[Announcement] Bitcoinica changes default leverage to 2.5:1 for everyone

[zhoutong]

Dear Bitcoinica Users,

Recently we have noticed a significant increase in Bitcoin's price fluctuation, and many Bitcoinica clients have been affected extremely negatively. The average spreads and the frequency of margin calls have been pushed up.

There are rumors saying that the Manipulator(s) are targeting Bitcoinica's clients for profits. We ensure that all your private trading data is safe with us and no one else other than me (not even Jon) has access to it at this moment. There's no way that a manipulator can get an accurate estimate of a price that triggers liquidations. However, it's entirely possible to predict for customers who trade with full leverage.

In light of the actual situations, we have decided to temporarily decrease the leverage to 2.5:1 (from the previous default 5:1). Existing customers with open positions over this leverage will not be affected and this applies only on your next trade. Accordingly, we have adjusted the maintenance margin requirement to 10% (down from 20%) to enable more tolerance of loss.

By doing so, the cost of manipulating against Bitcoinica customers will be much higher, with our maximum tolerance of as high as 36% for movements against positions. That means, a drop from $3 to $2 will not trigger forced liquidations for customers who bought at or below $3. Or put in on a larger scale: drop from $30 to $20. This will obviously make Bitcoinica-targeted manipulation significantly harder.

Bitcoinica is now the second largest trading platform, with over 39,136.772 BTC traded in the last 24 hours, representing about 25% 35% of the total centralized trading volume between BTC and USD in the whole market. We are aware that this action taken will have an adverse impact on our trading volume, and our profits, but it's to the community's best interest to have a healthy environment of investment, trading and speculation. We are glad to make chances that benefit every Bitcoiner in general, even at the expense of our business potential.

In the future one week, we will roll out an update that allows you to choose your favorite leverage level from 1:1, 2.5:1, 5:1 and 10:1 (subject to verification). Meanwhile, if you are not satisfied with this change, you can request an increase of leverage to 5:1 by sending an email to support@bitcoinica.com or submitting a support ticket. We will fulfill your request immediately as we see it.

Thank you for your support and understanding in this matter. Should you have any enquiries, please reply below or sending an email to us.

Bitcoinica: https://www.bitcoinica.com/

[BubbleBoy]

If this a fancy way of saying  Bitcoinica's solvency is threatened because your long clients can't cover their loses ? I can't see any reason to limit the freedom of your clients as long as you are balanced overall; it's their money to lose.

[hugolp]

If this a fancy way of saying  Bitcoinica's solvency is threatened because your long clients can't cover their loses ? I can't see any reason to limit the freedom of your clients as long as you are balanced overall; it's their money to lose.

Default leverage.

[zhoutong]

If this a fancy way of saying  Bitcoinica's solvency is threatened because your long clients can't cover their loses ? I can't see any reason to limit the freedom of the customers as long as you are balanced overall; it's their money to lose.

No, our reserves have always been in a healthy state. We can effectively handle long or short positions up to 20,000 BTC now based on our current reserve levels. However, it's frightening to see some speculators with no knowledge about margin calls and the whole thing to lose their entire account.

We are just changing the defaults for everyone. For any person with a reasonable understanding about leverage, he should be able to send an email to us to request a change. It's that simple.

We are not limiting anyone's freedom. In fact, we have the incentive to make the leverage as high as possible, so that we can make more profits. But Bitcoinica is not a bucket shop, we want to create a good environment for all kinds of trading, not just pure speculation.

This change doesn't affect the group of people who know what they are doing, and for some special clients, we are happy to give them beyond 5:1 as long as they can provide valid justifications.

Let me know if you still have any concerns.

[BubbleBoy]

Default leverage.

Apparently it's not default leverage, it's maximum leverage, and 'special' clients can increase it if they provide 'valid justifications'.

However, it's frightening to see some speculators with no knowledge about margin calls and the whole thing to lose their entire account.

Why is that frightening ? The entire account turned into profit for some other client of yours, generating fees in the process. It should be exhilarating - you are making money.
You surely understand this move reeks of unbalanced positions and a shady operation, your quoted reserves notwithstanding ?

[netrin]

I have no problem with this decision; I just don't understand it. Any prudent speculator must realize they can't take a position greater than their account balance without taking on extra risk. Maybe you could make a video explaining the four order types, and some of the variable (margin balance, leverage, etc). Perhaps with the position view you could note the current liquidation price.

