Bitcoinica: How it works

[notme]

- Free to close any previous positions regardless of direction and order type (until the critical quantity, which should almost never happen).

Can you please describe what this is so I can make my own decision as to the robustness?  All positions are backed unless we go critical isn't very comforting.  How do you differ from the full setting aside of every position I have described and you continue to ignore?  I honestly would like to come back to bitcoinica as I have been profitable with it, but first I need my concerns addressed.

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[zhoutong]

- Free to close any previous positions regardless of direction and order type (until the critical quantity, which should almost never happen).

Can you please describe what this is so I can make my own decision as to the robustness?  All positions are backed unless we go critical isn't very comforting.  How do you differ from the full setting aside of every position I have described and you continue to ignore?  I honestly would like to come back to bitcoinica as I have been profitable with it, but first I need my concerns addressed.

Well, you can completely ignore this at the moment. We are confident enough to eat all the risk beyond this point.

We set our reserves based on all open positions, but they are not backed. So we basically hook up with our hedging system to efficiently manage all positions. Just like the guaranteed liquidity stuff - we take neutral risk.

[notme]

- Free to close any previous positions regardless of direction and order type (until the critical quantity, which should almost never happen).

Can you please describe what this is so I can make my own decision as to the robustness?  All positions are backed unless we go critical isn't very comforting.  How do you differ from the full setting aside of every position I have described and you continue to ignore?  I honestly would like to come back to bitcoinica as I have been profitable with it, but first I need my concerns addressed.

Well, you can completely ignore this at the moment. We are confident enough to eat all the risk beyond this point.

We set our reserves based on all open positions, but they are not backed. So we basically hook up with our hedging system to efficiently manage all positions. Just like the guaranteed liquidity stuff - we take neutral risk.

So positions are not fully backed by funds, but that's okay because they are backed by your word?  Seriously though, saying I can pretend they are backed because you think it's unlikely does not answer my concern.  You didn't see a problem with the way it was before, why should I trust you now? <- rhetorical.  In what situation would closing a position be restricted?

[Mushoz]

- Free to close any previous positions regardless of direction and order type (until the critical quantity, which should almost never happen).

Can you please describe what this is so I can make my own decision as to the robustness?  All positions are backed unless we go critical isn't very comforting.  How do you differ from the full setting aside of every position I have described and you continue to ignore?  I honestly would like to come back to bitcoinica as I have been profitable with it, but first I need my concerns addressed.

Well, you can completely ignore this at the moment. We are confident enough to eat all the risk beyond this point.

We set our reserves based on all open positions, but they are not backed. So we basically hook up with our hedging system to efficiently manage all positions. Just like the guaranteed liquidity stuff - we take neutral risk.

So positions are not fully backed by funds, but that's okay because they are backed by your word?  Seriously though, saying I can pretend they are backed because you think it's unlikely does not answer my concern.  You didn't see a problem with the way it was before, why should I trust you now? <- rhetorical.  In what situation would closing a position be restricted?

Let's use the situation that happened previously as an example. Because too many people went long, their USD was depleted, so people weren't able to liquidate their shorts. People that were negatively affected have been repaid out of Bitcoinica's pocket as far as I understand Zhoutong. The thing that changed, is that Bitcoinica will prevent people going long before they run out of USD in the future. This will ensure there is enough USD left for people to liquidate their shorts. There is a _very_ slim chance too many people liquidate their shorts all at once, causing the USD reserved for liquidating to be depleted as well. In the very small chance that this happens, Zhoutong just said they will eat the losses, so in that sense those losses are fully backed by Bitcoinica's funds.

Remember, for this to happen, lots of people will have to liquidate their shorts, and because of that, not many people will be left with open short positions, so the losses for the few people that are affected who still have open shorts, will be trivial for Bitcoinica to repay. Whether or not Bitcoinica has enough funds to cover those losses is anyone's guess, so we'll have to take their word on this matter. The only way to prove they do, would be a full 3rd party audit, but AFAIK Mtgox hasn't had one either, so if you think that is a risk too severe to take, you shouldn't be using Mtgox either. (Please correct me if I'm wrong, I'm not 100% sure Mtgox hasn't had a 3rd party audit.)

[notme]

Thanks for not adding anything to my understanding... Only Zhoutong can tell me what I want to know. Essentially it boils down to what percentage of positions are able to liquidate?  Is this percentage constant, or does it vary?  If it varies, how is it calculated?

[netrin]

(Please correct me if I'm wrong, I'm not 100% sure Mtgox hasn't had a 3rd party audit.)

As I remember, Mt. Gox' auditor indirectly published the names, email addresses, and hashed passwords of all of Mt. Gox' customer base.

[notme]

(Please correct me if I'm wrong, I'm not 100% sure Mtgox hasn't had a 3rd party audit.)

