Zero sum games

[Boussac]

The problem is governments and media blaming speculators for the financial crisis. People believe the propaganda. Speculation per se was never the problem.

You are right: speculation per se may not be the problem..
The problem is then that the tools of speculations are in the hands of a few displacing value from the real economy to the "financial" sector.

The search for efficiency is totally destructive when the definition of efficiency is disconnected from the social and environmental good.

Now can someone explain to me how I can speculate on par with JP Morgan using high frequency trading, commodity margin trading and what not ?
Oh, maybe THAT explains why Jamie Dimon paid himself 23 million dollars in 2011, in the midst of the biggest financial crisis since 1929.
This kind of paycheck is a tax on the real economy. Unlike state taxes it is not imposed by a democratically elected government but by a cynical group of people that can be best described as "speculators".

I certainly did not embrace the cause of bitcoin to see it  associated even remotely to words like "margin trading".

[Meni Rosenfeld]

Bitcoinica was a very important platform and the Bitcoin world took a serious hit now that it is gone.

It's true that day-traders add price stability and depth, which is beneficial to everyone involved in Bitcoin. But that's not the only thing Bitcoinica did.

Let's start with short-selling. People think of it as a speculative bet (against the currency), and it can be that. But it can also be the opposite - it can be used as a hedge to avoid speculating. Suppose a service takes Bitcoin payments and pays with bitcoins, but in between it doesn't want to be exposed to currency risk. They will need some Bitcoin reserve to operate smoothly, and they can lose if those bitcoins decrease in value. With a margin trading platform, they can take a short position that exactly negates the bitcoins they're holding at the time. This way they have bitcoins to use but don't care at all what the price will do.

They don't need to want a neutral position necessarily. Personally my overall BTC position is long, but within reason; and I have use for more bitcoins than my position. So I bought bitcoins on one hand, and took a short position on Bitcoinica on the other; this way I had bitcoins available to be used, but with not as much risk.

Even when short-selling and leveraged buying are used speculatively, it can be as a long-term investments. People who don't believe the current Bitcoin price is justified can signal this with a short position; this helps prevent bubbles as the one we saw in June 2011. People who do believe in the future growth of Bitcoin can take a leveraged long position; this allows more money to enter the Bitcoin economy, which eventually finds its way to the establishment of new Bitcoin businesses.

Put differently, even if Bitcoinica is a "zero-sum game", it's a game where value flows from the wrong people to the right people. If Bitcoin needs to succeed, the platform moves money from the people who don't understand it to the visionary people who can use the money to further build it; if Bitcoin needs to fail, the platform moves money from the crazy people who are obsessed with it to more reasonable people who will use the funds to create actually necessary businesses. So whatever the fate of Bitcoin is, margin trading (and other "speculative" instruments) are a net positive for the world.

[muyuu]

Bitcoinica was a very important platform and the Bitcoin world took a serious hit now that it is gone.

It's not gone. They will be back, some people have invested real money on it.

Will people trust them again? well I don't know, but they still trust MtGox, don't they... so maybe they will.

[Meni Rosenfeld]

Bitcoinica was a very important platform and the Bitcoin world took a serious hit now that it is gone.

It's not gone. They will be back, some people have invested real money on it.

Will people trust them again? well I don't know, but they still trust MtGox, don't they... so maybe they will.

My impression is that if they do come back it will be months from now.

If they repay my deposit now I'll have no problem trusting them in the future.

[nedbert9]

The problem is governments and media blaming speculators for the financial crisis. People believe the propaganda. Speculation per se was never the problem.

You are right: speculation per se may not be the problem..
The problem is then that the tools of speculations are in the hands of a few displacing value from the real economy to the "financial" sector.

The search for efficiency is totally destructive when the definition of efficiency is disconnected from the social and environmental good.

Now can someone explain to me how I can speculate on par with JP Morgan using high frequency trading, commodity margin trading and what not ?
Oh, maybe THAT explains why Jamie Dimon paid himself 23 million dollars in 2011, in the midst of the biggest financial crisis since 1929.
This kind of paycheck is a tax on the real economy. Unlike state taxes it is not imposed by a democratically elected government but by a cynical group of people that can be best described as "speculators".

I certainly did not embrace the cause of bitcoin to see it  associated even remotely to words like "margin trading".

