Bitcoinica: How it works

[cypherdoc]

i'm glad you turned off  the ignore button.  now would you please answer my legitimate questions?

I think he's figured out you won't be happy with any answer to any question.   

If you would read carefully, you'd notice that not only are these legitimate questions, they're unemotional which you should value highly.  You're not contributing anything here except a judgment.

[1714157770]

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[BadBear]

i'm glad you turned off  the ignore button.  now would you please answer my legitimate questions?

I think he's figured out you won't be happy with any answer to any question.   

If you would read carefully, you'd notice that not only are these legitimate questions, they're unemotional which you should value highly.  You're not contributing anything here except a judgment.

You're right, and I do. I'll admit I'm just skimming your posts in the bitcoinica threads lately, assumed it was the same old.  A bear can turn bull, and cypherdoc can turn...rational?  What kinda crazy world is this?   

[Serge]

You're right, and I do. I'll admit I'm just skimming your posts in the bitcoinica threads lately, assumed it was the same old.  A bear can turn bull, and cypherdoc can turn...rational?  What kinda crazy world is this?  

the kind of world where we have rational bulls and crazy bears, no pun intended )

[cypherdoc]

i'm glad you turned off  the ignore button.  now would you please answer my legitimate questions?

I think he's figured out you won't be happy with any answer to any question.  

If you would read carefully, you'd notice that not only are these legitimate questions, they're unemotional which you should value highly.  You're not contributing anything here except a judgment.

You're right, and I do. I'll admit I'm just skimming your posts in the bitcoinica threads lately, assumed it was the same old.  A bear can turn bull, and cypherdoc can turn...rational?  What kinda crazy world is this?  

nah, they're actually very good questions which will have a big impact on a customers risk profile.  i keep poking holes in the model which leads to an update (acknowledgment of problem) which then leads to another contradiction and another update.

for example:  Zhou now guarantees liquidity for shorts even in a Bullseye situation which was forced by several customer complaints including my own.  that means he needs to dig into Bitcoinicas own pocket and trade against his customers to fulfill that obligation.  that leads to a conflict of interest.  so solving one problem the way he is, is leading to another problem.

another hole which i single handedly exploited was that spike i caused from 3.5 to 3.9 that i talk about here:  

https://bitcointalk.org/index.php?topic=55970.msg667447#msg667447

for verification of my claim i come onto this thread within minutes of execution and ask "How many":
https://bitcointalk.org/index.php?topic=49445.msg655781#msg655781

henceforth the never ending stream of questions...

as a moderator of the busiest Discussion Forum i really don't think you should be rendering judgments on ppls character when you admit you just "skim" like you just did here and here:

https://bitcointalk.org/index.php?topic=49445.msg661906#msg661906

these are complex questions which require alot of thought and gaming.  to just brush them off as FUD and assume the worst isn't right.

[cypherdoc]

I would be surprised if anybody who actually understood Bitcoinica would use them.

The basic problem is that he doesn't have the capital to hedge a significantly imbalanced customer position, at which time Bitcoinica becomes a bucket shop where he is your counter party... add a large move to that and he goes bankrupt (and you with him).

A significantly imbalanced unhedged position can be entered directly: by people opening too many new positions, or indirectly: by people closing existing positions, or by people withdrawing funds.  That this doesn't happen and wipe you out is left entirely to chance.

Here's my proposition zhoutong: for a 10,000 BTC consulting fee, I will tell you the solution to this that will reduce the chance of Bitcoinica's collapse to 0.  (Payable in advance... and that's at a discount because it makes me smile that a 17 y/o is parting these fools of their money.)

