Miners, You Should Be Earning 7% Fixed Income With Options

[dreamwatcher]

Old fashioned brute force. 000000000,000000001,0000000002,0000000003..........etc......etc (well actually one assumes that the the system is using at least a 8 characters so you generally start from there, also many people use the default passwords on their ISP routers. They are random but always the same length.)

Remember, one is preforming it locally with a captured handshake sequence, so there is no network traffic or logging going on.

Well, at cost 10 (compare to Vladimir's 15, which is a lot harder), my PC bcrypt's around 12 passwords per second. Assuming 92 symbols, you have slightly higher than 58 bits of entropy at length 9. So you'd need something 300 billion times more powerful than my PC to scan the complete range in 36 hours. Even with application specific hardware that would be impractical. Of course this assumes that the passwords are "truly" random.

The 36 hour example is when the length and parameters of the password are know.

The example used are ATT Uverse routers that use a 10 digit passkey. so the range is 0000000000 - 999999999. I usually split the range between two computers. Using a couple GPUS and the proper programs, I was able to throw around 100,000 - 125,000 passwords a sec at the packets, so 12 passwords a second is not even close to what a "hacker" would be able to do even on a normal PC.This was years ago, so GPU processing is even faster now, look at current mining rates.

I guess the main point I am trying to make, is the mistake of limiting the range of a password. One of the most valuable things a "hacker" can have when trying to crack encryption is hints on the range of the password. If he knows the length (or range), excluded symbols...etc. It greatly (exponentially) cuts down on the range the "hacker" has to brute force.

Random passwords are great, but provide no more protection to a true brute force (not dictionary, or rainbow table) crack of encryption done at a local level,with password parameters known, and the right hardware/software.
Some of the best server side password requirements allow for a large range (I suggest a minimum of 10 up to 64) of length and symbols (including the ever ignored space) and maybe a quick dictionary check to make sure common words are not used.

Even then, one will run into the human side of security. Make passwords requirements too complex and they end up on post-it's or text files placed the computer desktop.

Two-factor authorization is truly a way to thwart brute force hack, as brute forcing a password may not be all that difficult to a skilled hacker with the right equipment, once the second factor is introduced, I see it as end game- Into the realm of dam near impossible without government alphabet soup agency like abilities.

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[BitcoinOPX]

Wow, that's what I get for not remembering where I am...

Trying to defend the integrity of a 6 character password to a room full of network professionals. *shakes head*

Okay, for the record I don't endorse using 6 character passwords as general practice. I was speaking extremely generally, in other words in terms of every use case requiring a password. As mentioned I believe security involves context. Securing a neighborhood forum site is not the same as a bank. My statement was about the lower bound of password length. That's where the 6 characters came from. For a neighborhood forum or dating site or similar I don't think it's wrong to say security experts agree at least 6 random characters, upper and lower, symbols etc. regard that as secure - for those kinds of sites - whereas common words like "love" are insecure.

I should have qualified that statement. That's my mistake.

The length of 12 characters seems to be popular in this thread as "very secure", but if it's a question of securing the data against the government suddenly that length doesn't seem so adequate. That's what I mean about context.

Of course longer passwords are always going to be more secure. I would love to require 150 character passwords, but usability becomes an issue. That's the only reason for adopting shorter passwords.

I wasn't trying to lecture anyone, least of all here... I was trying to make a case and defend the thought process behind our procedures. I'm certainly willing to take suggestions on security. Improving is always a goal. I feel we're all on the same side. We are the productive side of society, not the ones looking to steal, circumvent, and hack.

Continuing the rationale of assigning users passwords, it does seem to ensure users don't use one which unlocks their email for example. They would have to change their password to ours retroactively, and it would still unlikely be one used at other sites like LinkedIn, for example.

Not every user has the same security practices. But certainly we could change to user supplied passwords if that would be an improvement.
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Next, to address very valid concerns about level of funds and our operations, we purposely look to limit fund amounts. Storing 10,000 BTC would indeed change security context. Originally, we planned to back options with actual bitcoins, and were set up to work with BTCrow.com. However, that's now replaced with a contract for difference model where only the amount of funds representing the change in price movement is posted.

In any case, no funds are stored on the site and we manually approve every withdrawal. Even if our system is completely compromised the hacker couldn't move any funds. I also neglected to say every withdrawal request requires email confirmation, so a hacker would not only need account access, but to have access to the user's email account as well.

Regarding anonymity please see here: https://bitcointalk.org/index.php?topic=84092.msg935881#msg935881

I'll try and reply to the other questions later.

[BitcoinOPX]

Hey everyone,

By the way, yes we do salt and hash passwords with bcrypt, and we've made 12 characters the minimum password length now.

To receive a minimum 12 character password please click 'My Account' then 'reset password'.

I'll answer more questions shortly.

