Is Margin Trading Killing Bitcoin?

[traderman]

I think it's about time we have this discussion!

http://www.btcfeed.net/news/margin-trading-killing-bitcoin/

[TheRama]

Uhhh.. I'm not a market genius, but I'm pretty sure currency traders create liquidity, not take it away.

If anything we need more traders to close the bid-ask spreads in all of the exchanges.  The huge spreads between bitcoin exchanges is what is the problem.  We also need more futures trading to create more predictability in the price of bitcoin and give those futures traders as much margin as the exchange can handle.

[traderman]

Having more traders is better as the spread will be tighter, but margin creates too much swinging. Especially in a price fall where you get mass liquidation due to panic.

Uhhh.. I'm not a market genius, but I'm pretty sure currency traders create liquidity, not take it away.

If anything we need more traders to close the bid-ask spreads in all of the exchanges.  The huge spreads between bitcoin exchanges is what is the problem.  We also need more futures trading to create more predictability in the price of bitcoin and give those futures traders as much margin as the exchange can handle.

[odolvlobo]

Don't bother reading the article. Only one sentence in the entire article was about margin trading and Bitcoin and here it is:

Bitfinex’s current leverage is about 3.3 to 1 for buying Bitcoin/Litecoin on margin, which is very miniscule compared to the leverage in more established markets.

[GRWer]

i am not sure about margin . but the chinese exchanges okcoin & huobi are creating tons of faking bitcoins on their platform to make profit , that's why bitcoin price falls

[traderman]

The implication is that Bitfinex being the largest exchange and offering traders the option to lever up in an illiquid market causes excessive volatility.

Don't bother reading the article. Only one sentence in the entire article was about margin trading and Bitcoin and here it is:

Bitfinex’s current leverage is about 3.3 to 1 for buying Bitcoin/Litecoin on margin, which is very miniscule compared to the leverage in more established markets.

[Crypto9er]

The implication is that Bitfinex being the largest exchange and offering traders the option to lever up in an illiquid market causes excessive volatility.

Don't bother reading the article. Only one sentence in the entire article was about margin trading and Bitcoin and here it is:

Bitfinex’s current leverage is about 3.3 to 1 for buying Bitcoin/Litecoin on margin, which is very miniscule compared to the leverage in more established markets.

I m more worried about Higher leverage (Like futures trading - 10/20x leverage), where sometimes with just few coins, traders can move the price up/down by few $. It make it much easier for "Big players" to manipulate the price and drive it in any direction they want.

[PaulPierce]

The implication is that Bitfinex being the largest exchange and offering traders the option to lever up in an illiquid market causes excessive volatility.

Don't bother reading the article. Only one sentence in the entire article was about margin trading and Bitcoin and here it is:

Bitfinex’s current leverage is about 3.3 to 1 for buying Bitcoin/Litecoin on margin, which is very miniscule compared to the leverage in more established markets.

I m more worried about Higher leverage (Like futures trading - 10/20x leverage), where sometimes with just few coins, traders can move the price up/down by few $. It make it much easier for "Big players" to manipulate the price and drive it in any direction they want.

True mate..even I am a bit worried about the "big Players" but I guess there is mostly someone to counter it..so it doesnt move much..unless few big guns sync it together.

[slacknation]

if everyone wants the price of bitcoin to go up, y don't we create a system such that no one can sell lower than the last price?

[traderman]

The problem isn't the price going up, it is the wild back and forth swings as leveraged traders enter and exit trades that is hampering Bitcoin being used as an actual currency. When the Russian rubble started to drop in the last few weeks people were scrambling to buy any hard asset they could get their hands on to preserve purchasing power. So the same concept applies to Bitcoin. Stability is necessary for bitcoin to flourish as a means of exchange, otherwise all we have is a fancy new casino.

if everyone wants the price of bitcoin to go up, y don't we create a system such that no one can sell lower than the last price?

[fenghush]

I've read the article and I missed the point how margin trading is killing bitcoin.

[TheRama]

The problem isn't the price going up, it is the wild back and forth swings as leveraged traders enter and exit trades that is hampering Bitcoin being used as an actual currency. When the Russian rubble started to drop in the last few weeks people were scrambling to buy any hard asset they could get their hands on to preserve purchasing power. So the same concept applies to Bitcoin. Stability is necessary for bitcoin to flourish as a means of exchange, otherwise all we have is a fancy new casino.

if everyone wants the price of bitcoin to go up, y don't we create a system such that no one can sell lower than the last price?

