Bitcoinica: How it works

[cypherdoc]

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.

i agree with this.  this is what i was referring to as a derivative tower so to speak.

USD's are the base currency, BTC is the speculative asset, and now you add leverage with more BTC on top of this.  the leverage contraction would be enormous in a downdraft.

[1714042653]

1714042653

[RaggedMonk]

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

Cypher: Every time you ask a question, someone answers it, then you ask new questions and make many more posts saying nobody is answering you.  Can you write out your unanswered questions clearly and grammatically, and stop whining about being ignored, so we can actually find your questions and respond to them? 

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 answered well, but here is my take)

3. Probably.  The 50K should be lent to other customers once deposited.  If the entire system is skewed long, for example, that user would not be able to buy until it rebalances.

4. What does this mean?  That is barely English.

What do you mean by "hits"? (Sees?)

What is a displayed ask?  Do you mean the current market buy price (seen in the "Instant Execution" tab)?

If you want to lock in a price, you should use a limit order, not market.  If you want to place a market order, you should not be upset if the price moves a bit.  The purpose of a market order is to be fast, not precisely priced. 

[RaggedMonk]

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.)

You can prevent that degree of imbalance by stopping people from opening new postions (which your customers will consider acceptable), however people closing positions and/or withdrawing funds can also bring about 'critical imbalance' - i.e. a position you can not hedge, where you will have to either prevent people from closing positions and withdrawing funds (which they will react very badly to) or _become_ a bucket shop (you were trying out the former, now it looks like you will try out the latter).

My prediction for the end of Bitcoinica: the latest volitility that broke Bitcoinica was a rise which tends to be slower moving than crashes, at some point in the future we're going to get a crushing panic selloff (maybe when the US gov tries to shutdown bitcoin), then Bitcoinica will go under.

What an asshole. Trying to charge zhou to explain features that are already implemented.  Bitcoinica didn't break, it did what you appear to be suggesting.  Go back to the newbie forums, troll.

[cypherdoc]

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

Cypher: Every time you ask a question, someone answers it, then you ask new questions and make many more posts saying nobody is answering you.  Can you write out your unanswered questions clearly and grammatically, and stop whining about being ignored, so we can actually find your questions and respond to them? 

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 answered well, but here is my take)

3. Probably.  The 50K should be lent to other customers once deposited.  If the entire system is skewed long, for example, that user would not be able to buy until it rebalances.

4. What does this mean?  That is barely English.

What do you mean by "hits"? (Sees?)

What is a displayed ask?  Do you mean the current market buy price (seen in the "Instant Execution" tab)?

If you want to lock in a price, you should use a limit order, not market.  If you want to place a market order, you should not be upset if the price moves a bit.  The purpose of a market order is to be fast, not precisely priced. 

if the displayed ask is $4, and i place a limit order @$4, am i guaranteed to get filled @$4?

[RaggedMonk]

I am assuming you mean a limit buy order.  I have never seen an explicit guarantee (which makes sense because the market can move in the time it takes for your order to be sent), but most of the time you will get filled. If you want an instant execution, it would make more sense to use a market order for the situation you are talking about.

If you are asking about the price being guaranteed, when I look in my order history, all limit orders get executed at the price I specified or one more favorable (ex. Limit buy at $5.00, executed at 4.8424!).  My history shows no trades at worse than my own limit price (and of course there shouldn't be any of those). 

[zhoutong]

So we have been running the service for over 3 months and we get over 1,800 customers.

The redflag issue has proven to everyone that Bitcoinica is not a bucket shop.

I wonder how a guy with completely no understanding of this thread can charge 10,000 BTC for consultation.

zhoutong: you haven't thought Bitcoinica through, which is why surprise problems keep poping up.

I haven't accused you of being a bucket shop: I am saying when your positions become significantly imbalanced you will have to stop people from closing positions and from withdrawing funds... or you will have to _become_ a bucket shop.  Your recent change was a band-aid, you kicked the can down the road to some future date.

You can prevent that degree of imbalance by stopping people from opening new postions (which your customers will consider acceptable), however people closing positions and/or withdrawing funds can also bring about 'critical imbalance' - i.e. a position you can not hedge, where you will have to either prevent people from closing positions and withdrawing funds (which they will react very badly to) or _become_ a bucket shop (you were trying out the former, now it looks like you will try out the latter).

I understand Bitcoinica perfectly, apparently you and your customers don't (your system works within certain statistical parameters, outside that it will blow up)... but for a modest fee I will help you out.

My prediction for the end of Bitcoinica: the latest volitility that broke Bitcoinica was a rise which tends to be slower moving than crashes, at some point in the future we're going to get a crushing panic selloff (maybe when the US gov tries to shutdown bitcoin), then Bitcoinica will go under.

