Bitcoinica - Advanced Bitcoin Trading Platform

[tvbcof]

You have to put funds into bitcoinica for short selling. If the price goes up too much, where you risk not being able to pay for the shorted bitcoins anymore, you're automatically liquidated: You automatically buy back the bitcoins you shorted.

If that's the case, then I don't understand the benefit of Bitcoinica, because the following seem identical to me:

a) having 10 bitcoins deposited with Bitcoinica, and borrowing 10 bitcoins with the hope of buying them back at a lower price

b) selling your own 10 bitcoins with the hope of buying them back at a lower price?

Sure.  You pay Bitcoinica to play in the first case and not in the latter.

You're example is a bit silly though.  Normally you would deposit far fewer BTC (of equiv) than you borrow.  Consequently, you get liquidated before the price goes to infinity.

[notme]

You have to put funds into bitcoinica for short selling. If the price goes up too much, where you risk not being able to pay for the shorted bitcoins anymore, you're automatically liquidated: You automatically buy back the bitcoins you shorted.

If that's the case, then I don't understand the benefit of Bitcoinica, because the following seem identical to me:

a) having 10 bitcoins deposited with Bitcoinica, and borrowing 10 bitcoins with the hope of buying them back at a lower price

b) selling your own 10 bitcoins with the hope of buying them back at a lower price?

Those are identical.  But you can also deposit 10BTC worth the dollars and borrow 10BTC to short.

[barbarousrelic]

You have to put funds into bitcoinica for short selling. If the price goes up too much, where you risk not being able to pay for the shorted bitcoins anymore, you're automatically liquidated: You automatically buy back the bitcoins you shorted.

If that's the case, then I don't understand the benefit of Bitcoinica, because the following seem identical to me:

a) having 10 bitcoins deposited with Bitcoinica, and borrowing 10 bitcoins with the hope of buying them back at a lower price

b) selling your own 10 bitcoins with the hope of buying them back at a lower price?

Sure.  You pay Bitcoinica to play in the first case and not in the latter.

You're example is a bit silly though.  Normally you would deposit far fewer BTC (of equiv) than you borrow.  Consequently, you get liquidated before the price goes to infinity.

Working through the numbers I think I understand now - thanks!

[flower1024]

hi zhou tong,

what do you think about paying interest on deposits (maybe even on gainings)?

this would encourage people to deposit more money which (hopefully) reduces the death-star *.

[Matthew N. Wright]

hi zhou tong,

what do you think about paying interest on deposits (maybe even on gainings)?

this would encourage people to deposit more money which (hopefully) reduces the death-star *.

LOL @ deathstar

[elux]

So... Where'd all the nice quotes graphs go?

Last month's quotes all vanished when we hit february. 

Is the usefulness supposed to go to zero on every new month?

[zhoutong]

So... Where'd all the nice quotes graphs go?

Last month's quotes all vanished when we hit february. 

Is the usefulness supposed to go to zero on every new month?

You can change the URL to view all previous dates. :-)

[amazingrando]

zhoutong-

Can you give us more info on the asterisk problem.  I'm guessing that it is a liquidity problem as we see it when there are major changes in price and people are either accumulating or shorting on leverage.  I also see that there are now caps on account sizes.  Is there a plan and ETA for resolving the asterisk issue?

[notme]

zhoutong-

Can you give us more info on the asterisk problem.  I'm guessing that it is a liquidity problem as we see it when there are major changes in price and people are either accumulating or shorting on leverage.  I also see that there are now caps on account sizes.  Is there a plan and ETA for resolving the asterisk issue?

It's not possible to eliminate the asterisk without taking out loans every time people want to borrow more.  I highly doubt that someone would provide such a deal to bitcoinica, and almost certainly borrowing BTC when the asterisk is on the sell side isn't likely to work out.

[amazingrando]

zhoutong-

Can you give us more info on the asterisk problem.  I'm guessing that it is a liquidity problem as we see it when there are major changes in price and people are either accumulating or shorting on leverage.  I also see that there are now caps on account sizes.  Is there a plan and ETA for resolving the asterisk issue?

It's not possible to eliminate the asterisk without taking out loans every time people want to borrow more.  I highly doubt that someone would provide such a deal to bitcoinica, and almost certainly borrowing BTC when the asterisk is on the sell side isn't likely to work out.

Actually I don't think it's that unreasonable.  Any trading system/firm that offers margin trading will need a certain amount of credit to fund its margins.  The bitcoin market cap is very small and you'd only need a fraction of that to fund margin accounts, so you're not talking very much money in the grand scheme of things.

Given that bitcoins and btc trading is unregulated and that bitcoin is still big experiment at this point, traditional lenders/banks may be unwilling to provide the necessary float.

[notme]

Given that bitcoins and btc trading is unregulated and that bitcoin is still big experiment at this point, traditional lenders/banks may be unwilling to provide the necessary float.

This.

[kronosvl]

what about using glbse for funds? (either bonds or shares)

[notme]

what about using glbse for funds? (either bonds or shares)

Because selling shares for BTC to fund USD reserves would put downward pressure on price.  You might as well just short.

[BitPay Business Solutions]

is the "NO RESERVE" problem ever going to get fixed?