Nicely put.  Couldn't have been more succinct.

[muyuu]

The problem is governments and media blaming speculators for the financial crisis. People believe the propaganda. Speculation per se was never the problem.

You are right: speculation per se may not be the problem..
The problem is then that the tools of speculations are in the hands of a few displacing value from the real economy to the "financial" sector.

The search for efficiency is totally destructive when the definition of efficiency is disconnected from the social and environmental good.

Now can someone explain to me how I can speculate on par with JP Morgan using high frequency trading, commodity margin trading and what not ?
Oh, maybe THAT explains why Jamie Dimon paid himself 23 million dollars in 2011, in the midst of the biggest financial crisis since 1929.
This kind of paycheck is a tax on the real economy. Unlike state taxes it is not imposed by a democratically elected government but by a cynical group of people that can be best described as "speculators".

I certainly did not embrace the cause of bitcoin to see it  associated even remotely to words like "margin trading".

Nicely put.  Couldn't have been more succinct.

Except it means fuck-all. It's just liberal mantras that have zip to do with market efficiency and are used by governments as an excuse to racketeer in every private human transaction.

[MatthewLM]

The problem is governments and media blaming speculators for the financial crisis. People believe the propaganda. Speculation per se was never the problem.

Manipulation is the problem, like the FED.

I tend to disagree. Rather the problem is loosing the link to the original intention, the big picture.
Originally, all those regulatory mechanisms where created to protect society and bind the mere egoism of profit back to a larger goal.

This original reason is long forgotten, or became a shallow far fetched and remote goal. Finally we think regulation is just a value pre se, it is just good because it is good (and because we allways did it that way). Which allows requlation to be ursurped by shady, secondary and short-term goals like winning the next election.

--Ichthyo

So you think as long as the central planners somehow remember to "protect society and bind the mere egoism of profit back to a larger goal" (which is the propaganda used in the socialist media) we will all be better off than if we had free markets?

An interesting thing happens when people begin to trust the government to regulate. The government doesn't do as people expect it to and therefore people buy into scams more easily. For example look at the rigged futures markets. Why do people still trust the the futures markets? No sane person would but people are led into insanity by having blind faith in the government regulators.

[MarketNeutral]

Bitcoinica was a very important platform and the Bitcoin world took a serious hit now that it is gone.

It's true that day-traders add price stability and depth, which is beneficial to everyone involved in Bitcoin. But that's not the only thing Bitcoinica did.

Let's start with short-selling. People think of it as a speculative bet (against the currency), and it can be that. But it can also be the opposite - it can be used as a hedge to avoid speculating. Suppose a service takes Bitcoin payments and pays with bitcoins, but in between it doesn't want to be exposed to currency risk. They will need some Bitcoin reserve to operate smoothly, and they can lose if those bitcoins decrease in value. With a margin trading platform, they can take a short position that exactly negates the bitcoins they're holding at the time. This way they have bitcoins to use but don't care at all what the price will do.

They don't need to want a neutral position necessarily. Personally my overall BTC position is long, but within reason; and I have use for more bitcoins than my position. So I bought bitcoins on one hand, and took a short position on Bitcoinica on the other; this way I had bitcoins available to be used, but with not as much risk.

Even when short-selling and leveraged buying are used speculatively, it can be as a long-term investments. People who don't believe the current Bitcoin price is justified can signal this with a short position; this helps prevent bubbles as the one we saw in June 2011. People who do believe in the future growth of Bitcoin can take a leveraged long position; this allows more money to enter the Bitcoin economy, which eventually finds its way to the establishment of new Bitcoin businesses.

Put differently, even if Bitcoinica is a "zero-sum game", it's a game where value flows from the wrong people to the right people. If Bitcoin needs to succeed, the platform moves money from the people who don't understand it to the visionary people who can use the money to further build it; if Bitcoin needs to fail, the platform moves money from the crazy people who are obsessed with it to more reasonable people who will use the funds to create actually necessary businesses. So whatever the fate of Bitcoin is, margin trading (and other "speculative" instruments) are a net positive for the world.

+1

Short selling for hedging purposes is a pillar of mature markets.

I can't even mention 'short selling' to most people without their giving me a pavlovian 'evil speculators' response.

Naked short selling? That's different.

