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Author Topic: Bitcoinica: the problem is the internal trades  (Read 1120 times)
realnowhereman
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January 18, 2012, 01:02:30 PM
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A thought occurred to me about why Bitcoinica might be causing it's own problems (i.e. it's running out of reserve constantly).

The problem is that trades on Bitcoinica aren't moving the market.  Because it's matching orders internally for the majority; then only the overflow into Bitcoinica's reserves ever makes it out into the order book.  Until that point the price on Mt.Gox doesn't move.

Imagine a world were Mt.Gox had margin trading at 1:1.

You want a 10 BTC short but you have only dollars; you have to borrow BTC, then sell them.  That sale moves the market somewhat.

You want a 10 BTC long but you only have BTC; you have to borrow dollars, then buy BTC with them.  That buy moves the market somewhat.

With Bitcoinica, market sentiment doesn't move the market. Let's say the market thinks prices should be $10, but they are $5, as more and more people go long it should be buying BTC at the market place.  Those "buys" push the price closer to $10, making the long slightly less attractive.

You might argue that it makes no difference; but it does.  A long and short are not precise opposites, just like bid and ask aren't.  They each only move one half of the market.  That means the spread is much smaller than it should be because it is hidden away.

Strangely, I think it's bad for Bitcoinica too -- the fact that a "*" is appearing means that the market isn't compensating for preponderance of "longs", so Bitcoinica eventually has to dip into its reserves to keep supplying them.  Eventually, those reserves must run out.  If the market moved, then the long becomes less profitable and less certain.

Going long is a market moving action that, at present, doesn't move the market.

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teflone
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January 18, 2012, 02:39:41 PM
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I will just say this, not letting the market move in whatever direction, and hitting the * wall, will cause repeated explosions..

Not to mention mtgox is a Vic 20, and bitcoinica is a supercomputer in comparison.. Why dont we all use the fast computer ?

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realnowhereman
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January 18, 2012, 03:08:29 PM
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I will just say this, not letting the market move in whatever direction, and hitting the * wall, will cause repeated explosions..

I think the appearance of the "*" is indicative that the price of a buy is too low and so too many people have gone long; and ergo the price of bitcoins is too low.  But how can they be low if people have been buying?  The answer is that they haven't been buying.

A short term solution (if Mr Bitcoinica is listening) is surely to increase your spread the closer you get to your reserve.  Voila, negative feedback, problem solved.

There will be crying and gnashing of teeth that the spread is too high; but the market will be self-correcting again.

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