If one day the longs all panic sell to cover and people with BTC as magin start withdrawing their funds, you will have to either prevent people from closing positions and withdrawing funds or become a bucket shop - either way it's the end of Bitcoinica.

Good attempt.

Bitcoinica is modeled after the real world brokerages, and we lack two things from real world:

- legal protection as a brokerage
- money market

These two will solve problems.

But well, we have done enough to protect our customers and ourselves. There're constantly new issues brought up because of the different contexts. The redflag was there on day one, why nobody complained for the first three months? Why this time people are speculating the collapse when we're doing better than ever?

We are not Mt. Gox, and we take some risk. But we have experienced the last three months of volatility: including 9/9 crash, 9/11 spike and all kinds of market conditions. We have forced liquidated positions as huge as 38,000 BTC without problems.

I've thought through, at least I have experience. I have 5 years trading experience (Chinese stocks, warrants and forex) and 3 years Ruby programming experience. And I have access to my advisor, who is a forex broker himself.

[smickles]

<snip>
We have forced liquidated positions as huge as 38,000 BTC without problems.
<snip>

I just have to say:
ouch.

[ineededausername]

<snip>
We have forced liquidated positions as huge as 38,000 BTC without problems.
<snip>

I just have to say:
ouch.

Wonder if that 38k BTC guy is still playing on Bitcoinica... I'd ragequit if I were him

[pirateat40]

<snip>
We have forced liquidated positions as huge as 38,000 BTC without problems.
<snip>

I just have to say:
ouch.

Wonder if that 38k BTC guy is still playing on Bitcoinica... I'd ragequit if I were him

Oh its just smoke and mirrors.  Don't worry go long.

[mjcmurfy]

I have 5 years trading experience.

You're 17 now, so are you telling us you have been trading since you were 12?
Pokemon cards do not count.

And I have access to my advisor, who is a forex broker himself.

Who is your advisor, any relation to you? Are you paying him for his advice or does he work pro-bono? What exactly is his role?
Is he involved in the technical, financial, legal or PR aspects of bitcoinica? All of the above?

[smickles]

<snip>

Who is your advisor, any relation to you? Are you paying him for his advice or does he work pro-bono? What exactly is his role?
Is he involved in the technical, financial, legal or PR aspects of bitcoinica? All of the above?

ooh, those are some good questions.

[zhoutong]

I have 5 years trading experience.

You're 17 now, so are you telling us you have been trading since you were 12?
Pokemon cards do not count.

And I have access to my advisor, who is a forex broker himself.

Who is your advisor, any relation to you? Are you paying him for his advice or does he work pro-bono? What exactly is his role?
Is he involved in the technical, financial, legal or PR aspects of bitcoinica? All of the above?

I bought my first stock in Shanghai Stock Exchange in 2006 when I was 12. It's not a game.

My advisor doesn't take charge of Bitcoinica operations, and I don't pay him. I help him with his new social marketing venture and he helps me confirm the viability of the features that I purpose.

I did everything on my own.

[Bigpiggy01]

Ummm Zhoutong,

Last time you recommended a long squeeze 

What are your thoughts on a short squeeze atm?

[Otoh]

Ummm Zhoutong,

Last time you recommended a long squeeze 

What are your thoughts on a short squeeze atm?

go for it 

[notme]

Ummm Zhoutong,

Last time you recommended a long squeeze 

What are your thoughts on a short squeeze atm?

go for it 

He has automated his recommendations now... ATM he's fairly balanced, so no squeeze is available.

[cypherdoc]

can someone explain this to me?:

https://bitcointalk.org/index.php?topic=56615.msg674392#msg674392e

i thought that even in a red flag event the longs were supposed to be able to cash out in USD's?

[Otoh]

I'm probably being thick here but would someone be kind enough to explain how I can reduce my long position on bitcoinica  (profit taking) without liquidating it all, I have made a few sales & that reduces the number of bitcoins that I am long but it doesn't release the proceeds in $ for me to withdrawal to Mt.Gox - do I have to liquidate my whole position to free up those funds or just until the number of bitcoins that I am long matches the number that I initially deposited so that there's then no leverage, ideally I would like to leave those long & sell my leveraged positions & remove that profit in $, many thanks

[alan2here]

Stuff is relative to you'r first contrabution to the position vs subseqent ones?

[Otoh]

I don't understand sorry, I started with a 300Btc deposit & went long 300 a while back, when the price rose I increased the number of bitcoins that I was long with leverage now I would like to know if I can retain my original 300 Btc long position  by selling bitcoins or do I have to liquidate the whole position (or sell all little by little) in order to release the $ profit for withdrawal - sry to be such a trading noob

[alan2here]

I wasn't answering you. I'm trying to find out how it works too.