They hedge every imbalance. If they don't have enough funds to hedge more, they stop accepting new positions that would cause a further imbalance (The asterisk already discussed in this thread). Bitcoinica does _not_ bet against its customers. If your consulting is as good as your thread reading skills, that would be the ripoff of the century :p

how can u say that when Zhou's already made clear that he doesn't hedge every position and that his algo makes judgment calls in this regard?  he's already given the definition of reserves and that is 100% of customer deposits and 50% of his profits (aka his own pocket).

and now that they're guaranteeing liquidity for the shorts in a red flag situation where do u think those funds are coming from?  him. 

which means they will be trading against their customers.

whose reading skills are in question?

[Dan The Man]

I tried making a trailing stop order for the first time and I was not impressed. When the price was around $5.2, I set a trailing stop buy order at $5.5 and promptly it was filled at a market price for $5.25. This of course was immediately before the price fell to 4.7

[zhoutong]

I would be surprised if anybody who actually understood Bitcoinica would use them.

The basic problem is that he doesn't have the capital to hedge a significantly imbalanced customer position, at which time Bitcoinica becomes a bucket shop where he is your counter party... add a large move to that and he goes bankrupt (and you with him).

A significantly imbalanced unhedged position can be entered directly: by people opening too many new positions, or indirectly: by people closing existing positions, or by people withdrawing funds.  That this doesn't happen and wipe you out is left entirely to chance.

Here's my proposition zhoutong: for a 10,000 BTC consulting fee, I will tell you the solution to this that will reduce the chance of Bitcoinica's collapse to 0.  (Payable in advance... and that's at a discount because it makes me smile that a 17 y/o is parting these fools of their money.)

They hedge every imbalance. If they don't have enough funds to hedge more, they stop accepting new positions that would cause a further imbalance (The asterisk already discussed in this thread). Bitcoinica does _not_ bet against its customers. If your consulting is as good as your thread reading skills, that would be the ripoff of the century :p

how can u say that when Zhou's already made clear that he doesn't hedge every position and that his algo makes judgment calls in this regard?  he's already given the definition of reserves and that is 100% of customer deposits and 50% of his profits (aka his own pocket).

and now that they're guaranteeing liquidity for the shorts in a red flag situation where do u think those funds are coming from?  him. 

which means they will be trading against their customers.

whose reading skills are in question?

Your reading skill.

We don't hedge every single order, but we always track total positions accurately. We match orders internally and hedge when the positions are imbalanced.

Also, we reserve a percentage of open positions for them to close. So we won't be at exactly 0 USD or ฿ when you see the *. We have more, but only for people with open positions.

I didn't answe your questions because they all have been addressed previously. And I can't propose any changes based on your posts, never.

The spike doesn't matter. Just 10 seconds out of 86400 seconds in the day with no threat of adverse selection. I don't really have to care.

[zhoutong]

I tried making a trailing stop order for the first time and I was not impressed. When the price was around $5.2, I set a trailing stop buy order at $5.5 and promptly it was filled at a market price for $5.25. This of course was immediately before the price fell to 4.7

This was a known issue. Trailing stops are extremely tricky to deal with and I'm rewriting the code.

[Mushoz]

2. We don't bet against our clients. We never want them to lose. There's no incentive to do that.

Why would you trade on a platform where you bet against the platform owner?

We're market maker, yes.

But we don't bet against our customers.

Why should we take the risk when we can comfortably earn the spreads and hedge the customers' orders elsewhere?

[cypherdoc]

2. We don't bet against our clients. We never want them to lose. There's no incentive to do that.

Why would you trade on a platform where you bet against the platform owner?

We're market maker, yes.

But we don't bet against our customers.

Why should we take the risk when we can comfortably earn the spreads and hedge the customers' orders elsewhere?

out of curiosity, do u have a financial relationship with Bitcoinica?

[cypherdoc]

I tried making a trailing stop order for the first time and I was not impressed. When the price was around $5.2, I set a trailing stop buy order at $5.5 and promptly it was filled at a market price for $5.25. This of course was immediately before the price fell to 4.7

This was a known issue. Trailing stops are extremely tricky to deal with and I'm rewriting the code.

but you already said they were safe 

https://bitcointalk.org/index.php?topic=55970.msg669617#msg669617

[BadBear]

My role there is keeping the forum usable and readable without interfering with peoples right to express themselves. That's why you can post things like

you know what?  i'm tired of being nice to you just b/c you're a 17 yo kid.  f*ck you prick!