The persistent high levels of theoretical spatial arbitrage I see in the bitcoin market reflects both the immaturity of bitcoin as well as the need for short-selling to hedge against currency risk.

Market risk is a no brainer and especially interesting considering the irreversibility of bitcoin transactions.

I would love to see data showing what percentage of new coins miners keep for themselves, so as to further understand currency risk vis-a-vis operational risk.

Moreover, there's so much potential for bitcoin to transform traditional finance.
Traditional finance is deeply flawed and desperately needs this transformation.

[MatthewLM]

Stossel is always good: http://www.youtube.com/watch?v=GhS0cjvdPfk

The problem with futures market is that people don't realise it all paper and based on fiat currency. Naked shorting doesn't even require anyone to touch any of the commodity the market is supposed to be based on. People don't realise this and trust the regulators that naked short selling doesn't get out of control. Well naked short selling is indeed used on a massive scale and the regulators do nothing about it. In a free market at least people will be forced to figure this out for themselves and there would be competition with exchanges and not monopoly exchanges.

And of course the markets are manipulated by fiat currency that can be created out of nothing. Fiat is just arbitrary numbers, arbitrary numbers are perfect for manipulating/distorting markets.

[makomk]

1.2.4 Trading is a positive zero-sum game
  Rational Traders will not play a true zero-sum game in which they only value trading profits. If all traders were all alike, all expected returns would be zero and no one would benefit from trading. If some traders are more skilled than others, the skilled traders would want to trade but the unskilled traders would not. No one would trade.

This assumes that traders are rational, and in particular that they're able to rationally assess their own skill level and correctly attribute any gains to either luck or skill. The available evidence rather suggests that isn't true. It also fails to account for the principal-agent problem - if traders are getting large bonuses for making profitable trades with their employer's money, they have an incentive to make trades that would make no rational sense if they were the one that stood to gain or lose directly.

[DeathAndTaxes]

Let's start with short-selling. People think of it as a speculative bet (against the currency), and it can be that. But it can also be the opposite - it can be used as a hedge to avoid speculating. Suppose a service takes Bitcoin payments and pays with bitcoins, but in between it doesn't want to be exposed to currency risk. They will need some Bitcoin reserve to operate smoothly, and they can lose if those bitcoins decrease in value. With a margin trading platform, they can take a short position that exactly negates the bitcoins they're holding at the time. This way they have bitcoins to use but don't care at all what the price will do.

Sadly I never used Bitcoinica other than a token deposit and "bet" (and now likely will never get the chance).  However if my plan to offer Bitcoin funded prepaid cards takes off I will need some way to hedge my long exposure to BTC.  

While I intend to keep a personal stash the amount of BTC I am long at any particular time may be ecessive.  Bitcoinica (or a similar service) would have the option of providing a > 0 sum benefit.

The currency risk is a cost of doing business and that cost becomes part of the price of goods and services.  Mechanisms which reduce that cost make Bitcoin businesses more competitive.  End users (even those who never open a Bitcoinica acct)  will benefit by having lower costs for the services they wish to use.

Just because Bitcoinica can be used for only zero sum transactions doesn't mean it can only be.  Obviously investors/speculators are going to reach for the low hanging fruit but that can lead to larger positive sum systems.

Mining <- the start of it all and the ultimate zero sum game (between miners)
 leads to:
Currency exchange
 which allows:
Trading/Speculation  
 which provides liquidity and hedging for:
Enterprise sized merchants and service providers

Good discussion in this thread.  Initially I found myself thinking the same thing as Gavin.  Some people in the thread got this wrong implying Gavin (and others indicating zero sum) are demonizing speculators, falling for mass media, etc.  Not true.  It is possible to believe BOTH that speculation is valid AND still zero sum.

Comments by Meni and others made it clear to me that speculation is more than zero sum because hedging is impossible without speculators.  Hedging most certainly is + sum as it lowers cost, risk and capital requirements.

[Gavin Andresen]

I'm definitely not in the "speculators are evil" camp.  Speculation for the right reasons (hedging risk, for example) is a very good thing.

I personally think speculation for the thrill of gambling is not a good thing, but I'm also not in the "Every Bad Thing (where I get to decide what Bad and Good is) Should Be Illegal" camp. If you want to gamble you should be free to do so; I think it is stupid that we let rich people on Wall Street gamble with other people's money and yet have laws that make it illegal for not-so-rich people to gamble with their own money.