[BitcoinOPX]

Regarding the comment about no options on the site yet, yes, we've only recently opened. That's what I'm doing in the Mining forum  

During our Beta soft launch there seemed to be good interest

However, after going live with real money we have yet to see much activity. I think it's because many don't understand how to make money with options. For example, there was repeated confusion about the difference between the Trade screen to place orders, and the Create options section. I don't think that's only due to the UI. I think many people are learning the fundamentals of how options work.

Let me answer the specific question from @Brunic:

I've made an account, to try it out. I'm a newbie in those sorts of thing, and all this seems as easy as making a worldwide speech in japanese.

So, here's my real life situation. At the end of the month, I'm going to sell 300 Bitcoins. I'm mining them right now, and they are going to be sold. Let's say you want to teach me how to use BitcoinOPX for my first time knowing that I'm selling 300 Bitcoins at the end of the month, what do you tell me?

This is a perfect example. Notice he says "they are going to be sold". That means his mind is already made up about selling, which is the key benefit of what I'm talking about.

Right now June 16, 2012 say the average price of bitcoins is $6.50, and @Brunic knows he wants to sell 300 coins at the end of the month. At BitcoinOPX every Friday options reach Maturity, meaning they can be exercised/settled. So let's pick the target date Friday, June 29, 2012 as our option Maturity.

Here is the dilemma: @Brunic knows he will sell in the future, but he doesn't know what the BTC price will be then. It can be higher or lower (or the same). Without using options he would probably just buy or sell whatever the price. All things being equal he would win, lose or break even 33% of the time. Say the price typically swings 10% bi-weekly. At our current price of $6.50 by Friday June 29 the price will be either $7.15 or $5.85 (or still be $6.50).

Selling 300 coins means a difference of 300 x $.65 = $195 potential gain or loss from the current price of $6.50. By selling regardless of price as bitcoin goes so @Brunic goes, some months good, some bad etc.

Options provide an... option. He knows the price is now $6.50, and he knows he will sell, so why not lock in an additional 10% on the current price free and clear? By creating and selling options he can do just that. He can lock in a future sell price of $7.15 for June 29th, today. Here's how:

1. Go to BitcoinOPX.com and create a free account
2. From My Account click 'Create Option' to create a free option
3. Create an option as CALL, maturity Friday 6 p.m. June 29, 2012, strike price $6.50, for 100 coins (we will create 3 such options)  
4. Click 'Continue'

The system, using a formula, will calculate the amount of escrow required to cover this option. An insufficient USD message with the amount required for escrow will show, since we haven't deposited any money yet. For this option the amount is $105.99.

Since we will create 3 such options we go to Mt.Gox and generate a USD redeemable code for $105.99 x 3 = $317.97. We actually make it for $325.00 to cover any price moves while we create the option.

Go back to BitcoinOPX and click 'Deposit' from My Account and use the redeemable code for instant deposit. Next, go back and create the 3 options described above.

The 3 options will now be in your account ready to be put on sale. Under my account you will see your resulting USD and escrow balances. To this point you've spent no money, and taken no irreversible action. You can cancel the options and your balances will be updated.

Go ahead and click 'Sell to Open' on one of the options, which brings up the Trade screen. We are going to open a position. All the relevant information is already filled in except the "limit" amount, the lowest possible price we will accept for this option. Remember we want to lock in a bitcoin sale price $.65  higher than now, so we multiply number of coins which is 100 x $.65 = $65.00.

Click to send the order. If the option sells you will receive $65.00 minus a .65 trade fee = $64.35 USD in your account. Do this for the other two options. If all of them sell you will have $193.05 USD added to your account.

Notice this is approximately the $195 amount from above representing how much we gain or lose from a future price swing of 10%. What we have done is ensure we gain 10% up front.

Now let's look at what is going on.

You can withdraw the $193.05 and pocket it. That's profit free and clear.  We have approx. $318 in escrow, and 3 open positions. Each position is a June 29 $6.50 CALL for 100 BTC. This means on that date if the weighted average BTC price is above $6.50 we owe the difference multiplied by number of coins to the option holder.

Let's say Dave bought all 3 options. Here are the possible scenarios:

1. Price is higher than $6.50

Let's say the price is $7.50. This is what Dave was hoping for and the reason he bought the options in the first place. He was speculating the price would go higher than $7.15, because anything past that and he makes his invested money back plus profit. Remember, on each option he paid $65.00. So pricing from $6.50 to $7.15 means he only recovers his $65.00.

You owe $7.50 - $6.50 (strike price) multiplied by 300 = $300.00

The system will automatically settle the options out of your escrow funds. You lose almost the entire amount. The remainder is returned to your USD balance which you can withdraw anytime.

