Topic: is/was Bitcoinica a shady business...? - page 2. (Read 2323 times)

http://en.wikipedia.org/wiki/Bucket_shop_(stock_market)

Hi Stephen, thanks for your explanation.

So basically this looks like any kind of banking business, but without the official assurance to cover customers funds when the bank collapses. Bitcoinica seems to take some risks and puts some algorithmic means into place to alleviate those risk. Yet still there remains the possibility of a finnancial "meltdown". And when we choose(d) to trade on Bitcoinica, basically we were just taking that kind of counterparty risk.




This might be the most important question to ponder. If we really want the Bitcoin market to be that free/uncontrolled entity, only regulated by demand and supply, then it seems we've inevitably to accept the fact that surprising / upsettling / destructive actions occur within that market. On the other hand, if we want some kind of regulation, we should again think of building up centralised institutions, which turns us back into all those unsolved questions our current governmental and regulatory systems are suffering from.

-- Ichthyo

Your question is worded as if the only risk taker is Bitcoinica.  The fact that a users balance can be below their margin requirement, or negative even (where funds are owed to Bitcoinica) proves that trading risks extend to those who hold leveraged positions as well.

This is one of those situations where the algorithm makes sense when things work as expected.  There are dependencies however and when things go wrong, they go horribly wrong.

When Bitcoinica does forced liquidations it must trade those on an external market. The only one it trades on is Mt. Gox, as far as I know.  Any bot trader will tell you that the automated trading API there has "less than six sigma reliability".  Add in the situation where Bitcoinica was responsible for half or more of the volume at Mt. Gox (particularly during times where there was a big selloff or a price spike) and you have instability all over the place -- something an algorithm cannot be programmed to compensate for.

So, as a result, the spread is set wider than would seem necessary and this gives added protection for Bitcoinica.  On the other side, Bitcoinica does not cover for the account holder and instead passes on the trading losses as liquidations happen at levels where the price has moved further than they were at the time the triggering event occurred.

Because the accounts can be opened using without submitting identifying documents, there can be many accounts controlled by a single operator.  With 10X leverage and a large number of Bitcoinica accounts ("sockpuppets"), the market at Mt. Gox can be manipulated by a single operator or with the help of momentum traders piling on.

The manipulator in many scenarios is not worried that forced liquidations could potentially cause the account to result in a negative balance because the accounts were opened and funded anonymously.

So this system allows the winner to keep the gains, but the losses then either gets absorbed by Bitcoinica or gets passed on to the other customers in the form of higher spread.

So Bitcoinica itself doesn't need to be "shady", but its current form allows shady business a place to operate.

Hi all,

maybe someone might help to clarify that question...?

I am interested in the finance-technical side of that question. We all know that the site might have used better IT security measures. But anyone in the IT business (like myself) also knows that implementing IT security is expensive (especially in development time). And the stunning thing with Bitcoinica is for sure how fast it was implemented, operational and financially successfull (at least until the desaster happened...).

So my question is rather about the "financial mechanics". Several people claimed in this forum that a margin trading platform is impossible in such a shallow marked as Bitcoin is currently. And that a business like Bitcoinica is bound to fail and collapse.

Can someone please clarify what risks Bitcoinica was actually taking?


In my understanding, the only risk Bitcoinica was taking is that the rates move away between the time point when a position is force liquidated (you get zouthonged) and the time point when these closing orders are actually executed at market price. Because, as I understand it, they used the (margin) value of the currency accounts plus the initial spread added on every new position to back the liquidity given out as loan. And when that liquidity wasn't sufficient, the starfish would appear and no further active positions could be opened.

So please, explain why a margin trading platform with this construction might be financially unsound.

Thanks
--Ichthyo