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Author Topic: Bitcoinica now out of both, BTC and USD  (Read 2273 times)
RogerR
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January 17, 2012, 05:43:38 PM
 #1



Both, bulls and bears, are heavily over-leveraged so it seems. One of them will bite the dust eventually.
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January 17, 2012, 05:47:24 PM
 #2

I'm not sure if I understand how this all works, but couldn't the risk from the bulls be offset by the risk from the bears?  I thought Bitcoinica's "fund" is meant to correct an imbalance.  When the price moves, somebody's going to win, and somebody's going to lose, and the losers pay the winners, right?

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January 17, 2012, 05:51:11 PM
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Yes, that is very strange... the most profitable scenario for bitcoinica is where there are the same number of buyers/sellers. That way they don't have to hedge on mtgox.

If they ran out of USD and BTC at the same time, i'm pretty sure they have a hedging problem.
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January 17, 2012, 05:56:39 PM
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everything was going fine until bitcoinica showed up  Undecided


Add this to another era in bitcoin history.
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January 17, 2012, 06:00:19 PM
 #5

Perhaps I've not understood Bitcoinica (I've tried hard and I can't explain it to myself satisfactorily any other way):

The leveraged part has to be borrowed from somewhere, it can't just be matched up.  I assume that comes out of the reserve too.

I guess this from this reasoning (assume a $5 BTC price):

  • Alice has $100; and leverages at 1:3.  She shorts against her $100 margin, meaning she needs to borrow (100*3/5) = 60 BTC (which she then instantly sells of course)
  • Bob has 10 BTC; and leverages at 1:6.  He goes long against his 10 BTC margin, meaning he needs to borrow (10*6*5) = $300 (which he then instantly buys BTC with of course)

Where does the missing 50 BTC come from that it can be sold?  Where does the missing $200 come from that it can be used for purchases?  The answer must be Bitcoinica's reserves.

Presumably they've now been used up, and "*" is showing for both sides.

(I'm happy to be corrected, I don't claim to be any kind of expert).

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January 17, 2012, 06:01:56 PM
 #6

I'm not sure if I understand how this all works, but couldn't the risk from the bulls be offset by the risk from the bears?  I thought Bitcoinica's "fund" is meant to correct an imbalance.  When the price moves, somebody's going to win, and somebody's going to lose, and the losers pay the winners, right?

Balancing the bulls against the bears would be risky, because what if one side suddenly decide to close their positions? If you don't have the reserves to cover those closes, you will be out of money. I think that the fact that Bitcoinica records profits in dollars might skew the risk towards one side, but still each position should be independently leveraged. Maybe some fractional reserve could be pulled off, but then it becomes a risk that at some point someone will want money that isn't there because it's being loaned out to someone else.

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January 17, 2012, 06:03:16 PM
 #7

Perhaps I've not understood Bitcoinica (I've tried hard and I can't explain it to myself satisfactorily any other way):

The leveraged part has to be borrowed from somewhere, it can't just be matched up.  I assume that comes out of the reserve too.

I guess this from this reasoning (assume a $5 BTC price):

  • Alice has $100; and leverages at 1:3.  She shorts against her $100 margin, meaning she needs to borrow (100*3/5) = 60 BTC (which she then instantly sells of course)
  • Bob has 10 BTC; and leverages at 1:6.  He goes long against his 10 BTC margin, meaning he needs to borrow (10*6*5) = $300 (which he then instantly buys BTC with of course)

Where does the missing 50 BTC come from that it can be sold?  Where does the missing $200 come from that it can be used for purchases?  The answer must be Bitcoinica's reserves.

Presumably they've now been used up, and "*" is showing for both sides.

(I'm happy to be corrected, I don't claim to be any kind of expert).

Shorts and longs should cancel each other out. There's no possible way for them to run out of both USD and BTC. This is either a bug, or a huge problem. I think/hope this is a bug and will be solved soon enough.

