This Bitfinex Credit Bubble cannot end well

[theonewhowaskazu]

Long positions on margin need the price to rise greater than the interest

But isn't this true in pretty much every situation ever?

It was true during 90s Asian financial crisis and 07 housing bubble

In what situation could a person trading on margin possibly make money if the price of the asset he's long doesn't increase faster than the interest he's paying to long that asset.

[Coinfan]

We have to recognize qualities to Bitfinex. They decided fast and, more or less, well.

However, if this measures (that in fact limit the leverage to 1.5) will be in force only on the 21 and even then won't affect existing positions, only after this date we shall see a decline on the grow of the swaps volume, but even then not necessarily a fast decline of the amount of swaps.

At current pace of grow of about 300,000/400,000 per day (see http://www.bfxdata.com/bitfinexLiquidityUSD.php), the volume will be at 34 million on the 21.

These measures don't solve the already existent problem. Having 31 million of swaps is a problem now. Having 34 millions will be worst. For those measures to have any real effect (like making the swaps go to about 20/25 millions), unless there is a crash, it will be necessary to wait perhaps more than a month.

The problem isn't the new interest collecting policy. Those are peanuts.

If bitcoin keeps going up, there won't be a crash. But what if it starts to decline? Will there be enough chairs (bitcoins bids at an acceptable price) when the music stops playing?

Bitfinex did the right thing when announced the new measures. We can't point fingers when they don't announce in anticipation new measures and point again fingers when they do announce them.

The question is: do we have a problem? And, if yes, as I think, is it an urgent problem? If it is urgent, 24h most be enough.

We can say that the urgency of the problem depends on the evolution of bitcoin. It is real urgent if bitcoin's price is about to decline. Well, about that it's anyone guess. But if we agree that the consequences can be severe, the simple serious risk should make something urgent.

 I think it's not overreacting to defend that the new measures should apply sooner and new swaps should be frozen, unless they were to renew old ones, for the sake of the lenders, the traders, the exchange and the community/bitcoin. If there are serious problems with Bitfinex, that will hurt bitcoin.

Anyway, Bitfinex most follow the situation very close, because it can escalate from urgent to an emergency. And should be prepared to adopt drastic measures, like freezing trade, if bitcoin drops more than 10% on Bitfinex alone.

[gizmoh]

Anyway, Bitfinex most follow the situation very close, because it can escalate from urgent to an emergency. And should be prepared to adopt drastic measures, like freezing trade, if bitcoin drops more than 10% on Bitfinex alone.

10% and freeze trading,that would be an outrageous bias move. Lenders (many taking loans) are fighting to offer low rates( 0.16% ) considering the level of risk which is currently higher than ever.
I think the only way to discourage high level of margin is for a crash to happen, some positions get liquidated and few traders/lenders lose money so that a precedent of High Risk lending/trading is set.

[Bitcoin_is_here_to_stay]

Expect flash crash in next days at least on 21th. Ever day after 21th there will be a small dump because of daily btc to usd swap. I am dumping right now first 200BTC

This is unlikely. The amount of BTC that would need to be sold as a result of bitfinex's new policy would be minimal

How do you know that? Can anybody but Bitfinex insiders have any idea? That would heavily depend on swaps "age", not only their number.

[theonewhowaskazu]

Expect flash crash in next days at least on 21th. Ever day after 21th there will be a small dump because of daily btc to usd swap. I am dumping right now first 200BTC

This is unlikely. The amount of BTC that would need to be sold as a result of bitfinex's new policy would be minimal

How do you know that? Can anybody but Bitfinex insiders have any idea? That would heavily depend on swaps "age", not only their number.

what

[CEG5952]

Anyway, Bitfinex most follow the situation very close, because it can escalate from urgent to an emergency. And should be prepared to adopt drastic measures, like freezing trade, if bitcoin drops more than 10% on Bitfinex alone.

10% and freeze trading,that would be an outrageous bias move. Lenders (many taking loans) are fighting to offer low rates( 0.16% ) considering the level of risk which is currently higher than ever.
I think the only way to discourage high level of margin is for a crash to happen, some positions get liquidated and few traders/lenders lose money so that a precedent of High Risk lending/trading is set.

This would be ideal. But BFX has already created incentive for the opposite, by previously freezing the market and rolling back trades.

[Bitcoin_is_here_to_stay]

Expect flash crash in next days at least on 21th. Ever day after 21th there will be a small dump because of daily btc to usd swap. I am dumping right now first 200BTC

This is unlikely. The amount of BTC that would need to be sold as a result of bitfinex's new policy would be minimal

How do you know that? Can anybody but Bitfinex insiders have any idea? That would heavily depend on swaps "age", not only their number.

what

How anybody could know what amount of btc would need to be sold to satisfy daily payments for interests, whether it would induce margin calls etc?

