Since Player A is "short" one contract, he could go to the options market and buy back the contract, perhaps at 0.3 BTC, incurring a total 0.2 BTC loss (but saving himself the 1 BTC loss).

An options market has the added benefit that they help stabilize price. That is, speculators could move from trading fiat->bitcoin and instead just stay in Bitcoin.  If I were concerned about Bitcoin price falling, I would pay a small fee for a put contract instead of going through the hassle of an exchange, thus hedging my Bitcoin position.

Somebody needs to do this.

[halvoraarud]

I agree, and surprised that nobody has done this yet!  Seems like a BIG market, given the transaction volume on the exchanges.

HA

[coinrevo]

Very interesting. Here is the problem though. Say A and B have 10,000$ total wealth in USD. USD/BTC is 1000$. They both buy 10BTC. Now A is going long BTC/USD and B goes short. BTC/USD moves to 800$ (-20%). A owes B 2BTC. A nows owns  8 BTC and B owns 12 BTC. However the price has moved. A has 8*800$=6400$ net worth, B has 12 BTC * 800$ = 9600$. B has actually lost money! So there is little to no incentive to go short BTC/USD when you own BTC. If B wants go short, he should simply sell. This is a very general problem, otherwise we could manufacture shorts to reduce volatility in the BTC/USD exchange rate. Kind of like countries peg they currencies to say USD. In the end someone has to pay the bill. You need natural sellers to get shorts. If you're views are bearish BTC you should not own BTC in the first place.

[Sarchar]

Very interesting. Here is the problem though. Say A and B have 10,000$ total wealth in USD. USD/BTC is 1000$. They both buy 10BTC. Now A is going long BTC/USD and B goes short. BTC/USD moves to 800$ (-20%). A owes B 2BTC. A nows owns  8 BTC and B owns 12 BTC. However the price has moved. A has 8*800$=6400$ net worth, B has 12 BTC * 800$ = 9600$. B has actually lost money! So there is little to no incentive to go short BTC/USD when you own BTC. If B wants go short, he should simply sell. This is a very general problem, otherwise we could manufacture shorts to reduce volatility in the BTC/USD exchange rate. Kind of like countries peg they currencies to say USD. In the end someone has to pay the bill. You need natural sellers to get shorts. If you're views are bearish BTC you should not own BTC in the first place.

It's called a hedge for a reason.  In your example, B would.have lost 2000$ but instead only lost 400$.  If he had played 3 contracts, he'd be up 400$.

[halvoraarud]

Similar things are done in financial markets all the time.  Nothing new here.  Question is, who want to create this ?

HA