the other scenario Mushoz's simplistic argument ignores is what i've been calling slippage.
My post wasn't an argument. I wanted to explain how Bitcoinica works and how they hedge. Clearly in the other thread you said it was weird Bitcoinica said they had loads of BTC, but no USD, and that people couldn't buy BTC to go long or buy BTC to liquidate their shorts. All I wanted to do with my post is explain why liquidating shorts or going long requires Bitcoinica to have USD, and _not_ BTC. This "simplistic scenario" was clearly needed, because without it you failed to understand how hedging works, yet you were arguing about it like you did know how it works.
I agree 100% with you that people getting stuck with shorts and being unable to liquidate them is unacceptable. And that's what my suggestion to Zhoutong was for. He already said he is going to implement such a function, so that's good to prevent a similar situation in the future. In the mean time he already said he was going to pay out of his own pocket for the risk of others. I simply can't think of a way he could have handled this situation better.
the grossest example of this is when Zhou lost his Yubikey and thus his connection to gox. for example:
Of course they are using the API, and not a Yubikey...
let say you sell or short 5 BTC at Bitcoinica for $4 in a downtrending market like we had a coupla months back. he loses his connection to gox for whatever reason. in the meantime the price decreases further to $3.80. he then sells 5 BTC @ $3.80 only recovering $19 instead of $20. this begins to erode his USD balance or reserves. now we begin to understand where all the USD went.
And that's why the trade on Bitcoinica doesn't go through before they hedged the position on Mtgox. The situation you're describing simply isn't possible. They try to hedge for 4$. When that isn't possible due to whatever situation you can come up with, and the price falls to 3,80, that's the price the costumer is going to get. Unfair? That's the risk of market orders. If the customer used a limit order instead, which he should if he cares about the risk, and places the limit order at 4$, the trade simply wouldn't go through, because Bitcoinica is unable to hedge at 4$ as the price already fell to 3,80$.
even assuming he has his maximum connectivity in place, the fact that he's one step removed from gox still results in slippage as he can never execute (hedge) at the same price as his customers did on his site. multiply that by thousands of orders each week.
Again, read the response to the quote above.
now you will argue his algorithm takes this into acct through the spread. i argue its impossible to predict the violent swings and ignores the fact that there is constant complaining from customers to reduce that spread and thus his protection. it appears that he may in fact not have been charging enough via the spread given what has happened.
It's impossible to know exactly how much the risk is going to be. That's why they overestimate the risk in their spreads. Unfair? Not at all. As you understand they need to protect themselves against the risk, and of course they need to profit as well. That's why the spread is bigger than required. Both as an extra buffer against the risk and for profit.
Ferroh: assuming that Bitcoinica does indeed acct for 1/3-1/2 of gox's trading, what do you think about leveraged shorting and its effect on the USD/BTC price? it seems to me that it has caused an asymmetric artificial overshoot to the downside but will not contribute to an overshoot to the upside due to his lack of USD reserve to continuously feed an upward spiral.
Do you know what's required on Bitcoinica to short? BTC. Do you know how they get BTC? That's correct. They buy BTC. So for every BTC that was shorted, a BTC was bought. Actually, there's _more_ BTC bought by Bitcoinica than there was sold through shorting. Do you know why? Because they need reserves.
on the way down, when there were few to no buyers, he was able to easily step in as a market maker with his USD reserves to buy up the selling/shorting pressure b/c the price was so low. this may not work to the same degree with higher prices to the upside though as we're witnessing.
How do you know how Bitcoinica's balance is doing? AFAIK they have some pretty big investors, and turning in some nice profits. Why do you have to come up with stories how they might be running out of USD because of losses, when you have no idea how they are doing? Could it maybe be, that there are actually too many people long for their reserves to handle? I mean, look at the last month. It's been an extremely Bullish market. It isn't weird that a lot of people are long currently.
in this sense Bitcoinica has been destructive to the price and perhaps arguably to the economy. am i missing something?
Yes, a lot. Honestly no offense, it's good to have skeptics as well. But please don't try to present things as facts and use them as arguments, when so many things are clearly wrong in your reasoning. If you think something might be bad for the market, Bitcoinica or anything else, but you are not sure how it works, just ask others, instead of stating it as facts. It would prevent a lot of FUD spreading through these forums.
Thanks for reading!