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January 17, 2012, 06:04:56 PM
 #8

I'm not sure if I understand how this all works, but couldn't the risk from the bulls be offset by the risk from the bears?  I thought Bitcoinica's "fund" is meant to correct an imbalance.  When the price moves, somebody's going to win, and somebody's going to lose, and the losers pay the winners, right?

Balancing the bulls against the bears would be risky, because what if one side suddenly decide to close their positions? If you don't have the reserves to cover those closes, you will be out of money. I think that the fact that Bitcoinica records profits in dollars might skew the risk towards one side, but still each position should be independently leveraged. Maybe some fractional reserve could be pulled off, but then it becomes a risk that at some point someone will want money that isn't there because it's being loaned out to someone else.

They leave sufficient funds for all parties to liquidate positions. That's why they run out of funds sometimes for new positions, yet it is still possible to close old positions. Them running out of both reserves simply shouldn't be possible though. Either a major bug, which should be fixed ASAP or a deeper underlying problem. Let's hope it's a bug.

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realnowhereman
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January 17, 2012, 06:07:23 PM
 #9

Shorts and longs should cancel each other out. There's no possible way for them to run out of both USD and BTC. This is either a bug, or a huge problem. I think/hope this is a bug and will be solved soon enough.

I can see how they cancel out when leverage is 1:1; but not when it's 1:x.

To short, you have to sell BTC, and you need x times the deposited BTC to do that.

To long, you have to buy BTC for dollars, and you need x times the deposited dollars to do that.

I think.

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January 17, 2012, 06:13:28 PM
 #10

Shorts and longs should cancel each other out. There's no possible way for them to run out of both USD and BTC. This is either a bug, or a huge problem. I think/hope this is a bug and will be solved soon enough.

I can see how they cancel out when leverage is 1:1; but not when it's 1:x.

To short, you have to sell BTC, and you need x times the deposited BTC to do that.

To long, you have to buy BTC for dollars, and you need x times the deposited dollars to do that.

I think.


When 2 persons deposit 100$. And one goes long for 10BTC, while the other shorts for 10BTC, Bitcoinica doesn't trade anything on Mtgox. If the market goes up by 10 cents, the guy who was long gets 1 dollar profit, while the other guy gets a 1 dollar loss.

When 2 persons deposit 100$. And one goes long for 100BTC, while the other shorts for 100BTC (So they are both using leverage), Bitcoinica doesn't trade anything on Mtgox either. If the market goes up by 10 cents, the guy who was long gets 10 dollar profit, while the other guy gets a 10 dollar loss.

If one persons liquidates (Either forced or manually), Bitcoinica does trade on Mtgox since they can no longer cancel each other out, unless someone else takes the opposing position again.

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Dan The Man
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January 17, 2012, 06:13:46 PM
 #11

Here is a hypothetical situation: You are Bitcoinica. You have reserves of $100 and 100 BTC. Dollars/bitcoin price is at par ($1=1BTC) and you are lending at a 10:1 leverage. Alice deposits $10 to leverage at 10:1 short and Bob deposits 10 BTC to leverage at 10:1 long. What happens if Charlie comes along and also wants to open up a position? You are out of reserves both ways. If you took any new position, you would be betting the house against Charlie.

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January 17, 2012, 06:17:25 PM
 #12

Here is a hypothetical situation: You are Bitcoinica. You have reserves of $100 and 100 BTC. Dollars/bitcoin price is at par ($1=1BTC) and you are lending at a 10:1 leverage. Alice deposits $10 to leverage at 10:1 short and Bob deposits 10 BTC 10$ to leverage at 10:1 long. What happens if Charlie comes along and also wants to open up a position? You are out of reserves both ways. If you took any new position, you would be betting the house against Charlie.

Changed your example slightly, to make the situation a bit more simple (Going long 10:1 with BTC backing it, is equal to going long by 11:1 with USD backing it). Having that out of the way, as explained in my earlier example, Bitcoinica won't trade for Either Alice or Bob, since they cancel each other out. That allows Charlie to use the reserves, because they still have those.

