ICBIT Derivatives Market (USD/BTC futures trading) - LIVE

[Fireball]

Do I understand it correctly that the price used to settle the account every day is the icbit futures market price, and the only time the "average price of the largest market" comes in is when the contracts expire at the end of december?

Yes, that's right.

[1713463819]

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[1713463819]

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[Fireball]

yeah, i hate that too 

I understand this is annoying, but please understand us too, it was done for security reasons when the exchange just started operating.

This limitation will be removed in the nearest future with the next major software update being deployed.

[Stephen Gornick]

I was demonstrating ICBIT to someone who, like me, occasionally does trading on the exchanges but did not previously have experience trading futures contracts.

The first question was one that I had ... why would you risk going long when the contract already trades 15% higher than the spot market?

And, of course, the answer is ... leverage.   If I am right in predicting the direct the exchange rate will move, I can gain more by buying BUZ2 contracts and use some of the leverage it offers  than I can by simply using those same funds and buying bitcoins at an exchange.


Here's my most recent trade:

Bought 5 BUZ2 contracts at $12.99:

2012-09-11 105 Buy                         BUZ2     12.99   5
2012-09-11 105 Trading fee for trade id 6  BUZ2    -0.025


Since that time (but before selling) I received variation margin adjustments

2012-09-12 105 Variation margin            BUZ2     0.02355995
2012-09-13 106 Variation margin            BUZ2    -0.0057161

(net variation margin adjustments:  0.01784385 )


So then I sold 5 contracts at $13.50 (it was a limit order and sold 2 first and then 3 more later):

2012-09-14 107 Sell                        BUZ2     13.5    2
2012-09-14 107 Trading fee for trade id 13 BUZ2    -0.01
2012-09-14 107 Variation margin            BUZ2     0.05102684

2012-09-14 107 Sell                        BUZ2     13.5    3
2012-09-14 107 Trading fee for trade id 12 BUZ2    -0.015
2012-09-14 107 Variation margin            BUZ2     0.07654026



Adding these all together I received 0.14541096 in margin adjustment but lost 0.05 in trading fees with a net gain of 0.09541096.

I didn't use the full margin available as I want to lessen the chance of seeing forced margin selling.  So I had 3 BTC leveraged to control 5 BTC worth of BUZ2 contracts.

I calculated my ROI of the 0.09541096 gain on roughly a 3 BTC investment and get the result - a 3.1% gain.

Had I bought straight BTC at the spot markets during the same time, I would have bought 3 BTC (the BTC/USD at the time was $11.10), and today sold at about $11.70.   The gain on that would have been $0.60 per BTC less fees of about $0.11, netting an ROI of 4.4%.

[Update: I needed to recompute the above numbers after making an error, including a variation margin twice.  With this specific trade I made less than had I traded on the spot market.   This is because the rise in the futures contract was less than the rise in the spot market over the same period, plus my price that I bought was at the upper range of the spread, as was my selling.]

Of course, the leverage knife cuts both ways.   I've also done trades on ICBit where I've speculated on the wrong direction, and lost more than I would have had I simply traded at an exchange where I was not using any leverage.

But I thought I'ld share this trade just in case it helps anyone wishing to see the numbers for an actual trade.

[Fireball]

The first question was one that I had ... why would you risk going long when the contract already trades 15% higher than the spot market?

And, of course, the answer is ... leverage.   If I am right in predicting the direct the exchange rate will move, I can gain more by buying BUZ2 contracts and use some of the leverage it offers  than I can by simply using those same funds and buying bitcoins at an exchange.

It's more than that.

First of all, your calculations rely on the market behavior and contain typical comparation of past actions based on current market state.
For example, I really would say that I should have bought some BTC @ $3 because I see it trades @11 now. However, back then, when BTC was trading close to $3, I was not that sure it would reach $11 by now.
Same applies to your judgement: What if futures market would rise higher and thus give you ability to sell @ 14.7 for example? In fact, it rose some day from exactly following the spot rate to a higher value (contango), so this is easily possible (the futures trading chart will be live quite soon so everyone could see historical data).

Next, yes, it's about "leverage". It's a personal decision of every trader to choose risk ratio. Obviously, ICBIT clearly advises against using full leverage, nevertheless, your 3 BTC in the account could be used as a guarantee for almost 40 BUZ2 contracts worth of $400. Your gain would be:
(1/12.99 - 1/13.50) * -10 * 40 = 1.7016 BTC - 40 * 0.05 = 1.5016 BTC. That's quite a difference!