As I remember, Mt. Gox' auditor indirectly published the names, email addresses, and hashed passwords of all of Mt. Gox' customer base.

To be clear, I trust what Zhoutong says in regards to Bitcoinica, just not that he is smart enough to foresee all possible problems.  Zhoutong, please answer my question regarding what portion of positions are covered.

[zhoutong]

Thanks for not adding anything to my understanding... Only Zhoutong can tell me what I want to know. Essentially it boils down to what percentage of positions are able to liquidate?  Is this percentage constant, or does it vary?  If it varies, how is it calculated?

It's a constant percentage of open positions in a certain direction with an absolute minimum threshold. There are variations such as withdrawals and currency conversions, but I have tested the feature against past data to ensure effectiveness.

The risk is actually very minimal, but we won't publish the exact numbers in order to prevent abuse.

[cypherdoc]

We have virtually no risk.

The market doesn't slip every 5 seconds. And during most of the violent moves previously, we received no or only a few orders. The high volume was always generated after the violent moves.

Now thankfully, Zhoutong, you seem to have the risks of slippage covered as explained above this quote, but your reasoning in this quote is flawed. Never _ever_ think something is not going to happen because it hasn't happened before. Always expect the worst and then some. This applies to anything, not just slippage risks. If you haven't made simulations in which there was heavy trading _during_ price movements, you should!

Even though I don't have any practical experience to prove this (because it never happened before), I do have theoretical consideration.

The main problem of any system with guaranteed liquidity is adverse selection. We are exposed to the systematic risk of customers trading only when they have opportunities to take advantage of price differences.

A similar example is exchange quotation. TradeHill gives users 5 seconds to confirm a Instant trade quotation. But since there's no cost to get a quotation, theoretically there's one possibility: a user gets a quote every 5 seconds, and confirm only when there's huge slippage.

What I have done here is to delay all order execution by 1-4 seconds. This makes sure that when you click Buy/Sell button exactly during the slippage, the actual execution will happen after the major price move.

And this is still considered as "guaranteed liquidity" because we update prices globally, not just for individual pending orders.

Mushoz:  can u translate this?

It means he is protecting himself against slippage due to random moves by using spreads, but the biggest risk is people trying to exploit slippage. Let's say the price is at 4$ on Mtgox and suddenly a spikes causes it to go down to 3.60. Someone wanting to exploit slippage could quickly sell at Bitcoinica, where the prices wouldn't have been updated yet. That's what the 1-4 second order execution delay is for. It allows the price on Bitcoinica to catch up to the market price, so that people aren't able to exploit slippage.

the corollary way to look at this is that it punishes the majority of ethical users who sometimes need to use market orders to get out of a bad situation fast. example:

ethical user sees ask displayed @ $4.70.  he's already lost significant money from a short executed @ $4.30.  the market continues to grind higher like its doing now.  he's terrified of a continued climb and wants to cover now but he's even more terrified to place a market order buy to cover b/c of the 4 sec delay rule which may subject him to a vicious spike.  he shouldn't have to continuously place limit orders at the ask which could fail to execute multiple times as the Bitcoinica ask price changes to catch up to gox leaving the customer behind.

is the 4 sec delay implemented more to protect Bitcoinica from slippage exploits at the expense of the avg ethical user who should be able to use market orders when he feels necessary?

edit:  in regards to limit orders:  correct me if i've made a mistake here.  i may be misunderstanding something.  Mushoz in his example above states the 4 sec rule "allows Bitcoinica to catch up to the market price" in the event of a spike thus preventing exploits.  to me this means that a limit order @ the ask may not be executed 4 sec after i push the button if the ask on Bitcoinica is forced to update to a higher price.

OTOH, Zhou has said they guarantee liquidity up to 50 BTC but with the 4 sec delay which implies that a limit order should be executed @ the original displayed ask after 4 sec no matter if there is a spike and a change in the ask as Bitcoinica catches up to gox.

this appears to be an inconsistency.

[notme]

Thanks for not adding anything to my understanding... Only Zhoutong can tell me what I want to know. Essentially it boils down to what percentage of positions are able to liquidate?  Is this percentage constant, or does it vary?  If it varies, how is it calculated?

It's a constant percentage of open positions in a certain direction with an absolute minimum threshold. There are variations such as withdrawals and currency conversions, but I have tested the feature against past data to ensure effectiveness.

The risk is actually very minimal, but we won't publish the exact numbers in order to prevent abuse.

Thank you for you answer Zhoutong.

[cypherdoc]

Amateur Hour Revisited:

since i'm not getting any answers to my last question, let me ask some more, or better yet, let me issue some warnings.