So now you are minus $300.00 from your escrow. Other than that you have all your original invested money - plus the $193.05. All you need to do is sell your 300 coins on Mt.Gox which yields 300 x $7.50 = $2250. Now take off $300 to cover that escrow = $1950. Now divide $1950 by 300 coins = $6.50   You get $6.50 per coin plus the $193.05 (and Dave profits $105.00 on $195.00)
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2. Price is exactly $6.50

Here you owe Dave nothing since there is no contract price difference. You sell your 300 coins on Mt.Gox at $6.50 = $1950, and you keep the earlier $193.05. You still made 10%  
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3. Price is lower than $6.50

Let's say the price is $6.00 Here you owe Dave nothing because CALL options only pay when market value is above the strike price. However, you still keep the earlier $193.05. You can sell your coins at $6.00 if you like, or hold them until the price rises again to $6.50, then sell, or... create more options on them!

In all cases you come out ahead, because you were going to sell and not hold anyway.

[BitcoinOPX]

Update: Okay, we still assign passwords upon signup, but users can now also choose their own password.

To choose your own password please click 'reset password' from My Account and select that option. We wouldn't want to deny anyone the ability to use a 150 character password.  

[P4man]

In all cases you come out ahead, because you were going to sell and not hold anyway.

Well; getting $6.5 when the exchange rate is $7.5 is not exactly what I would call "coming out ahead".
You also miss the scenario where no one buys your contracts.

That said, interesting service, subbed.

[BitcoinOPX]

Well; getting $6.5 when the exchange rate is $7.5 is not exactly what I would call "coming out ahead".
You also miss the scenario where no one buys your contracts.

That said, interesting service, subbed.

No, don't forget you also have the $193.05.

Divide the $193.05 by 300 coins = $.64 additional per coin! In other words, it's like selling at $7.15.

As for the scenario of no one buying the contract that's partly my job. I have to make sure people know speculative opportunities are available. However, Bitcoin grows overall every day and services are added every day, so that problem diminishes every day.

But, that's not really the point. The point is you have the opportunity to ensure you collect something above and beyond any given price point. It's if the option sells, yes, but it doesn't cost anything if it doesn't. You either lock in extra money or not. You don't lose.

[P4man]

If BTC value goes up, obviously you do lose. You lose the opportunity to sell your coins at that price.

[BitcoinOPX]

If BTC value goes up, obviously you do lose. You lose the opportunity to sell your coins at that price.

I meant you don't lose if the option doesn't sell.

As for the opportunity to sell your coins at a higher price, yes, the predictive timing dilemma always exists.

Options simply allow you to guarantee you get something upfront. Yes, the trade-off is that you lose out on price movement above your locked in sale price, but the point is at least you got something higher. By not using options if the price ends up stagnant or lower you get nothing extra or lose money guaranteed.

In other words it's great for people intent on selling. A bird in the hand is worth two in the bush, as they say.

[mtminer]

Interesting site.

How do you see who has open bids/asks for the options? I don't see any volume.

You might look at cutting back to bi weekly expiration dates or monthly until volume shows up.

[DutchBrat]

I'm still wondering how you are going to handle counter-party risk ?

[yochdog]

I for one absolutely LOVE what you are trying to do.  Being a finance geek, I would love the opportunity to sell call options against my future production. 

Clearly the biggest issue you are going to face is generating sufficient volume in the contracts.  I doubt you would be willing to be the counterparty to thousands of contracts miners will sell short?

[BitcoinOPX]

I'll answer new questions in a second. I want to explain a bit more about the motivation to use covered calls.

In the example above we say the price will typically move 10% for the term of our option. But we already locked in a 10% increase. This is to further address the concern from @P4man about losing the opportunity of selling coins for a higher price.

Look at the scenarios again. We're covered for every possible price up to $7.15. Moving higher than that is not likely since that would be more than a 10% swing. The risk is all on the option speculator. And if the price does go above $7.15 we still don't lose from our pocket, we only lose what might have been made. So there is an almost 100% chance of only coming out ahead, if the typical 10% price swing holds.

But let's say you're still not convinced. The math and logic sounds good, but your gut feeling expects a price spike. Then only use 200 coins for the option and hold 100! That way you're hedged. You get a $7.15 sale price ahead of time for 200 coins, and you keep 100 coins as a wildcard.

Your options don't stop there. Say you've included all 300 coins in writing options, and in a week the price starts shooting up. You think "I knew it, now I'll miss out on higher pricing." Here you could sell some puts! This begins to inject risk, but I'm explaining your options. Put options are the opposite of calls and you pay the difference when the market price is lower than the strike price.