And that's also the same reason I can say that, you're kind of a dick sometimes (that's all I'm gonna say on that). Free speech thing's gotta work both ways. Honestly you and I agree on a lot of things, you've brought up some good points in this thread. I wouldn't mind seeing those answers either, at least to get any issues resolved. If there is going to be short/long selling allowed order should be allowed to be placed at any time or they could adversely affect the exchange price if it doesn't work well. Things like not allowing shorts to liquidate when they want can cause spikes and cause even more liquidations or give false market data. Or even wipe out some dudes 401k. You're a smart guy, you can figure out how to present an argument better than that.

Besides it's the speculation forum, if they started enforcing rules everybody would be banned, including me and you  . Should take this into Meta discussion, it's off topic, if you really want to discuss it further.  I'm not even a moderator here, not that it matters, has nothing to do with my personal opinion.

 

[cypherdoc]

My role there is keeping the forum usable and readable without interfering with peoples right to express themselves. That's why you can post things like

you know what?  i'm tired of being nice to you just b/c you're a 17 yo kid.  f*ck you prick!

And that's also the same reason I can say that, you're kind of a dick sometimes (that's all I'm gonna say on that).

asking questions ppl don't want to answer is tough but someone has to do it.  this is the free market.  ppl like you wonder why i'm all over this.  its b/c i see problems that relate to money and if i can exploit them, i will.  i've said several times that i trade markets daily.  right now, i have 3 diff stock trading programs open with level 2 access.  the trading restrictions and problems i've witnessed on Bitcoinica does give me a hard on (panerai?) b/c they represent opportunities unheard of in regular markets.  and as i've warned other large players will enter with bad intentions.  the updates that continually get written are asymmetric and are meant to protect Zhou, not the customer.  not everything just some, like the 4 sec delay rule.  but if customers don't care, hey, so be it.

Dan the Man just verified my warnings above about stop loss orders.

Free speech thing's gotta work both ways. Honestly you and I agree on a lot of things, you've brought up some good points in this thread. I wouldn't mind seeing those answers either, at least to get any issues resolved. If there is going to be short/long selling allowed order should be allowed to be placed at any time or they could adversely affect the exchange price if it doesn't work well. Things like not allowing shorts to liquidate when they want can cause spikes and cause even more liquidations or give false market data. Or even wipe out some dudes 401k. You're a smart guy, you can figure out how to present an argument better than that.

and you presented that quote out of context.

Besides it's the speculation forum, if they started enforcing rules everybody would be banned, including me and you  . Should take this into Meta discussion, it's off topic, if you really want to discuss it further.  I'm not even a moderator here, not that it matters, has nothing to do with my personal opinion.

tell u what.  u and i should call a truce.  i'll try to stop being a dick if u will too.  lotsa this is in the eyes of the beholder.

but i still have questions for Zhou which i've never heard him answer. and if he has, i apologize; i can't find them and i still want the answers.  isn't this the "How it Works" thread?:

3. if i as a new customer deposits $50K and doesn't open a position, will those USD's get added to the shared pool and get lent out to longs to buy or shorts to cover?  as a result, is it possible for a new customer to be prevented from opening a position at all in the case of a Bullseye event?

4. i'm still not clear on a buyer who hits a displayed ask @$4.  is he guaranteed to get that price but just after 4 sec or can you refuse to honor it if we get a spike on mtgox?

[Mushoz]

My role there is keeping the forum usable and readable without interfering with peoples right to express themselves. That's why you can post things like

you know what?  i'm tired of being nice to you just b/c you're a 17 yo kid.  f*ck you prick!