Update on the OP's suggestion

Now whenever Bitcoinica is out of reserves (either USD or BTC), everyone can expect:

- Free to close any previous positions regardless of direction and order type (until the critical quantity, which should almost never happen).

its already happened twice in how many days?  this is the effect of allowing too much leverage with inadequate reserves.

- Not able to establish new positions (or increase existing positions) in certain direction until the reserve has been re-established (by others' deposit, or opposite trading).
- The price will show like *4.70594 (with the asterisk) to indicate trading restrictions.

have you ever heard of painting a Big Red Bullseye on one's own forehead?  when "someone" sees this little "*", that someone is gonna jam the market higher with a spike and "execute" all the shorts.  even if they have a stop loss order in place, in a thin market such as this, they might not get that exact price in a vicious spike and you'll be back to issuing alot of refunds trying to revive the zombies or just let them die at their own expense.  and then i'm confident new updates will be uploaded with yet another pause in trading capabilities.

- All pending orders are shown as "No reserve" and they will be "Active" again once the reserve has been re-established.

"Please Shoot Me"

It's highly recommended to place limit orders when trading restrictions are imposed, so that there won't be surprise execution prices after the removal of restrictions.

again, ethical customers should have the freedom to issue market orders w/o a 4 sec delay w/o the fear of being terrorized by a spike which is the result of that 4 sec rule (which is equivalent to an eternity).

also, i would like an answer to my previous question about Guaranteed Liquidity vs. Mushoz's explanation in regards to limit orders.

Now you can safely place stop loss orders because any trade restrictions will have no effect on these orders!

Safely?  

a stop loss order would effectively be a limit order. lets take the example of a Big Red Bullseye event and a short seller.  in a vicious spike, what happens if there are no specific asks at the stop loss "buy to cover" price as the price shoots up and the bots withdrawal their asks scrambling to get out of the way?

edit:  these same bots or providers of liquidity (sellers that would allow a short to cover) will see that same "*" and start withdrawing their asks, mark my words.

[cypherdoc]

Thanks for not adding anything to my understanding... Only Zhoutong can tell me what I want to know. Essentially it boils down to what percentage of positions are able to liquidate?  Is this percentage constant, or does it vary?  If it varies, how is it calculated?

It's a constant percentage of open positions in a certain direction with an absolute minimum threshold. There are variations such as withdrawals and currency conversions, but I have tested the feature against past data to ensure effectiveness.

The risk is actually very minimal, but we won't publish the exact numbers in order to prevent abuse.

Thank you for you answer Zhoutong.

you're happy with that answer?

[notme]

Thanks for not adding anything to my understanding... Only Zhoutong can tell me what I want to know. Essentially it boils down to what percentage of positions are able to liquidate?  Is this percentage constant, or does it vary?  If it varies, how is it calculated?

It's a constant percentage of open positions in a certain direction with an absolute minimum threshold. There are variations such as withdrawals and currency conversions, but I have tested the feature against past data to ensure effectiveness.

The risk is actually very minimal, but we won't publish the exact numbers in order to prevent abuse.

Thank you for you answer Zhoutong.

you're happy with that answer?

No, but I'm glad for a straight answer after her ignored my other posts.  I would prefer to see a fully backed Bitcoinica.

[cypherdoc]

do we have another Bullseye event?

[cypherdoc]

what the heck is this?

https://bitcointalk.org/index.php?topic=56273.msg669744#msg669744

[ineededausername]

what the heck is this?

https://bitcointalk.org/index.php?topic=56273.msg669744#msg669744

Oh dear, what if bitcoinica is insolvent?

I don't think they are. 

[sat0pi]

Oh dear, what if bitcoinica is insolvent?

I don't think they are. 

To be clear, I don't think they are either. It was most likely either a browser anomaly or a momentary problem with the server. I just found it odd.

[cypherdoc]

what happens if i as a new customer of Bitcoinica deposit $50K right now?  does it just sit there until i decide to do something with those USD's or will they be siphoned off to allow shorts to cover or other longs to buy?

[ineededausername]

what happens if i as a new customer of Bitcoinica deposit $50K right now?  does it just sit there until i decide to do something with those USD's or will they be siphoned off to allow shorts to cover or other longs to buy?

I think they will be siphoned off.

[cypherdoc]

what happens if i as a new customer of Bitcoinica deposit $50K right now?  does it just sit there until i decide to do something with those USD's or will they be siphoned off to allow shorts to cover or other longs to buy?

I think they will be siphoned off.

you better hope not b/c that would be a total ass rape for customers.  not being able to buy in a Bullseye situation with your own money?

why do you tolerate this?  you're losing money by not being allowed to participate in an uptrend.  thats just as bad as the shorts not being able to cover.  you need to be able to make those gains now so as to cushion the downswings which will inevitably come.