Bitcoinica operates like most any retail ForEx broker. I guess if you're making money, they're way better than sliced bread (up there with wheeled chariots). If you're not making money, they're the spawn of satan.
Most ForEx traders lose all their money. Most Forex traders blame the broker. They accuse the broker of
- betting against the customer (broker calls this hedging your position
- unfair spreads
- hunting stop losses w/ price spike (broker claims low liquidity)
- excessive slippage (again, broker claims low liquidity)
Of course, regardless of the honesty of the broker, all of the above can happen. Best thing or spawn? Again, boils down to whether you're working well with the system, and making money, or losing it.
You have to adjust your trading to suit your trading environment. If you do not, you'll lose money (and blame it on the broker) Bitcoinica works pretty well for me. It did not at first. I was pissed at them. I lost all of my gains to fucked up things in their interface for the first week. I accused them of stealing my money
(In my mind, not online) They've had software disasters that have liquidated tons of customers (and they've refunded too) - they're new, they seem to try hard, and I sure don't get the impression they're trying to steal my money now. They do suffer from low liquidity at times, so I don't use things like trailing stops or stop losses , and I rarely use a market order; the slippage on all the above can be astronomical - I use the Interest Rate page to estimate long/short open interest, watching the rates change will suggest the direction the price action will take.
It's not clear how exactly the bitcoinica pricing bot prices - if it's affected by the inside ask and bid at MtGox, it could dramatically affect the liquidity at the stated spread. There are lots of bots on MtGox that move the inside of the spread really tight, when there's no real order depth for around what appears to be about bitcoinica's spread.
As above, bitcoinica match customer orders against each other until they cannot, then their orders form a "dark pool" (order not on the orderbook) at MtGox. Most ForEx markets have many brokers/dealers connected to the same network, and/or the interbank network. Some of these will form dark pools in the same way, some others are straight through to liquidity providers. If the bitcoin exchanges would form a network orders would fill faster, and the price would be more stable
If you enter into a very large position, bitcoinica will hedge your position so that they don't lose money. In most cases, retail brokers are essentially traders just like their clients. I have seen this (in the dotcom bust in 2000) fail miserably for broker & customers when the broker's position move against him, causing him to have to sell his own stock in the brokership, which cause its price to plummet, resulting in forced liquidation of the entire business. In hours. Is bitcoinica the spawn of satan? I dunno, what is their real risk exposure? How much leverage are they using, and how much is at risk?
Even though bitcoinica doesn't publish the orderbook (yet, zhoutong said something about this a bit ago) you can tell pretty well what the depth is by watching the spread bounce. The spread is how bitcoinica, and many retail ForEx brokers make money. As a customer you have to understand this, and work around it, or you will lose your money.
Just like any ForEx, if you're using margin you need to fully understand risk, and understand the effects of drawdown when your position moves against you. (The loss on your position added to your equity balance * leverage = drawdown) The higher your leverage, the greater the drawdown per $/฿
One of the biggest reasons for people getting force liquidated is that they're funding their accounts in BTC. This can significantly accentuate the drawdown you experience as your Margin Balance loses value, along with your position, multiplying the effects.
Inexperienced traders, plus leverage, plus low overall market liquidity definitely add up to increased volatility. As more and more bitcoin investment opportunities come online, I'm sure this will diminish. The MPOE (Options) is helping some, as is the GLBSE.
It's actually a requirement of a currency, as far as I can tell, to be able to stand up to speculation. It may seem that your fiat money doesn't change in value, but it most certainly does, due to exactly this type of speculation. In many places, you can use 100:1, 200:1,500:1 leverage. More than enough rope
So....regardless of best thing since sliced bread, or the spawn of satan, bitcoinica, and other brokers offering leverage is good for bitcoin. It shows that bitcoin works like any other money