And that's also the same reason I can say that, you're kind of a dick sometimes (that's all I'm gonna say on that).

asking questions ppl don't want to answer is tough but someone has to do it.  this is the free market.  ppl like you wonder why i'm all over this.  its b/c i see problems that relate to money and if i can exploit them, i will.  i've said several times that i trade markets daily.  right now, i have 3 diff stock trading programs open with level 2 access.  the trading restrictions and problems i've witnessed on Bitcoinica does give me a hard on (panerai?) b/c they represent opportunities unheard of in regular markets.  and as i've warned other large players will enter with bad intentions.  the updates that continually get written are asymmetric and are meant to protect Zhou, not the customer.  not everything just some, like the 4 sec delay rule.  but if customers don't care, hey, so be it.

Dan the Man just verified my warnings above about stop loss orders.

Free speech thing's gotta work both ways. Honestly you and I agree on a lot of things, you've brought up some good points in this thread. I wouldn't mind seeing those answers either, at least to get any issues resolved. If there is going to be short/long selling allowed order should be allowed to be placed at any time or they could adversely affect the exchange price if it doesn't work well. Things like not allowing shorts to liquidate when they want can cause spikes and cause even more liquidations or give false market data. Or even wipe out some dudes 401k. You're a smart guy, you can figure out how to present an argument better than that.

and you presented that quote out of context.

Besides it's the speculation forum, if they started enforcing rules everybody would be banned, including me and you  . Should take this into Meta discussion, it's off topic, if you really want to discuss it further.  I'm not even a moderator here, not that it matters, has nothing to do with my personal opinion.

tell u what.  u and i should call a truce.  i'll try to stop being a dick if u will too.  lotsa this is in the eyes of the beholder.

but i still have questions for Zhou which i've never heard him answer. and if he has, i apologize; i can't find them and i still want the answers.  isn't this the "How it Works" thread?:

3. if i as a new customer deposits $50K and doesn't open a position, will those USD's get added to the shared pool and get lent out to longs to buy or shorts to cover?  as a result, is it possible for a new customer to be prevented from opening a position at all in the case of a Bullseye event?

4. i'm still not clear on a buyer who hits a displayed ask @$4.  is he guaranteed to get that price but just after 4 sec or can you refuse to honor it if we get a spike on mtgox?

3. It's probably pooled. This allows people that deposit USD to sell BTC or people who deposit BTC to buy more BTC. It wouldn't make sense for Bitcoinica to use their own funds for every hedge, because that would require insane reserves. If you don't like it, don't use Bitcoinica. Nobody is forcing you. And remember this pooling is always only temporary. Your funds are never "gone" or anything like that.

4. Not sure, you'll have to ask Zhoutong. Still, as I've said again and again, there's no reason to use market orders when you go do the same with limit orders and more. Imaging wanting to click when it's at 4$ and you're too slow to notice a spike, and you click at whatever other price is displays instead.

[cypherdoc]

3. It's probably pooled. This allows people that deposit USD to sell BTC or people who deposit BTC to buy more BTC. It wouldn't make sense for Bitcoinica to use their own funds for every hedge, because that would require insane reserves.

so someone who deposits $50K, doesn't establish a position, gets that $50K added to the pool, might in fact not be able to establish a position in a red flag event.  is this fair?

If you don't like it, don't use Bitcoinica. Nobody is forcing you. And remember this pooling is always only temporary. Your funds are never "gone" or anything like that.

why does everyone say this when asked questions?

4. Not sure, you'll have to ask Zhoutong. Still, as I've said again and again, there's no reason to use market orders when you go do the same with limit orders and more. Imaging wanting to click when it's at 4$ and you're too slow to notice a spike, and you click at whatever other price is displays instead.

but a market and limit order are not the same thing.  they serve different useful functions.  sure a limit order is safer.  but if the displayed ask @$4 keep moving up after you've clicked the button, it sounds like it won't fill and you could be stuck chasing it.  a market order, will sweep up and thru any asks that are listed until its filled.  when i trade stocks, the execution is instantaneous (relatively) so i'm not too exposed to a spike.  but a 4 sec delay could spell death to your acct as we saw on the spike to 4.95.

you didn't answer my question about whether you had a financial link to Bitcoinica.