Currency Pair    Amount    Base Price    P/L ($)    P/L (%)    Liquidation price *
BTCUSD    -1.0    $3.4170    $1.30    50.140%    $4.500
* With current account balance (with no further executed orders), this position would be liquidated if the price reached...

[zhoutong]

I have no problem with this decision; I just don't understand it. Any prudent speculator must realize they can't take a position greater than their account balance without taking on extra risk. Maybe you could make a video explaining the four order types, and some of the variable (margin balance, leverage, etc). Perhaps with the position view you could note the current liquidation price.

Currency Pair    Amount    Base Price    P/L ($)    P/L (%)    Liquidation price *
BTCUSD    -1.0    $3.4170    $1.30    50.140%    $4.500
* With current account balance (with no further executed orders), this position would be liquidated if the price reached...

That's a good way to warn users about the associated risk!

However, it might be too complicated because we have to consider the appreciation/depreciation of the user's BTC deposits. I'll figure out an algorithm to calculate the price accurately.

Thank you for your feedback. I will definitely try to implement such features in the near future.

[sadpandatech]

I have no problem with this decision; I just don't understand it. Any prudent speculator must realize they can't take a position greater than their account balance without taking on extra risk. Maybe you could make a video explaining the four order types, and some of the variable (margin balance, leverage, etc). Perhaps with the position view you could note the current liquidation price.

Currency Pair    Amount    Base Price    P/L ($)    P/L (%)    Liquidation price *
BTCUSD    -1.0    $3.4170    $1.30    50.140%    $4.500
* With current account balance (with no further executed orders), this position would be liquidated if the price reached...

That's a good way to warn users about the associated risk!

However, it might be too complicated because we have to consider the appreciation/depreciation of the user's BTC deposits. I'll figure out an algorithm to calculate the price accurately.

Thank you for your feedback. I will definitely try to implement such features in the near future.

  This is an excellent idea.

  And while the change may be to the dismay of some of your more seasoned traders like Bubbleboy, it is seemingly more inline with the majority of your client base, who are for the most part uninitiated with the more complex aspects of your service. That and the somewhat extreme nature of mtgox volatility make the new leveraging change a great offering to the majority. That's my unbiased opinion from the view of someone who is not at risk in either direction.

  Cheers

[zhoutong]

Default leverage.

Apparently it's not default leverage, it's maximum leverage, and 'special' clients can increase it if they provide 'valid justifications'.

However, it's frightening to see some speculators with no knowledge about margin calls and the whole thing to lose their entire account.

Why is that frightening ? The entire account turned into profit for some other client of yours, generating fees in the process. It should be exhilarating - you are making money.
You surely understand this move reeks of unbalanced positions and a shady operation, your quoted reserves notwithstanding ?

1. 5:1 leverage can be given without justification. It was our default, so you have the right to enjoy it if you register before this change.

2. To me, business should be from the heart. We haven't spent a single cent on marketing (except the $1 starting bonus and sponsorship for Bitcoins for Christmas), and we hate referral programs. Everything relies on word of mouth so far. Bitcoinica users love Bitcoinica and we're happy to know it. It's not my responsibility to maintain client relationships, but we can't simply ignore their interest by using financial jargons that they don't understand, or things like "you should have understood the risk before investing", "it's your bad trading decision" and "it's for our protection since we can't sue you viably" to end the relationships straightaway. That will be bad for our image, too.

We chose the opt-in mechanism because it works the best: it doesn't affect your freedom and it works.

You can say whatever you want about the reserves, but we hope that our past honesty and transparency can contribute to the trust that we've established with our consistent efforts. To put it simply, this decision has nothing to do with our reserves.

I can obviously make more money with higher leverage, but I will feel bad. The one thing about Bitcoinica that I'm most proud of is that it's made by a real human. It's meant to be benefiting everyone, and I'm quite disappointed that we have somehow encouraged excessive speculation. The profits don't make me happy if they come from someone who lost their money just now just because the system allows him to trade that much and he doesn't know the consequences.

I appreciate your feedback. If there's anything you can suggest to practically help the community, I will seriously consider adopting.