Margin trading doesn't create volatility.  The underlying creates volatility.  No one knows what bitcoins should be worth.  That's the primary issue.  It really doesn't matter if it's one dude buying and selling Bitcoin with 10x leverage or 10 people buying and selling Bitcoin with just cash.  It's the same.

We need MORE traders, leveraged or not.  The spreads are what makes BTC unusable for daily transactions, not volatility.  Imagine you go to a store that lets you pay with BTC with a spot price exchange....

For the buyer,  he doesn't want to pay in an equivalent amount of BTC because he's going to end up paying the Bid which might be .5 to 1% greater than the Ask price.

In that situation why would I pay in bitcoins when I can pull out my credit card and get 2% cash rewards?

[bigkahuna]

From reading this article I understand that as time passes, there will be less and less or an impact from margin traders.

[Elwar]

Maybe we should have guys with guns in every city that oversee every Bitcoin trade controlled by a central entity to make the rules of how bitcoins can be traded.

That would be ideal. Maybe then we would have a useful currency.

And if someone tries to make a trade that doesn't follow the rules...shoot them in the face.

[traderman]

I never suggested any kind of central control on traders, just imagine what will start to happen when traders are able to borrow 10:1 or 50:1, you think that won't create ridiculous volatility?? You think any merchant will accept Bitcoin with massive daily swings? Because that is where things are headed!

Maybe we should have guys with guns in every city that oversee every Bitcoin trade controlled by a central entity to make the rules of how bitcoins can be traded.

That would be ideal. Maybe then we would have a useful currency.

And if someone tries to make a trade that doesn't follow the rules...shoot them in the face.

[Elwar]

I never suggested any kind of central control on traders, just imagine what will start to happen when traders are able to borrow 10:1 or 50:1, you think that won't create ridiculous volatility?? You think any merchant will accept Bitcoin with massive daily swings? Because that is where things are headed!

Maybe we should have guys with guns in every city that oversee every Bitcoin trade controlled by a central entity to make the rules of how bitcoins can be traded.

That would be ideal. Maybe then we would have a useful currency.

And if someone tries to make a trade that doesn't follow the rules...shoot them in the face.

You can borrow 50:1 already.

[TheRama]

I never suggested any kind of central control on traders, just imagine what will start to happen when traders are able to borrow 10:1 or 50:1, you think that won't create ridiculous volatility?? You think any merchant will accept Bitcoin with massive daily swings? Because that is where things are headed!

Maybe we should have guys with guns in every city that oversee every Bitcoin trade controlled by a central entity to make the rules of how bitcoins can be traded.

That would be ideal. Maybe then we would have a useful currency.

And if someone tries to make a trade that doesn't follow the rules...shoot them in the face.

I'm saying that you are mistaken on the source of volatility.  Illiquidity creates volatility not the other way around.

You are thinking too hard of using BTC as a store of value when that is not how merchants like tigerdirect are using it.  Merchants today don't carry BTC on their books longer than they have to because of currency risk.  They are using Bitcoin as a medium of exchange where volatility matters much less than illiquidity and bid-ask spreads.  If the buyer has to buy on the bid and the merchant has to sell on the ask then BTC is not saving anybody money.

Bitcoin is itself volatile due to its newness, margin or no margin doesn't matter.  But what traders do is vitally important to the usability of bitcoins.  The best thing that can happen to bitcoin volatility is to create a trusted futures exchange with long term contracts that is also highly liquid.  Only way to do that is through margin.

[Elwar]

I have 5000 euro on a small European exchange. The current price is 195 euro. If I were to buy bitcoins with those 5000 euro I would drive the price up to 210 euro. This is what causes price swings.

If, however, people were going short and long on margin my measly 5000 euro wouldn't make a dent.

[Q7]

What happens in exchangers is that even though there is a buying and selling activity going on involving bitcoins in actual fact, btc never changed hands. It is just numbers adding up and reducing. And that is what gives the power to trader to short sell and pushing the price down with money they don't actually own. And yes, it affects bitcoin negatively.

[traderman]

YEP! No merchant will have confidence in bitcoin to hold it, it will just become another payment gateway for them. Which is ok, but that is not what Bitcoin was designed for.

What happens in exchangers is that even though there is a buying and selling activity going on involving bitcoins in actual fact, btc never changed hands. It is just numbers adding up and reducing. And that is what gives the power to trader to short sell and pushing the price down with money they don't actually own. And yes, it affects bitcoin negatively.