Here's my question for Bitcoinica
Hypothetical: the majority (let's say 90%) of bitcoinica users are long in the market (buying) and are leveraged close to the max (let's say 4 to 1).
From where do the currency funds come to fill those leveraged orders?
Same hypothetical question for large HEAVILY LEVERAGED sell orders that come from the majority of bitcoinica members?
Could you clarify that you do indeed have deep pockets with lots of money and bitcoins to fund these scenarios?
If you don't, then what mechanisms are in place so the market can't leverage past the point of no more funds?
If there are no mechanism and limited funds then the only other option would be for a fractional reserve exchange,
in that case it would be an ethical choice to clarify it to your users.
What does this mean for bitcoinica's users if there are no mechanisms and limited funds?
It means that at some point the leveraged buys or sells do no influence the market the same as a 1:1 buy or sell.
Leveraged buys and sells would merely be "placing your bets" on what way the market will go without really participating.
I would really appreciate if you could address all this.
Hypothetical: the majority (let's say 90%) of bitcoinica users are long in the market (buying) and are leveraged close to the max (let's say 4 to 1).
From where do the currency funds come to fill those leveraged orders?
Same hypothetical question for large HEAVILY LEVERAGED sell orders that come from the majority of bitcoinica members?
Could you clarify that you do indeed have deep pockets with lots of money and bitcoins to fund these scenarios?
If you don't, then what mechanisms are in place so the market can't leverage past the point of no more funds?
If there are no mechanism and limited funds then the only other option would be for a fractional reserve exchange,
in that case it would be an ethical choice to clarify it to your users.
What does this mean for bitcoinica's users if there are no mechanisms and limited funds?
It means that at some point the leveraged buys or sells do no influence the market the same as a 1:1 buy or sell.
Leveraged buys and sells would merely be "placing your bets" on what way the market will go without really participating.
I would really appreciate if you could address all this.
Yes, indeed it will definitely become a problem when every trades at one direction.
We have a circuit-breaking mechanism that stops order execution immediately once the surplus or deficit is so large that we can't back it. However, it has never been triggered since launch, due to these reasons:
1. Bitcoin is extremely volatile. Those who use leverage extremely heavily can be easily liquidated when market moves a lot. Therefore we do not advise users to use leverage in full unless they have 100% confidence. In fact, most of our users are rational enough and do not use heavy leverage for their trades.
2. Most of the time, there are long and short positions are the same time. If so many people are confident that Bitcoin will rise, the price would already have been pushed up. In spot exchanges, every buy order means an opposite sell order. At equilibrium price, it's highly likely that all trading in both directions.
3. Some people use Bitcoinica as a wallet. These funds are used as reserves.
We have a big thing to announce soon (in 2-3 weeks), which will solve this problem permanently even without the circuit breaker. We will update you soon!
Thanks zhoutong for the reply. That makes since and it is nice to know.
I hope you start supporting more than one exchange soon.
Your service is nice.