[BitPay Business Solutions]

is the "NO RESERVE" problem ever going to get fixed?

double * is bad connection to mtgox api
single * is no reserve

Yes I know.  I am unable to execute orders because Bitcoinica does not have the reserve liquidity in Mt. Gox.  I'm not trying to break the bank here, just buy a couple hundred BTC.  And all I get is "NO RESERVE".  So can Zhou tell us when this will get fixed?

[cunicula]

Question about bitcoinica starfish:

Bitcoinica is charging interest on deposits. Interests is meant to attract funds to give the exchange a reserve (so if btc skyrockets or collapses suddenly zhoutong does not go belly up).
However, I'm a little sceptical that investors will find this attractive with a variable rate. It is too much hassle to keep track of.

Consider this alternative:

bitcoinica could issue fixed term 6-month bonds with a locked in 30% annual interest rate. The bonds would have the proviso that Zhou can choose to pay the bond off either in dollars or in btc with the locked in exchange rate at the time of initial issue. Note here that the actual interest rate is less than 30% per annum because Zhou can take advantage of any exchange rate movement. If the exchange rate moves by more than 30% in either direction, then Zhou will make money and the bondholder will lose. Essentially then bitcoinica can insure itself against large exchange fluctuations in either direction by issuing these bonds. The fixed term would also protect Zhou against sudden collapses in confidence to some degree.

It seems like issuing these bonds could protect Zhou from the starfish and also provide an attractive expected return for investors. Have you considered this Zhou?

[zhoutong]

Question about bitcoinica starfish:

Bitcoinica is charging interest on deposits. Interests is meant to attract funds to give the exchange a reserve (so if btc skyrockets or collapses suddenly zhoutong does not go belly up).
However, I'm a little sceptical that investors will find this attractive with a variable rate. It is too much hassle to keep track of.

Consider this alternative:

bitcoinica could issue fixed term 6-month bonds with a locked in 30% annual interest rate. The bonds would have the proviso that Zhou can choose to pay the bond off either in dollars or in btc with the locked in exchange rate at the time of initial issue. Note here that the actual interest rate is less than 30% per annum because Zhou can take advantage of any exchange rate movement. If the exchange rate moves by more than 30% in either direction, then Zhou will make money and the bondholder will lose. Essentially then bitcoinica can insure itself against large exchange fluctuations in either direction by issuing these bonds. The fixed term would also protect Zhou against sudden collapses in confidence to some degree.

It seems like issuing these bonds could protect Zhou from the starfish and also provide an attractive expected return for investors. Have you considered this Zhou?

It's like a dual-currency account. This is a good idea.

However, we have already eliminated the starfish problem. Currently all interest rates are dynamic, and people are shifting their deposits and positions fast enough to provide liquidity when we need.

[cunicula]

It's like a dual-currency account. This is a good idea.

However, we have already eliminated the starfish problem. Currently all interest rates are dynamic, and people are shifting their deposits and positions fast enough to provide liquidity when we need.

Right it is just a dual-currency deposit with a 6-month fixed term. The strike price is set to the current exchange rate when the contract is issued.
http://en.wikipedia.org/wiki/Dual_currency_deposit

Ignore the starfish problem for the moment. As I understand it, Bitcoinica faces some probability of bankruptcy in the face of extreme exchange rate movements. Even if people are responding well to your interest rate signals now, you cannot be sure that they will respond the same way if the exchange rate becomes more volatile. One thing to consider is the potential for extreme volatility to cause users to lose confidence in bitcoinica and withdraw their deposits.

Due to these issues, it makes sense for you to get investors to park money in bitcoinica for a fixed term. I recommend you do this by issuing dual-currency deposits that insure you against volatility.

If you want to talk about details of the contracts, feel free to pm me.

[nrd525]

Given the current volatility, there is no way anyone should agree to do a dual-deposit unless the interest rate was more like 200%/year.

[cunicula]

Given the current volatility, there is no way anyone should agree to do a dual-deposit unless the interest rate was more like 200%/year.

This is true, but i'm not sure of the exact number.  

The basic points I think are:

1) Zhou's bets are not fully hedged. Therefore, there is a risk that bitcoinica will collapse under a severe and sudden market swing. In this scenario, some existing users would lose their deposits.

Therefore, it makes sense for Zhou to purchase some insurance against extreme movements. I'm not sure what a fair price for insurance is, but you are right that 30% interest is way too low. The easiest way to find out a more correct number (really a guess) is a Monte Carlo simulation using historical data.

2) Like a bank, Zhou has assets in demand deposits. In the event of a collapse in confidence, Zhou's users might suddenly decide to withdraw funds, leaving Zhou with inadequate liquidity to pay everyone off. This bank-run type activity tends to be self-fufilling, thus the rationale for the FDIC.

To reduce the risk of a run on deposits, it makes sense for Zhou to take in some deposits that have a predictable withdrawal period.

3) The dual currency account is attractive because it fulfills both the hedging function and the time deposit functions. It also offers a gambling opportunity which might appeal to some of Zhou's users. It can be made more gambler friendly by allowing for a secondary market on Bitcoinica where users can day trade dual currency claims on Zhou with each other. Zhou can charge a fee for mediating these trades to earn extra cash. Essentially, these claims would be like inverse volatility derivatives.