From his post, Tong thought about Bitcoinica and decided that he could be more effective at making the world a better place by working on something else that is more obviously positive-sum. Good for him!

[MoneyIsDebt]

IMHO, unless you are these traders' parents, you have no right telling them what they should or should not be doing with their time and money.

[unclescrooge]

How efficient is a product or service if it is already behind the curve 3-6 months after its release? 

Euh... wtf? A product is behind the curve because there are already others products better that were releasd. How more efficient can it be?

[MatthewLM]

Yes you have to laugh a bit at the joint's logic there.

[Andrew Vorobyov]

Stossel is always good: http://www.youtube.com/watch?v=GhS0cjvdPfk

The problem with futures market is that people don't realise it all paper and based on fiat currency. Naked shorting doesn't even require anyone to touch any of the commodity the market is supposed to be based on. People don't realise this and trust the regulators that naked short selling doesn't get out of control. Well naked short selling is indeed used on a massive scale and the regulators do nothing about it. In a free market at least people will be forced to figure this out for themselves and there would be competition with exchanges and not monopoly exchanges.

And of course the markets are manipulated by fiat currency that can be created out of nothing. Fiat is just arbitrary numbers, arbitrary numbers are perfect for manipulating/distorting markets.

Therefore I'm 100% positive that Bitcoin's financial arena will flourish... Just imagine, no bullshit games from FED, everything is transparent and accountable...

[caveden]

I'm definitely not in the "speculators are evil" camp.  Speculation for the right reasons (hedging risk, for example) is a very good thing.

Is not the "reason", it's the "talent/ability/knowledge/etc". A good speculator, i.e., one that guesses right, will help stabilize the price. A bad speculator (one that guesses wrong), will provoke the opposite effect. Free markets reward the former with profits and punish the latter with losses.

[caveden]

The search for efficiency is totally destructive when the definition of efficiency is disconnected from the social and environmental good.

Economic growth, or improvements in "economic efficiency" is, by definition, a better usage of scarce resources in the goal of attending agents (= those who "act") desires.
It is, though, by definition, connected to "social and environmental good", as long as you don't consider that "environmental good" = human sacrifice to the "benefit" of other species (how do you even define what's beneficial to species who can't even express their opinions is an open question...) .
If environmental good is the better usage of scarce resources to attend mankind's needs/wishes, then that's precisely what economic growth means too.

Oh, maybe THAT explains why Jamie Dimon paid himself 23 million dollars in 2011, in the midst of the biggest financial crisis since 1929.
This kind of paycheck is a tax on the real economy. Unlike state taxes it is not imposed by a democratically elected government but by a cynical group of people that can be best described as "speculators".

Err, such tax was imposed by a democratically elected government. The same government which created central banking, which inflated the money supply creating cheap credit and malinvestments all over, and which decided that some companies are "too big to fail" and rescued them with money taken from society.

These distributions of wealth from large and disperse groups to small and organized groups are inherent to governments, particularly democratic ones. Patri Friedman explains it in 2 minutes: https://www.youtube.com/watch?v=mgJ644LPL6g

I certainly did not embrace the cause of bitcoin to see it  associated even remotely to words like "margin trading".

Well, it will be associated, and not just "remotely".
I suggest you learn more why there's nothing wrong with margin trading and where the actual problems are, or you'll end up "unembracing" bitcoin soon, unfortunately...

[muyuu]

I certainly did not embrace the cause of bitcoin to see it  associated even remotely to words like "margin trading".

This is when zero-sum becomes positive sum. We get rid of the looniest of liberals. Good riddance.

[MarketNeutral]

I'm definitely not in the "speculators are evil" camp.  Speculation for the right reasons (hedging risk, for example) is a very good thing.

I personally think speculation for the thrill of gambling is not a good thing, but I'm also not in the "Every Bad Thing (where I get to decide what Bad and Good is) Should Be Illegal" camp. If you want to gamble you should be free to do so; I think it is stupid that we let rich people on Wall Street gamble with other people's money and yet have laws that make it illegal for not-so-rich people to gamble with their own money.

From his post, Tong thought about Bitcoinica and decided that he could be more effective at making the world a better place by working on something else that is more obviously positive-sum. Good for him!

+1
Well said.