[ripper234]

I'd love to read a short "for dummies" explanation of how exactly leverage works in Bitcoinica.

[zhoutong]

I'd love to read a short "for dummies" explanation of how exactly leverage works in Bitcoinica.

We're considering making a series of videos to showcase Bitcoinica's various features to newbies, or "dummies".

Thank you for your feedback!

[zhoutong]

I'd love to read a short "for dummies" explanation of how exactly leverage works in Bitcoinica.

To satisfy your need immediately, here you go:

So, you want to buy Bitcoins, and you're pretty sure that it will go up. You can buy some Bitcoins, and mortgage these Bitcoins to borrow some dollars, and buy more Bitcoins, ...

When you make profits, you will basically sell them all at higher prices and you just have to return the dollars to us. All the profits belong to you!

If you want to sell Bitcoins just because you feel it will drop and you don't even have Bitcoins, you can take advantage of this movement too. You can simply mortgage your dollars, borrow some Bitcoins, sell them and turn them into dollars, and mortgage these dollars and borrow more Bitcoins to sell,...

When you make profits, you will basically buy back the Bitcoins that you've sold at lower prices, and return the Bitcoins to us. The dollars leftover will be yours!

Bitcoinica makes the whole process seamless. You can open an account, deposit either currency and start trading with 1, 2.5 or 5 times the account balance that you have. When you trade, we first try to match your orders with someone else at Bitcoinica who trades in the opposite direction, if we can't find one, we will buy or sell accordingly at Mt. Gox to maintain a balanced portfolio.

We make profits by setting different prices for buying and selling, and the difference minus Mt. Gox fees will be our profits from this process. We don't charge or give interests.

At the same time, your account balance may be borrowed by someone else for trading. So basically Bitcoinica is a pool of USD and BTC, and everyone can take advantage of the secured loans of either currency to trade.

[ripper234]

I'd love to read a short "for dummies" explanation of how exactly leverage works in Bitcoinica.

To satisfy your need immediately, here you go:

So, you want to buy Bitcoins, and you're pretty sure that it will go up. You can buy some Bitcoins, and mortgage these Bitcoins to borrow some dollars, and buy more Bitcoins, ...

When you make profits, you will basically sell them all at higher prices and you just have to return the dollars to us. All the profits belong to you!

If you want to sell Bitcoins just because you feel it will drop and you don't even have Bitcoins, you can take advantage of this movement too. You can simply mortgage your dollars, borrow some Bitcoins, sell them and turn them into dollars, and mortgage these dollars and borrow more Bitcoins to sell,...

When you make profits, you will basically buy back the Bitcoins that you've sold at lower prices, and return the Bitcoins to us. The dollars leftover will be yours!

Bitcoinica makes the whole process seamless. You can open an account, deposit either currency and start trading with 1, 2.5 or 5 times the account balance that you have. When you trade, we first try to match your orders with someone else at Bitcoinica who trades in the opposite direction, if we can't find one, we will buy or sell accordingly at Mt. Gox to maintain a balanced portfolio.

We make profits by setting different prices for buying and selling, and the difference minus Mt. Gox fees will be our profits from this process. We don't charge or give interests.

At the same time, your account balance may be borrowed by someone else for trading. So basically Bitcoinica is a pool of USD and BTC, and everyone can take advantage of the secured loans of either currency to trade.

Thanks for the info! I think a concrete example demonstrating the use case will help a lot.

Supposed I have 10 BTC and 20 USD currently a Bitcoinica, with Mt. Gox having 1 BTC = 3 USD.
I think BTC will be worth 5 USD tomorrow.
What now?

How does the amount of leverage come into play? What happens if I had only 10 BTC, 0 USD, and I used my BTC to buy USD with leverage, but then BTC fell to 1 USD?

Also, does it make sense to hedge both with and against BTC at times? (Suppose I just want to accept BTC in my business ... I don't want to speculate, I just want to be able to assume 1 BTC = 3 USD for the next month ... can I "insure" / hedge against any change of BTC/USD rate, both up and down?)

[zhoutong]

I'd love to read a short "for dummies" explanation of how exactly leverage works in Bitcoinica.

To satisfy your need immediately, here you go:

So, you want to buy Bitcoins, and you're pretty sure that it will go up. You can buy some Bitcoins, and mortgage these Bitcoins to borrow some dollars, and buy more Bitcoins, ...

