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Author Topic: Why bitcoin is currently (Jan 16th) crashing and why it may continue  (Read 5313 times)
finway
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January 16, 2012, 05:19:08 PM
 #21

Nice post.

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trogdorjw73
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January 16, 2012, 06:23:02 PM
 #22

As soon as some of the longs are liquidated, those of us who still have some margin held back will catch the knife...

That is exactly the problem.

Since so many people want to buy, Bitcoinca will not have reserve until there are less people wanting to buy.

Since there will CONTINUE to be no reserve (because people are trying to catch the knife), this problem will get worse.

When a few more people start shorting, the people who are longing will be liquidated and/or panic.

We already dropped from 7.18 to 6.55 and we still have no reserve.

This problem is only getting worse.
There is no crash and the consolidation above 6.5 could be a great and one of the last buying opportunites before a breakout.
It's not a buying opportunity if there is no reserve.
I disagree that Bitcoinica is the main source of buying pressure.
Generally I would have disagreed too. But this time is different. From 6.3-7.0, Bitcoinica was running a spread-free promotion and the hedging volume was over 80% of Mt. Gox's over the same period. Even though I didn't look through trading logs, I'm pretty sure that Bitcoinica was the buying pressure.

But for the crash, I have no comment about it. Again, I reached the conclusion from the data available to you all.
What was the volume like on MtGox when Bitcoinica was 83% of the total trade volume? Seems like it was low on the 13, 15, 16 and high on the 14. Is the 14th when Bitcoinica was running the promotion, or was it the 15th?

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January 16, 2012, 07:43:53 PM
 #23

As you probably know, the "Bitcoin for Dummies" episode was a huge success.  Many people are searching for bitcoin and many people are buying bitcoin.   Because of this, many people are trying to buy on Bitcoinica.  Too many people are trying to buy, so Bitcoinica ran out of reserve.


The way Bitcoinica works when it is in no reserve mode is this:
-if you are neutral (not short, not long), you can ONLY sell
-if you are long, you can ONLY sell
-if you are short, you can buy and sell


This leads to the strange paradox that when so many people are trying to buy, the price will fall.


This is new.

When we went from 2 to 7, Bitcoina did not allow people who were shorting to close their position (by buying), so we had the opposite problem -- when so many people wanted to buy, the price rose EVEN FASTER.  This was because people who had short positions had no choice but to be liquidated, forcing the price up.



Despite there being so much support for Bitcoin right now, we may actually see prices drop faster and faster.


wrong.
bitcoin is crashing right now because of the thread "protect the money"
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January 16, 2012, 07:52:26 PM
 #24

I love when people with 40 posts try to educate the rest of us who have been around for months...

I respect the fact that Bitcoinica can have "reserve" issues, but I'm not sure it if will completely cause a "crash."

There are plenty of other exchanges to get bitcoins, and plenty of people with money elsewhere who will continue to level the price out where ever it lands.

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January 16, 2012, 08:26:05 PM
 #25

Bitcoinica being maxed out doesn't cause a crash. It basically means that as if there is any liquidation within Bitcoinica, it will never see the light of day, because there are so many queued up orders to pick up that sell. It also means that if Bitcoinica does get its hands on some more capital, there will be a big spike in Bitcoin purchases as all those leveraged orders get carried out. This would be in Bitcoinicas interest because each of those orders is like profit.

The only problem is that if customers hold onto those long positions indefinitely, then the one time profit off of the trade stops covering the constant interest on any capital loan.

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January 16, 2012, 08:53:19 PM
 #26

As soon as some of the longs are liquidated, those of us who still have some margin held back will catch the knife...

That is exactly the problem.

Since so many people want to buy, Bitcoinca will not have reserve until there are less people wanting to buy.

Since there will CONTINUE to be no reserve (because people are trying to catch the knife), this problem will get worse.


When a few more people start shorting, the people who are longing will be liquidated and/or panic.




We already dropped from 7.18 to 6.55 and we still have no reserve.


This problem is only getting worse.

There is no crash and the consolidation above 6.5 could be a great and one of the last buying opportunites before a breakout.
It's not a buying opportunity if there is no reserve.

I think this is the most insightful post I have read for a while. Everyone is seeing the blinking asterisk of bitcoinica and concluding that there is simply huge buying pressure.

However, the blinking eye (i.e. no reserve) also means that a lot of people have bought, and that there has to be some kind of leveraged component to that (else their would be no blinking eye).

It all boils down to how leveraged up this net long position in bitcoinica is. Zhou says 'normally 6 figures' for USD holdings, so they are holding between 100k and 999k of bitcoinica USDs. These are probably not all in bitcoin, as some people are leveraged. (e.g. if someone deposits $1 then they could potentially use up to $10 of bitcoinca's USD holding) so if they only have $100k USD and that was all leveraged 10:1 then that would only be ~1600BTC ($10k/worth). Conversely if they held 999k are all in bitcoin with no leverage that would be around 160k - but wholly unleveraged there would be no 'liquidation squeeze' to speak of.