[Newbie1022]

Expect flash crash in next days at least on 21th. Ever day after 21th there will be a small dump because of daily btc to usd swap. I am dumping right now first 200BTC

This is unlikely. The amount of BTC that would need to be sold as a result of bitfinex's new policy would be minimal

How do you know that? Can anybody but Bitfinex insiders have any idea? That would heavily depend on swaps "age", not only their number.

what

How anybody could know what amount of btc would need to be sold to satisfy daily payments for interests, whether it would induce margin calls etc?

Traditionally, regulatory deleveraging by itself does not create much of a shock. That said, it often multiplies the destruction when coupled with a downward market event otherwise independent of the deleveraging. A quintessential example is the market reeling during the mortgage bubble when, in the grips of a liquidity crisis, the regulators suddenly demanded that the banks hold more liquidity (exacerbating the demand for the little amount of liquidity and causing margin calls that wouldn't have otherwise occurred under the previous capital requirements). In a nutshell, it is ok to tighten the leash in a relatively stable market, but not when it is reeling.

How does this situation relate? Well, bitcoin has been relatively stable of late so the timing is actually pretty good. That said, the volume has also been abysmal of late, the price is still susceptible to a big swing if Chinese regulators decided to clamp down harder again, and because this is such a small market (and Bitfinex only a moderately sized component of that smaller market) if we start to get some downward movement then there is no telling where it will stop.

Anyhow, flash crashes don't usually occur when everybody expects them to and the reason is pretty simple... parties will want to secure some of the cheap coins so they'll provide a bid that is within 10 to 20% of the market price... they are actually providing the liquidity to protect against it -- notice the big floors at 400 and 500 (if it drops to that, it would still be a big event, but it wouldn't be an end of days sort of scenario by any means). So, there'll probably be some modest excitement, but nothing big. Then again, if we somehow breached 400 then there is very little standing in the way between $400 and about $1.10.

[nrd525]

Does anyone know how much other exchanges are lending out?

For instance, BitVC (a Huobi project/partner) recently started lending out CNY, BTC, and LTC.

https://bitcointalk.org/index.php?topic=662221.0

[Bitcoin_is_here_to_stay]

Expect flash crash in next days at least on 21th. Ever day after 21th there will be a small dump because of daily btc to usd swap. I am dumping right now first 200BTC

This is unlikely. The amount of BTC that would need to be sold as a result of bitfinex's new policy would be minimal

How do you know that? Can anybody but Bitfinex insiders have any idea? That would heavily depend on swaps "age", not only their number.

what

How anybody could know what amount of btc would need to be sold to satisfy daily payments for interests, whether it would induce margin calls etc?

Traditionally, regulatory deleveraging by itself does not create much of a shock. That said, it often multiplies the destruction when coupled with a downward market event otherwise independent of the deleveraging. A quintessential example is the market reeling during the mortgage bubble when, in the grips of a liquidity crisis, the regulators suddenly demanded that the banks hold more liquidity (exacerbating the demand for the little amount of liquidity and causing margin calls that wouldn't have otherwise occurred under the previous capital requirements). In a nutshell, it is ok to tighten the leash in a relatively stable market, but not when it is reeling.

How does this situation relate? Well, bitcoin has been relatively stable of late so the timing is actually pretty good. That said, the volume has also been abysmal of late, the price is still susceptible to a big swing if Chinese regulators decided to clamp down harder again, and because this is such a small market (and Bitfinex only a moderately sized component of that smaller market) if we start to get some downward movement then there is no telling where it will stop.

Anyhow, flash crashes don't usually occur when everybody expects them to and the reason is pretty simple... parties will want to secure some of the cheap coins so they'll provide a bid that is within 10 to 20% of the market price... they are actually providing the liquidity to protect against it -- notice the big floors at 400 and 500 (if it drops to that, it would still be a big event, but it wouldn't be an end of days sort of scenario by any means). So, there'll probably be some modest excitement, but nothing big. Then again, if we somehow breached 400 then there is very little standing in the way between $400 and about $1.10.

that was more or less my point. We only now some btc will be sold. We cannot know whether it would be a proverbial "last straw" and would start a free fall. I agree that prices have been relatively stable but longs have been exploding. Now that Finex will finally tighten the leash it will most likely cause some decline - or at least prevent upwards movement as traders would be prepare to bargain hunt. It is anybody's guess if it will be a mild adjustment or if the situation will get out of control temporarily.

I am also not sure why Finex disconnected from Stamp? Do we know if they can re-connect if needed?

[Coinfan]

Anyway, Bitfinex most follow the situation very close, because it can escalate from urgent to an emergency. And should be prepared to adopt drastic measures, like freezing trade, if bitcoin drops more than 10% on Bitfinex alone.