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January 17, 2012, 06:25:17 PM
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Here is a hypothetical situation: You are Bitcoinica. You have reserves of $100 and 100 BTC. Dollars/bitcoin price is at par ($1=1BTC) and you are lending at a 10:1 leverage. Alice deposits $10 to leverage at 10:1 short and Bob deposits 10 BTC to leverage at 10:1 long.

I am bitcoinica, I have $110USD and 110BTC real.

When Alice buys I have to spend $100 to get 100 BTC. I have $10 and 210BTC.
When Bob goes short, I sell 100BTC for $100. I Have $110 and 110 BTC again.

I also have an outstanding credits to Bob and Alice for the spread I charged when I 'executed' their trades.

Charlie can open a position either way (up to the value of the reserves)

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January 17, 2012, 06:37:25 PM
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Hmm. I forgot toe say that the $10 and 10BTC are effectively on loan!

So to continue.... Charlie deposits $10. Buys 100BTC.

I have $20 and 210 BTC. (I owe $20 and 10BTC, I am owed spread on all trades to date)

Price moves against Alice, she is forced to liquidate. My debt to her offset by her realised loss.

I have $10 and 210 BTC (I owe $10 and 10BTC, I am still owed spread on Bob and Charlies trades). So I am running $10 profit.

Derek comes along and deposits $10 and wants to go long at 10:1. He gets "no reserve".

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January 17, 2012, 06:42:17 PM
 #15

Eventually trade frequency increases such that you can do order matching in real time, so you never even have to go to market for some trades - thus earning you 100% of your spread.

I suspect the next phaseis to have enough bitcoin/USD & trade volume, that you no longer need to hedge against gox and instead become another exchange. Well played mr z.

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January 17, 2012, 06:45:21 PM
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everything was going fine until bitcoinica showed up  Undecided

What fantasy world are you living in? Everything was fine until Bitcoinica? Like, Allinvain theft, Gox hack, and mybitcoin theft were fine in your book, but Bitcoinica is the devil.  Shocked


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January 17, 2012, 06:45:34 PM
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Eventually trade frequency increases such that you can do order matching in real time, so you never even have to go to market for some trades - thus earning you 100% of your spread.

I suspect the next phaseis to have enough bitcoin/USD & trade volume, that you no longer need to hedge against gox and instead become another exchange. Well played mr z.

he's in great position for that but it doesn't mean he won't have to solve fiat problems like every other exchange to be able to accept funds from all over the globe if he decides to go that route. i guess he could at least hookup with Paxum for starters
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January 17, 2012, 07:47:25 PM
 #18

Guys, this was already discussed and answered by zhoutong. The "*" sign appears not only when they are out of reserves, but also when there's a problem with MtGox API and Bitcoinica can't connect to make trades/get rates. When this happens they block the trades for 10-15 seconds. And that's it, nothing to see here, move along.
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January 17, 2012, 08:40:10 PM
 #19

Guys, this was already discussed and answered by zhoutong. The "*" sign appears not only when they are out of reserves, but also when there's a problem with MtGox API and Bitcoinica can't connect to make trades/get rates. When this happens they block the trades for 10-15 seconds. And that's it, nothing to see here, move along.

It's important because it affects the level of liquidity in the Bitcoinica pseudo-market. Just as problems with deposits/withdrawals and account access has effected the liquidity of the exchanges. And it's not going to get better until Z can operate his own exchange.

Crossing fingers! Smiley

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January 17, 2012, 08:51:25 PM
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It's important because it affects the level of liquidity in the Bitcoinica pseudo-market. Just as problems with deposits/withdrawals and account access has effected the liquidity of the exchanges. And it's not going to get better until Z can operate his own exchange.

The redflags I'm talking about are momentary and don't affect trading this much. Also, I was referring to accusations that something is seriously wrong on Bitcoinica side, when that might not be the case.

That being said I hate the No Reserve redflags, because they cripple rallies Smiley.
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