The reality then is that there are something between 1600 - 160k bit coins leveraged at anything up to x10.  Zhou has mentioned they have 'normally 5 figures' of bitcoin. This puts the real figure somewhere between 10k-100k bitcoin again potentially with leverage up to 10x. Generally speaking the higher the total number of bit coins they have on hand the lower the net leverage is likely to be as the greater number of bit coins requires a greater number of 'real' dollars to back.

The other factor to then consider is what the internal hedging position is. However many net BTC short the shorts are can be internally hedged against the longs. So the USD holdings only cover the discrepancy between internal short and long positions. Bitcoinica claims to be 42% hedged, if that means the other 58% is net zero internally. Then (for the sake of simplicity we'll round to 50%) there is double the above figure (10-100k BTC) long right now, and the same again short.

Now I'm not sure what conclusions people will draw from this, because every day I read bits of information here and there, and then find myself amazed at how commentary extrapolates this info into some uber-bullish statement.

Speculating on how many BTC bitcoinca has at what leverage is the name of the game, plump for the middle holdings ($500k) & leverage(5:1), take a $6 purchase price and your zhoutong price as about $5. 250k in at $4 at 2.5:1 and your zhoutong price is around $2.56 for . However if you take the irrationally exuberant position of being leveraged up say 10:1 on $500k at an average purchase price of $6 your average shouting price is ~$5.64 and you have around 83k BTC to liquidate.

As you can see a marketplace that has been in the 'bitcoin is going to the moon' mindset, that was suddenly faced with declining price could quite possibly be leveraged up enough to cause a spectacular downward spike as all the leveraged longs get liquidated. 80k BTC selloff into an already bearish market, with shorts piling on. This is exactly how it is possible to test $2 again. As a long term bull, temporary bear, I fully expect a flaming so knock yourself out permabulls!

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January 16, 2012, 08:54:47 PM
 #27

Hey guys... * has been gone for a while now.

https://www.bitcoin.org/bitcoin.pdf
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January 16, 2012, 08:57:35 PM
 #28

Hey guys... * has been gone for a while now.

Time for a nice spike up I think Wink
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January 16, 2012, 08:59:02 PM
 #29

And the * is back ....

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January 16, 2012, 08:59:36 PM
 #30

Hey guys... * has been gone for a while now.

Time for a nice spike up I think Wink

It happened, but it was leveraged because the * is back.

https://www.bitcoin.org/bitcoin.pdf
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January 16, 2012, 09:00:18 PM
 #31

Hey guys... * has been gone for a while now.

It is?  I just logged in.

Quote
BTC/USD ▲*6.71930 Buy
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January 16, 2012, 09:00:35 PM
 #32

Hey guys... * has been gone for a while now.

Time for a nice spike up I think Wink

It happened, but it was leveraged case the * is back.

I guess Zhou only had a few G's lying around lol
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January 16, 2012, 09:21:35 PM
 #33

I don't trust Bitcoinica... he's 17? Experience of responsability = 0
i would never give him my money...

Bitcoinica isn't Bitcoin and will not cause a crash beacause its foolish mechanism...
it's only my opinion...

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January 16, 2012, 09:42:59 PM
 #34

Hey guys... * has been gone for a while now.

It is?  I just logged in.

Quote
BTC/USD ▲*6.71930 Buy

It was gone for a bit. Long enough for me to put a bet by buying some at 8-1 leverage. Ill probably end up losing all the profit I made with my 1BTC initial investment. Thats all of  2.5 BTC Cheesy.

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January 16, 2012, 09:49:00 PM
 #35

Regarding the spikes of doom... Who keeps leaving their computer on so their cat can walz all over the keyboard?

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January 16, 2012, 09:52:20 PM
 #36

Regarding the spikes of doom... Who keeps leaving their computer on so their cat can walz all over the keyboard?

Someone with way too much money to be trusting a cat.

https://www.bitcoin.org/bitcoin.pdf
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January 16, 2012, 10:13:45 PM
 #37

Would be interesting to know what kind of money this guy has got as a reserve given it is widely believed he is a teenager.

Not enough, obviously
finway
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January 17, 2012, 12:54:58 AM
 #38

When will MtGox support hedging?  Huh

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January 17, 2012, 01:13:55 AM
 #39

The price doesn't drop because people want to buy. It just gets massively unstable if everyone buys on margin.

Excessive margin trading is not healthy, and I have no understanding why one would use it just now. IMO, this is one of the worst situations for margin trading, the market doesn't look stable at all and I also know of no convergence that is bound to happen.

Isn't this the kind of situation in which one takes a balanced position and lowers risks, not multiplies them up even more? Huh
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January 17, 2012, 01:20:39 AM
 #40

The price doesn't drop because people want to buy. It just gets massively unstable if everyone buys on margin.

Excessive margin trading is not healthy, and I have no understanding why one would use it just now. IMO, this is one of the worst situations for margin trading, the market doesn't look stable at all and I also know of no convergence that is bound to happen.

Isn't this the kind of situation in which one takes a balanced position and lowers risks, not multiplies them up even more? Huh

Agreed! If I were to use it, it would ONLY be for a "sure thing", or as close as you could get anyway. Right now, things could still go either way while someone is pushing it.

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