And last, but not least. When you exchange currency on the spot market, you're buying and selling Bitcoins in favor of US Dollar or other fiat currency.
For the growth of Bitcoin economy, Bitcoins must get actually used more and more, and not just exchanged back and forth.
This is one of the things where the futures market comes into play. It gives a way to really use Bitcoins. Right now, the usage is limited to BTC/USD value speculations, hedging the risk of value fluctuations and arbitraging between spot and futures market, however when gold, oil and s&p500 futures are added, opportunities would greatly increase.

[Stephen Gornick]

however when gold, oil and s&p500 futures are added, opportunities would greatly increase.

Will that be XAU/USD or XAU/BTC ?   (or, for example for Brent crude ... OIL/USD or OIL/BTC  )?

Also, ... get to it!   OIL is going up!   

[[Tycho]]

Will that be XAU/USD or XAU/BTC ?   (or, for example for Brent crude ... OIL/USD or OIL/BTC  )?
Also, ... get to it!   OIL is going up!    :)

Oil and Gold futures will be nominated in BTC.

[Ichthyo]

Oil and Gold futures will be nominated in BTC.

very much appreciated, we need more anchor points outside the Bitcoin ecosystem.


Technical question out of curiosity: how do you plan to implement the "settlement" of those futures?
I take it, that at settlement time, the seller isn't expected to send a truck with oil to the buyer 

[[Tycho]]

Technical question out of curiosity: how do you plan to implement the "settlement" of those futures?
I take it, that at settlement time, the seller isn't expected to send a truck with oil to the buyer  ;D

No, just as with BTCUSD futures you'll receive your profit/loss in BTC.

[unclescrooge]

Ok time to give this baby a try

[picobit]

SECURITY AT ICBIT.

Hi.

I am a little worried about security at ICBIT.  Unlike traditional exchanges, where I pull my btc out as soon as I have bought them, on ICBIT you need to have money in your margin account for an extended amount of time.  That increases the need for good security, both against my account getting hacked and against the ICBIT site getting hacked.

It is very difficult to judge how focussed ICBIT is on security.  But they do not offer two-factor authentication, that is a bad sign!  If my computer is hacked, so will my ICBIT account be.  Two-factor auth should be possible both on login, and on withdrawals, either using yubikeys or google authenticator.

But what about the site security?  The security stuff they mention on the front page appear a bit minimal.  They use https and salt the passwords.  Fine, my password won't be easily recovered if the site is hacked (unlike Linkedin  ).  But all coins will be gone ?

What fraction of the bitcoins are in cold storage?  In my (slightly extreme) opinion, ICBIT should not use a hot wallet at all!  All money should be stored offline, and it should be clearly written on the web page that bitcoin withdrawals take one business day for this reason.  Then I would trust them (more).

Remember, it is not a question of IF the site is hacked, but of WHAT happens when it is hacked! 

Sorry for being so negative, but the bitfloor f***up was a bit scary.   And in some ways ICBIT is the successor of Bitcoinica, hopefully not in too many ways   

[toffoo]

Hey Fireball,

What do you figure the "fair value" of one of these BUZ2 BTC-USD futures contracts is?

[Fireball]

SECURITY AT ICBIT.

on ICBIT you need to have money in your margin account for an extended amount of time.  That increases the need for good security, both against my account getting hacked and against the ICBIT site getting hacked.

This scheme is better because for the value of futures contracts you have you need to keep only a small fraction of that value as a margin reserve. Unlike trading at spot market where you need to keep all money all the time to be able to trade.

But they do not offer two-factor authentication

We are working possible options. Google 2-factor would be the first implemented, and SMS checks might follow.

But what about the site security?  The security stuff they mention on the front page appear a bit minimal.  They use https and salt the passwords.  Fine, my password won't be easily recovered if the site is hacked (unlike Linkedin  ).  But all coins will be gone ?

It's quite bad to brag about security. And it's even worse to provide additional details. That's helping an attacker, not users. What matters is a reputation, and steady organic growth instead of a fast rise and painful fall.

What fraction of the bitcoins are in cold storage?

It was done this way in the start, however users were quite annoyed that they have to wait this long for their withdrawals. So now a small fraction of the total assets is maintained in the hot wallet, and majority is stored offline.