10% and freeze trading,that would be an outrageous bias move. Lenders (many taking loans) are fighting to offer low rates( 0.16% ) considering the level of risk which is currently higher than ever.
I think the only way to discourage high level of margin is for a crash to happen, some positions get liquidated and few traders/lenders lose money so that a precedent of High Risk lending/trading is set.

We all know how great are cheap coins and that some people are already lining their orders, hoping...

However, I might be wrong, but I don't think that the orderbook will support a crash bigger than 10%. More than 10% and some of the traders that are already in serious negative (some might have been kicking the can down the road for months) will be liquidated and, specially, even the risky traders will start dumping to avoid bigger loses and the risk of a liquidation.

There might be about 66,000 btcs ready to be dumped. About 40,000 borrowed, 16,000 supporting this margin (and these 56,000 can't go anywhere else to sell) and at least more 10,000 from arbitrageurs and potential sellers looking for a high price (see https://bitcointalk.org/index.php?topic=667105.msg7763304#msg7763304).

So, more than 10% and the crash might go easily to 40% (that is about 248, taking in account current price of 724, so 376; but since many are already at a loss from 644-680, they will start blasting sooner, around 400). At this value, all hell will break loose with everyone being liquidated, and this time we won't stop at 100, we'll go straight to less than 1 usd.

But no one will win nothing with that, because all trades (lower than 400 or all?) will be reversed or else it would be the end of Bitfinex.

Anyone wanting to bet on a crash, better avoid being too greedy and concentrate the money at around 10% and 35%. Less than 400 and you will see your trades reversed. And even at 400 or 450, Bitfinex might decide to reverse it to avoid millions in losses to the traders.

Or bet on Btc-e, those guys have deeper pockets and swallowed the loses of the previous crash. You might get bitcoins for low prices and be able to keep them. Because a crash on bitfinex will scare them too and they are probably also working with high leverage.

But if Bitfinex doesn't stop things at 10% it will be incurring on the risk to have to stop and reverse things at 1usd. And every time Bitfinex reverses the market it's ruining its reputation as a well functioning market. Right now, everyone knows that people with bids lower than 375 are wasting their time. And this knowledge hurts the Bitfinex market.

More than 10% and many traders will lose a lot, not only because they took crazy risks, but also because of the defects of the Bitfinex Market. And these defects are mainly caused by this crazy swaps bubble.

But, of course, if Bitcoin keeps going up, for now, the idiots will be us, the traders will survive and richer.

[shinjikenny123]

They'll rollback trades if a flash crash happen? That's unfair 
I'll move away from their exchange if they do that

[superbit]

I don't fully understand why they don't connect to bitstamp for selling BTC only, not buying.

I understand not buying there as the funds run out too fast and they need to keep wiring over millions of dollars, but selling would add the market depth on bitstamp's side in the case of a massive margin call.  This added support could greatly reduce how low the coins on bitfinex go.  It could even be only a panic switch that they turn on if the spread between the 2 exchanges is more than X%.

Or am I missing something?

[Newbie1022]

What I don't quite comprehend is how exactly would they lose money on a flash crash? For one, there is no market regulation so what is to stop them from trading or having a proxy trade on the exchange to scoop up coins on the cheap? Also, the parties who are overleveraged will have already paid their fees -- there may be an issue if they cannot liquidate for enough wherein there'd be massive losses, but again, this could be offset by buying coins on the cheap. And finally, wouldn't there be a flood of volume in the race back upwards to a respectable price?

In a nutshell... how would this event not just be a redistribution of wealth as opposed to [much of a] destruction of wealth? Furthermore, if it is a destruction of wealth wouldn't the exchange still make the difference back on increased near-term volume. OR... would people shuffle their newly acquired cheap coins off Bitfinex for fear that it would collapse before they had a chance to use them?

[ask]

selling again... 150 BTC and price dropped 3 USD.  Only God can help those people who will have highly leveraged positions on 21th, when thousands of BTC will be sold. 

I am a bull,  but now i will close my position with lose and wait for flash crash below 500 USD..

[Coinfan]

I don't fully understand why they don't connect to bitstamp for selling BTC only, not buying.

I understand not buying there as the funds run out too fast and they need to keep wiring over millions of dollars, but selling would add the market depth on bitstamp's side in the case of a massive margin call.  This added support could greatly reduce how low the coins on bitfinex go.  It could even be only a panic switch that they turn on if the spread between the 2 exchanges is more than X%.

Or am I missing something?

Connecting to Bitstamp for selling bitcoins means Bitfinex sending there their USDs and we selling to Bitfinex at Bitstamp prices, with Bitfinex eating the loss in the case of a crash.

