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!