[trogdorjw73]

3. It's probably pooled. This allows people that deposit USD to sell BTC or people who deposit BTC to buy more BTC. It wouldn't make sense for Bitcoinica to use their own funds for every hedge, because that would require insane reserves.

so someone who deposits $50K, doesn't establish a position, gets that $50K added to the pool, might in fact not be able to establish a position in a red flag event.  is this fair?

If you don't like it, don't use Bitcoinica. Nobody is forcing you. And remember this pooling is always only temporary. Your funds are never "gone" or anything like that.

why does everyone say this when asked questions?

4. Not sure, you'll have to ask Zhoutong. Still, as I've said again and again, there's no reason to use market orders when you go do the same with limit orders and more. Imaging wanting to click when it's at 4$ and you're too slow to notice a spike, and you click at whatever other price is displays instead.

but a market and limit order are not the same thing.  they serve different useful functions.  sure a limit order is safer.  but if the displayed ask @$4 keep moving up after you've clicked the button, it sounds like it won't fill and you could be stuck chasing it.  a market order, will sweep up and thru any asks that are listed until its filled.  when i trade stocks, the execution is instantaneous (relatively) so i'm not too exposed to a spike.  but a 4 sec delay could spell death to your acct as we saw on the spike to 4.95.

you didn't answer my question about whether you had a financial link to Bitcoinica.

For #3, everything put into Bitcoinica would be part of the pool I'd imagine. If everyone puts in USD and takes a long position, then very quickly Bitcoinica would have to start buying BTC in order to cover those. Likewise, if everyone put in BTC and took a short position, Bitcoinica would have to start selling BTC in order to have enough reserve. Over time, of course, Bitcoinica has been increasing their holding of both USD and BTC because they get their 1-5% margin wherever the market goes. They've also likely lost at least a portion of that to accounts that got force liquidated at a price that left them negative. Still, I'm sure they're way ahead overall. Realistically, if Bitcoinica has something like $100K USD long and $100K USD short (probably more like $500K or even $1000K each), both sides can't be right and so when the market moves one way or the other, one side loses, the other side wins, and Bitcoinica always wins.

For #4, if you put in a market order buy at $5 a fraction of a second before or after someone on MtGox sends through a $10K buy order that moves the price up $1, yes, you'd get dinged for that extra $1 (and perhaps more as the sudden spike would likewise cause a sudden jump in leverage "just in case"). There is no such thing as "instantaneous" transactions, but of course at MtGox if you put in a sell for $5 right about the same time someone else puts in a huge sell order at $4.999, at least your sell won't ever execute. When you're trading market orders, you're always running a risk that someone, somewhere is putting in a huge sell/buy right before you -- whether it's delayed four seconds or not. In fact, if you go to MtGox and put in a sell order at $4 right now, and watch MtGoxLive, you'll see that it doesn't execute immediately, and in heavy traffic there could be many seconds of delay (though your order is at least put in the queue somewhere). Best-case, though, "instant" on the Internet still has to account for round trip time of the network traffic ("ping"), which would likely be at least half a second for your order to go to MtGox, process, and send the update out over the network API. The only place that could really execute an "instant" trade would be MtGox itself, and they would need to do something like this: pause all other trades, execute our trade at the current prices, and then resume all other trades. Then they would know for sure exactly what the price will be. All of that is more or less happening in real-time, except that they just take the top order from the queue and execute it (or if it's not an order that will actually commit right now, they put it on the order books).

[notme]

+1

Zhoutong?

[sgbett]

Any downward spike will be even worse for all the people who's margin balance is leveraged up from BTC Currency.