Read this: https://bitcointalk.org/index.php?topic=667105.msg7775687#msg7775687

[Coinfan]

What I don't quite comprehend is how exactly would they lose money on a flash crash? For one, there is no market regulation so what is to stop them from trading or having a proxy trade on the exchange to scoop up coins on the cheap? Also, the parties who are overleveraged will have already paid their fees -- there may be an issue if they cannot liquidate for enough wherein there'd be massive losses, but again, this could be offset by buying coins on the cheap. And finally, wouldn't there be a flood of volume in the race back upwards to a respectable price?

In a nutshell... how would this event not just be a redistribution of wealth as opposed to [much of a] destruction of wealth? Furthermore, if it is a destruction of wealth wouldn't the exchange still make the difference back on increased near-term volume. OR... would people shuffle their newly acquired cheap coins off Bitfinex for fear that it would collapse before they had a chance to use them?

Bitfinex raised the fees on the interest received by lenders promising in return to compensate lenders in case of losses because of a crash bigger than 40% (in this case borrowers won't have collateral enough to payback the principal to lenders because of the ratio of leverage of 1:2.5).

If bitcoins crashes to 100 usds or even 200, Bitfinex won't have money to compensate all the lenders that loss money because traders/borrowers were forced to sell at 100 and now can not return the lent money. And in case of a serious crash it won't stop at 100.

Even if Bitfinex bought coins at the same price, probably it wouldn't have profit enough to pay all lenders their principal.

Anyway, until now, Bitfinex never recognized having any bid orders in their own orderbook. Maybe it has some, maybe not.

[shinjikenny123]

What I don't quite comprehend is how exactly would they lose money on a flash crash? For one, there is no market regulation so what is to stop them from trading or having a proxy trade on the exchange to scoop up coins on the cheap? Also, the parties who are overleveraged will have already paid their fees -- there may be an issue if they cannot liquidate for enough wherein there'd be massive losses, but again, this could be offset by buying coins on the cheap. And finally, wouldn't there be a flood of volume in the race back upwards to a respectable price?

In a nutshell... how would this event not just be a redistribution of wealth as opposed to [much of a] destruction of wealth? Furthermore, if it is a destruction of wealth wouldn't the exchange still make the difference back on increased near-term volume. OR... would people shuffle their newly acquired cheap coins off Bitfinex for fear that it would collapse before they had a chance to use them?

Bitfinex raised the fees on the interest received by lenders promising in return to compensate lenders in case of losses because of a crash bigger than 40% (in this case borrowers won't have collateral enough to payback the principal to lenders because of the ratio of leverage of 1:2.5).

So they wanted higher profit and screw those people waiting patiently on the buy side if a flash crash happen?

[Newbie1022]

What I don't quite comprehend is how exactly would they lose money on a flash crash? For one, there is no market regulation so what is to stop them from trading or having a proxy trade on the exchange to scoop up coins on the cheap? Also, the parties who are overleveraged will have already paid their fees -- there may be an issue if they cannot liquidate for enough wherein there'd be massive losses, but again, this could be offset by buying coins on the cheap. And finally, wouldn't there be a flood of volume in the race back upwards to a respectable price?

In a nutshell... how would this event not just be a redistribution of wealth as opposed to [much of a] destruction of wealth? Furthermore, if it is a destruction of wealth wouldn't the exchange still make the difference back on increased near-term volume. OR... would people shuffle their newly acquired cheap coins off Bitfinex for fear that it would collapse before they had a chance to use them?

Bitfinex raised the fees on the interest received by lenders promising in return to compensate lenders in case of losses because of a crash bigger than 40% (in this case borrowers won't have collateral enough to payback the principal to lenders because of the ratio of leverage of 1:2.5).

If bitcoins crashes to 100 usds or even 200, Bitfinex won't have money to compensate all the lenders that loss money because traders/borrowers were forced to sell at 100 and now can not return the lent money. And in case of a serious crash it won't stop at 100.

Even if Bitfinex bought coins at the same price, probably it wouldn't have profit enough to pay all lenders their principal.

Anyway, until now, Bitfinex never recognized having any bid orders in their own orderbook. Maybe it has some, maybe not.

Makes sense. Yea, I definitely wouldn't want them to be trading on their own platform regularly because, obviously, they'd have an edge not really being subjected to their own fees and that would be wanton market manipulation. At the same time, I think it'd be smart for them to have some bids in low, in case of a crash, which they could then liquidate on another market (or on their own if there is a quick bounce back) so that they could cover their obligations to their lenders. This, itself, is not a perfect solution and is a bit screwed up, but it seems much more proper than just freezing trading because some people gambled too hard. If I were them, that's what I'd do, but this is doubtful.

[nrd525]

Apparently BitVC has 1 million CNY lent out (around 150k US).