OP made a fundamental mistake by assuming there are no reserves. In normal situation (without asterisk), Bitcoinica's reserves are able to cover all open positions. That means, Bitcoin price can go to $10,000 or $0.01 and we don't have to take any market risk out of this.
When there is asterisk, we can still cover all existing positions, but we can't cover more. That's why you can always reduce your positions without worrying too much.
I have run through many simulated market moves before I release the algorithms to the public, and our financial situations are much better than expected.
Topic: Bitcoinica model is flawed - page 2. (Read 2666 times)
Has anyone found any resources on how to start a brokerage? Or a retail forex shop?
This is essentially what Bitcoinica is.
This is essentially what Bitcoinica is.
Yes, I came to this conclusion too...had an account on there for a couple days to see how it worked, and as soon as I did, took whatever I had off. I don't think there's anything particularly wrong with them taking that risk, since the customer can have the advantage at some point, but from a business perspective, it could cause them problems. People can still go 10:1 long now, max out their reserves without any shorters, pushing up the price forever, beyond even what they would be able to catch up on, and bitcoinica only stands to lose all its reserves to its own customers.
I think it's worse than that. When their customers make too much money (as they will if bitcoins go up while "*" indicates that Bitcoinica is maxed out long). The short's losses can only cover those profits up to their deposits; after that there is reported profit being made by the longs that is not really being generated. The long accounts will all show huge profits, but there will be no real money to cover those profits. Customers will surely realise that at some point, and effectively a run will ensue. Whoever gets their money out first will profit.
So... it's not simply that bitcoinica will lose money to its customers; it's that there will not be enough money to pay winners. The customers are not making the profits they think they are. However, they are taking the risks they think they are, and some risks that they don't know about.
I've been thinking hard about how Bitcoinica works, and can only conclude that it's completely flawed.
Is no one else suspicious at the admitted losses Bitcoinica made during the huge bounce last week? If Bitcoinica is working correctly, it should always make money.
Is no one else suspicious at the admitted losses Bitcoinica made during the huge bounce last week? If Bitcoinica is working correctly, it should always make money.
Yes, I came to this conclusion too...had an account on there for a couple days to see how it worked, and as soon as I did, took whatever I had off. I don't think there's anything particularly wrong with them taking that risk, since the customer can have the advantage at some point, but from a business perspective, it could cause them problems. People can still go 10:1 long now, max out their reserves without any shorters, pushing up the price forever, beyond even what they would be able to catch up on, and bitcoinica only stands to lose all its reserves to its own customers.
If they were so inclined, the model also adds enormous incentive to deliberately force people out of positions on both ends of the market (so they can re-balance things and profit internally) - pretty much exactly how things happened last week, for example. I'm not insinuating any wrong doing was done, but if wrong doing were to be done, I believe last week is exactly what it would look like.
I've been thinking hard about how Bitcoinica works, and can only conclude that it's completely flawed. I hope I'm wrong, so here's my reasoning:
Imagine that Bitcoinica has no reserves. Mr Short, and Mr Long trade positions with each other at a price of $5 for $50 and 10 BTC respectively. The trading pool at this point holds $50 and 10 BTC.
When the price falls to $2.5, Mr Long is forcibly liquidated; that must be done by trading on Mt.Gox. Mr Long's 10 BTC (which is still in the pool) gets converted to $25, and stored in the Bitcoinica fund pool. Mr Short's position at that moment is therefore fully backed, there is $75 in the pool. What if price continues to drop though? When price is $1, Mr Short is expecting to get his original $50, plus $50 profit. The pool only holds $75 though.
The answer is of course, that when Mr Long was liquidated, no trade on Mt.Gox can have happened. Instead, someone else must be found to take over his position. That liquidation required a new party to buy 10 BTC at $2.5, leaving the pool with $50 and 20 BTC. Who is going to take that on though?
Bitcoinica has dealt with this problem by introducing its reserves, and upon liquidation it takes on the counter party position using those reserves.
That is an unsustainable though, those reserves are not infinite. Travel backward in time, when bitcoins were $0.01 and imagine you had gone long (1:1) with 100 BTC. That required someone else to go short for $1. Now BTC are $6 each; and you are worth 200*6 = $1200; at some point that shorter was liquidated, losing their $1; but that leaves us $599 lacking in the fund pool.
Now imagine that same was done at 1:10 leverage, there is no way to magically create the backing for the profits that are due, and Bitcoinica would have had to find (1900*6-1) to cash out the long position. When the market moves a significant amount, Bitcoinica's reserves will be insufficient to cover the profits that participants are expecting.
Forced liquidations would need to happen in both the negative and positive directions. When your counter party is liquidated; that is the end of the game for you too, but you end up in profit.
Is no one else suspicious at the admitted losses Bitcoinica made during the huge bounce last week? If Bitcoinica is working correctly, it should always make money.
Imagine that Bitcoinica has no reserves. Mr Short, and Mr Long trade positions with each other at a price of $5 for $50 and 10 BTC respectively. The trading pool at this point holds $50 and 10 BTC.
Code:
Price 2.5 3.75 5 7.5 10
Net long / BTC 0 6.67 10 13.33 15
Net short / BTC 30 16.67 10 3.33 0
Net long / dollars 0 25 50 100 150
Net short / dollars 75 62.5 50 25 0
When the price falls to $2.5, Mr Long is forcibly liquidated; that must be done by trading on Mt.Gox. Mr Long's 10 BTC (which is still in the pool) gets converted to $25, and stored in the Bitcoinica fund pool. Mr Short's position at that moment is therefore fully backed, there is $75 in the pool. What if price continues to drop though? When price is $1, Mr Short is expecting to get his original $50, plus $50 profit. The pool only holds $75 though.
The answer is of course, that when Mr Long was liquidated, no trade on Mt.Gox can have happened. Instead, someone else must be found to take over his position. That liquidation required a new party to buy 10 BTC at $2.5, leaving the pool with $50 and 20 BTC. Who is going to take that on though?
Bitcoinica has dealt with this problem by introducing its reserves, and upon liquidation it takes on the counter party position using those reserves.
That is an unsustainable though, those reserves are not infinite. Travel backward in time, when bitcoins were $0.01 and imagine you had gone long (1:1) with 100 BTC. That required someone else to go short for $1. Now BTC are $6 each; and you are worth 200*6 = $1200; at some point that shorter was liquidated, losing their $1; but that leaves us $599 lacking in the fund pool.
Now imagine that same was done at 1:10 leverage, there is no way to magically create the backing for the profits that are due, and Bitcoinica would have had to find (1900*6-1) to cash out the long position. When the market moves a significant amount, Bitcoinica's reserves will be insufficient to cover the profits that participants are expecting.
Forced liquidations would need to happen in both the negative and positive directions. When your counter party is liquidated; that is the end of the game for you too, but you end up in profit.
Is no one else suspicious at the admitted losses Bitcoinica made during the huge bounce last week? If Bitcoinica is working correctly, it should always make money.
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