As BTC price drops the 'margin balance' also drops forcing quicker liquidations for anyone who was leveraged up.

I still have a few hundred bucks parked over there for a speculative leveraged up buy at knockdown prices but I don't fancy risking much more than that for now.

[Mushoz]

you didn't answer my question about whether you had a financial link to Bitcoinica.

I don't. I do use it myself though. I love leverage

[Mushoz]

3. It's probably pooled. This allows people that deposit USD to sell BTC or people who deposit BTC to buy more BTC. It wouldn't make sense for Bitcoinica to use their own funds for every hedge, because that would require insane reserves.

so someone who deposits $50K, doesn't establish a position, gets that $50K added to the pool, might in fact not be able to establish a position in a red flag event.  is this fair?

If you don't like it, don't use Bitcoinica. Nobody is forcing you. And remember this pooling is always only temporary. Your funds are never "gone" or anything like that.

why does everyone say this when asked questions?

4. Not sure, you'll have to ask Zhoutong. Still, as I've said again and again, there's no reason to use market orders when you go do the same with limit orders and more. Imaging wanting to click when it's at 4$ and you're too slow to notice a spike, and you click at whatever other price is displays instead.

but a market and limit order are not the same thing.  they serve different useful functions.  sure a limit order is safer.  but if the displayed ask @$4 keep moving up after you've clicked the button, it sounds like it won't fill and you could be stuck chasing it.  a market order, will sweep up and thru any asks that are listed until its filled.  when i trade stocks, the execution is instantaneous (relatively) so i'm not too exposed to a spike.  but a 4 sec delay could spell death to your acct as we saw on the spike to 4.95.

you didn't answer my question about whether you had a financial link to Bitcoinica.

For #3, everything put into Bitcoinica would be part of the pool I'd imagine. If everyone puts in USD and takes a long position, then very quickly Bitcoinica would have to start buying BTC in order to cover those. Likewise, if everyone put in BTC and took a short position, Bitcoinica would have to start selling BTC in order to have enough reserve. Over time, of course, Bitcoinica has been increasing their holding of both USD and BTC because they get their 1-5% margin wherever the market goes. They've also likely lost at least a portion of that to accounts that got force liquidated at a price that left them negative. Still, I'm sure they're way ahead overall. Realistically, if Bitcoinica has something like $100K USD long and $100K USD short (probably more like $500K or even $1000K each), both sides can't be right and so when the market moves one way or the other, one side loses, the other side wins, and Bitcoinica always wins.

For #4, if you put in a market order buy at $5 a fraction of a second before or after someone on MtGox sends through a $10K buy order that moves the price up $1, yes, you'd get dinged for that extra $1 (and perhaps more as the sudden spike would likewise cause a sudden jump in leverage "just in case"). There is no such thing as "instantaneous" transactions, but of course at MtGox if you put in a sell for $5 right about the same time someone else puts in a huge sell order at $4.999, at least your sell won't ever execute. When you're trading market orders, you're always running a risk that someone, somewhere is putting in a huge sell/buy right before you -- whether it's delayed four seconds or not. In fact, if you go to MtGox and put in a sell order at $4 right now, and watch MtGoxLive, you'll see that it doesn't execute immediately, and in heavy traffic there could be many seconds of delay (though your order is at least put in the queue somewhere). Best-case, though, "instant" on the Internet still has to account for round trip time of the network traffic ("ping"), which would likely be at least half a second for your order to go to MtGox, process, and send the update out over the network API. The only place that could really execute an "instant" trade would be MtGox itself, and they would need to do something like this: pause all other trades, execute our trade at the current prices, and then resume all other trades. Then they would know for sure exactly what the price will be. All of that is more or less happening in real-time, except that they just take the top order from the queue and execute it (or if it's not an order that will actually commit right now, they put it on the order books).

Couldn't have said it better. Please read this! Exactly the way I see it!