Sorry for being so negative, but the bitfloor f***up was a bit scary.   And in some ways ICBIT is the successor of Bitcoinica, hopefully not in too many ways   

It's not negative at all, it's realistic!

[Stephen Gornick]

But they do not offer two-factor authentication

We are working possible options. Google 2-factor would be the first implemented, and SMS checks might follow.

This is why I'm trading on ICBit with only a trivial amount for now.

Also, when considering how to implement it, please read the following:

A plea to exchanges ... lets do 2 factor right!
 - http://bitcointalk.org/index.php?topic=109424.0

[picobit]

Thanks, Fireball, for your reply.

Yes, only keeping a margin account is better than keeping a lot of money.  I tend not to daytrade (since I do not believe that I am better than the market at predicting fluctuations), but to make longterm trading.  Send money to exchange, buy bitcoins, withdraw bitcoins - or reversely; minimizing my exposure to hacking to a short time.  But if I want to hold a long-term position on ICBIT, my margin account is exposed for a longer time.

Well, your reply eased my worries somewhat, in particular the part about cold storage (and steady growth).

The only part I disagree about is the "not bragging about security".  We need a lot more bragging about security to put pressure on the insecure sites.  And if security is weakened by bragging about it, it was not good to begin with.  Solid security can stand scrutiny.

As for having everything in cold wallets and delay withdrawals: That would annoy me too, but less than having my funds stolen
Of course I might come in a situation where I need to access my funds here and now....

[Stephen Gornick]

There are announcements made on the site's Twitter feed @ICBIT_se that don't appear in this thread.

 - https://twitter.com/icbit_se

One that was just made, so I thought I would cc: it here:

Margin requirements for BUZ2 are going to be increased after clearing. Pls make sure reserved funds are less than available.

  - https://twitter.com/icbit_se/status/248495421859713024

[Fireball]

There are announcements made on the site's Twitter feed @ICBIT_se that don't appear in this thread.

 - https://twitter.com/icbit_se

One that was just made, so I thought I would cc: it here:

Margin requirements for BUZ2 are going to be increased after clearing. Pls make sure reserved funds are less than available.

  - https://twitter.com/icbit_se/status/248495421859713024

Yes, thanks for pasting it here. Margin requirement was increased from ca. 0.07 to 0.1039 BTC per contract as a safety measure because of a possibility of rapid rate fluctuations.

[nimda]

But what about the site security?  The security stuff they mention on the front page appear a bit minimal.  They use https and salt the passwords.  Fine, my password won't be easily recovered if the site is hacked (unlike Linkedin  ).  But all coins will be gone ?

It's quite bad to brag about security. And it's even worse to provide additional details. That's helping an attacker, not users. What matters is a reputation, and steady organic growth instead of a fast rise and painful fall.

Security through obscurity is no security at all.

[Fireball]

It's quite bad to brag about security. And it's even worse to provide additional details. That's helping an attacker, not users. What matters is a reputation, and steady organic growth instead of a fast rise and painful fall.

Security through obscurity is no security at all.

It's not security by obscurity at all.

Remember all those exchanges who claimed "we are secure advanced trading platforms"? Where are they now, and where are people's money?

Or another example. Have you seen any bank office which have a large banner which says: "Our doors are very well protected, and windows are hard to break. Money are stored in the basement in a special storage made of steel and concrete, currently containing $10 mln in cash and 10kg of gold"? Who benefits from this information? Thieves who robbed a bank in Stockholm a couple of years ago, maybe?

Sum up: saying "we are super secure" won't change anything. Explaining details of the setup will help thieves but won't help average users at all (they have no way to verify anyway). The only positive thing is constructive discussion (e.g. 2-factor auth demand - ok, implementation is going).

[Fireball]

Security through obscurity is no security at all.

To give one more insight, how obscurity helps.
Everyone can see that our servers seem to be hosted by Hetzner (IP lookup). However, noone can be sure they are physically located in Hetzner's datacenter or we just use those servers as proxy/forwarders.
Obviously, this kind of info will never be revealed to make the real servers' location hidden from thieves.

[picobit]

No, that kind of information would be silly to disclose, of course. 

As for the real bank: Our local bank claims on signs all over the place that their main safe is protected with a time lock taking 10 min to open.  I guess that is also to protect their employees from failed robbery attempts.  But yes: sometimes financial institutions brag about security, but of course never without careful consideration.