When you make profits, you will basically sell them all at higher prices and you just have to return the dollars to us. All the profits belong to you!

If you want to sell Bitcoins just because you feel it will drop and you don't even have Bitcoins, you can take advantage of this movement too. You can simply mortgage your dollars, borrow some Bitcoins, sell them and turn them into dollars, and mortgage these dollars and borrow more Bitcoins to sell,...

When you make profits, you will basically buy back the Bitcoins that you've sold at lower prices, and return the Bitcoins to us. The dollars leftover will be yours!

Bitcoinica makes the whole process seamless. You can open an account, deposit either currency and start trading with 1, 2.5 or 5 times the account balance that you have. When you trade, we first try to match your orders with someone else at Bitcoinica who trades in the opposite direction, if we can't find one, we will buy or sell accordingly at Mt. Gox to maintain a balanced portfolio.

We make profits by setting different prices for buying and selling, and the difference minus Mt. Gox fees will be our profits from this process. We don't charge or give interests.

At the same time, your account balance may be borrowed by someone else for trading. So basically Bitcoinica is a pool of USD and BTC, and everyone can take advantage of the secured loans of either currency to trade.

Thanks for the info! I think a concrete example demonstrating the use case will help a lot.

Supposed I have 10 BTC and 20 USD currently a Bitcoinica, with Mt. Gox having 1 BTC = 3 USD.
I think BTC will be worth 5 USD tomorrow.
What now?

How does the amount of leverage come into play? What happens if I had only 10 BTC, 0 USD, and I used my BTC to buy USD with leverage, but then BTC fell to 1 USD?

Also, does it make sense to hedge both with and against BTC at times? (Suppose I just want to accept BTC in my business ... I don't want to speculate, I just want to be able to assume 1 BTC = 3 USD for the next month ... can I "insure" / hedge against any change of BTC/USD rate, both up and down?)

When you have 10 BTC and 20 USD, you will have 50 USD margin balance at the price of 3. With 2.5x margin, you have 125 USD to trade, so you can buy about 40 BTC. If BTC rises to $5 tomorrow, you get profits of 40 x (5-3) = $80. Then your account will have 100 USD and 10 BTC. The 10 BTC you deposited will remain unchanged, and it appreciates!

If you have BTC and want to short BTC, you must short more than what you have in order to be effective. When you make profits, your unrealized profits will come into the mortgage as well. So even if your BTC loses value, your unrealized profits of your short position can cover the depreciation. In the end, you still get the same BTC back, but you will earn USD profits.

It depends. If you want to stabilize your business, it's a nice thing to have. You can hedge even before the confirmations (and ship the good after confirmations). So you get guaranteed USD payments with minimal risk. The best thing about leverage is that you don't have to deposit you whole business into Bitcoinica. Only a part of money which is enough to cover the fluctuation will be good for hedging. Same thing applies for mining.

[Dan The Man]

It might be handy if you put an indicator on each position of at what price a margin call would occur at and what price liquidation would occur at. It makes it easier for people not crunching the numbers to analyze risk.

[zhoutong]

I was under the impression I would have 5 to 1 leverage. I keep my account well funded and was no pleased to see it at 2.5  Will you correct this issue? Thank you.

Changed your account's leverage to 5:1.

We fulfill anyone's request to increase leverage. It's just one email away.

[zhoutong]

Thank you, I will keep adding coins! 

Well, it's better to say:

Thank you, I will keep earning coins!

[Shuai]

can i ask why bitcoinica is not listed on bitcoincharts.com if it is so widely used? Is it some evil conspiracy by gox?

[zhoutong]

can i ask why bitcoinica is not listed on bitcoincharts.com if it is so widely used? Is it some evil conspiracy by gox?

1. Bitcoin Charts didn't accept Bitcoinica because we're not an exchange.

2. We're not associated with Mt. Gox in any way.

[zhoutong]

So, if I were to sell suddenly sell 1,000,000 coins on your site, this would not effect the mtgox price at all?

I could get your price down to 0 more or less and mtgox would not notice?

Just trying to understand how this works, this is not at all an attack.

If you do so, we will just hedge your positions at Mt. Gox.

The market price will definitely go down. That's why Bitcoinica is not an exchange.