Say the price was $6.50, but moved up to $6.75. You could issue a put option for the same strike price of $6.75 expiring around the same time or maybe a week after the earlier options. You make it for 300 coins. Projecting a 10% downside swing from $6.75 would be $.68 x 300 = $204.00. So that's how you price your puts. You would be betting the price wouldn't end up below $6.07 by expiration, or you start to lose money. However, if you're right that the price will only continue upward then you've gained an additional $.68 per coin, or up to $7.83 per coin before you miss out on profits from the original 300 coins ending higher than $7.15.

[Brunic]

It's really interesting. Thanks for the great explanation! You can be sure I'll look into that 

[P4man]

allright, Ill toss you an idea I intended to develop myself, but since you already have most of the work done, and my time is finite, you get it for for free. If it makes you rich, feel free to toss me some coins

Instead of only trading bitcoin options, add difficulty options, so that miners can hedge against future increases in difficulty. That would allow them to invest in mining hardware without taking on the full risk of their investment going south due to increases in difficulty, particularly now with ASICs on the horizon.

[nedbert9]

This is great stuff.  Hmm, no options listed yet :/

[BitcoinOPX]

allright, Ill toss you an idea I intended to develop myself, but since you already have most of the work done, and my time is finite, you get it for for free. If it makes you rich, feel free to toss me some coins

Instead of only trading bitcoin options, add difficulty options, so that miners can hedge against future increases in difficulty. That would allow them to invest in mining hardware without taking on the full risk of their investment going south due to increases in difficulty, particularly now with ASICs on the horizon.

Here I think you mean bitcoin futures. Thanks for your generosity You're right it is a great idea, and we're already working on it.

Since we settle using a contract for difference model - the advantage being traders don't need to own the underlying asset - we can really allow trading on anything with a price. We're working on adding Gold, Euros, Stocks, and of course bitcoins as CFDs.

This is great stuff.  Hmm, no options listed yet :/

No, we're just starting up. This is quite a complex trading site, and I think it will take a while to move in the complex traders  

But I'm working on it!

[BitcoinOPX]

Interesting site.

How do you see who has open bids/asks for the options? I don't see any volume.

You might look at cutting back to bi weekly expiration dates or monthly until volume shows up.

On the Trade screen you can see the best bid/ask for each option. Typically option chains don't show open bids/asks, but do show open interest.

There is no volume yet. I think I have to explain the opportunities the site presents first. Bitcoin is still a relatively small community. You're right it may be a good idea to limit expiration dates. For example, a 2 month max contract term may be better than 1 year and would also help limit insufficient escrow due to volatility as I'll explain below.

I'm still wondering how you are going to handle counter-party risk ?

This is the trickiest thing to solve, even in the real world   It's even harder due to bitcoin favoring anonymity.

First we backed options with bitcoins, but I thought that was too burdensome. A contract for difference model is far more flexible. For example, @Brunic says he is currently mining the 300 coins he will sell in the future, so he couldn't put them up for collateral beforehand anyway.

In our Beta feedback thread someone suggested using a formula to calculate escrow, so that's the direction we went. However, I'm now thinking that may be too complex and inadequate for coverage. I'm thinking to simply require escrow to cover a 50% price move.

That gives traders more solid payment assurance. They can feel safe buying with the potential to make up to a 50% difference in price.

In the example above it would mean, for example, putting up  $6.50 x 50% = $3.25 then multiplied by 300 coins = $975 into escrow.

That's a lot more burdensome on the option writer, but only half as burdensome as putting up the coins directly. And it gives plenty of upside room to speculators. The price could move to $9.75 and they would know they would be paid.

I for one absolutely LOVE what you are trying to do.  Being a finance geek, I would love the opportunity to sell call options against my future production.  

Clearly the biggest issue you are going to face is generating sufficient volume in the contracts.  I doubt you would be willing to be the counterparty to thousands of contracts miners will sell short?

Thanks!

No us being a counterparty wouldn't be prudent, but there may be good interest in the speculation thread. It's chicken and egg, though, first the options have to be written before people can decide whether or not to speculate on them

[Goomboo]

Typically option chains don't show open bids/asks, but do show open interest.

Options chains actually do show open bid/asks.  Each put / call at each strike price is an entirely different traded instrument.  In other words, you need a full depth of market and time and sales for every single one.

[BitcoinOPX]

Typically option chains don't show open bids/asks, but do show open interest.

Options chains actually do show open bid/asks.  Each put / call at each strike price is an entirely different traded instrument.  In other words, you need a full depth of market and time and sales for every single one.

Hi @Goomboo, nice to speak with you again.  

Typically option chains show only the best bid/ask, and that is for each call/put at each strike price. Yes, each strike price is an entirely different instrument, but you won't typically find the detailed bids and asks for each instrument. If you know a way to do that I'd love to see it For example, here is the option chain for Google's stock:

http://finance.yahoo.com/q/op?s=GOOG+Options

However, as I said before when this topic came up Bitcoin is largely about blazing new trails, and if that's something that enough people want to see we may certainly add it.