9 ms·

If you are short and bitcoin goes up, then you should lose money. That is expected. If bitcoin price crashes, how does it imply exchanges will become compromis

by verroq 9y ago

If you are short and bitcoin goes up, then you should lose money. That is expected. If bitcoin price crashes, how does it imply exchanges will become compromised??? Counterparty risk also exists for established exchanges. Secondly I’d venture to say for retail traders, their offerings are vastly inferior to bitfinex/bitmex/okcoin. You get much higher leverage and lower margin requirements. You also don’t pay for quotes or any “access” fees which eat into your margins.

JumpCrisscross 9y ago
> If bitcoin price crashes, how does it imply exchanges will become compromised??? The same way every market before central counterparties (CCPs) failed: exchange participants default and leave the exchange holding the bag [1]. If an exchange permits shorting, then it permits margin accounts. When prices drop, margin borrowers have a habit of defaulting. This is in addition to the risk of lightly-regulated exchanges having fewer Bitcoins than they claim to have [2][3]. > Counterparty risk also exists for established exchanges It's better managed. Goldman Sachs requires 100% margin on its Bitcoin trades [4]. This is only the first layer of protection. If you bust on a CME trade, your broker makes up the difference; if they bust, other CME members make up the difference; et cetera [5]. Central counterparties were created to solve this problem. [1] https://www.federalreserve.gov/econresdata/feds/2016/files/2016087pap.pdf https://www.federalreserve.gov/econresdata/feds/2016/files/2... [2] https://www.bloomberg.com/news/articles/2017-12-05/mystery-shrouds-tether-and-its-links-to-biggest-bitcoin-exchange https://www.bloomberg.com/news/articles/2017-12-05/mystery-s... [3] https://www.theguardian.com/technology/2017/jul/11/gox-bitcoin-exchange-mark-karpeles-on-trial-japan-embezzlement-loss-of-millions https://www.theguardian.com/technology/2017/jul/11/gox-bitco... [4] https://www.bloomberg.com/news/articles/2017-12-14/goldman-said-to-seek-100-margin-on-some-bitcoin-futures-trades https://www.bloomberg.com/news/articles/2017-12-14/goldman-s... [5] https://www.cmegroup.com/education/files/balancing-ccp-and-member-contributions-with-exposures.pdf https://www.cmegroup.com/education/files/balancing-ccp-and-m...
- fineng123 9y ago
  Hopefully this doesn't get buried as it's 100% correct and thanks for that. Counterparty risk is why shorting tether isn't free money even though it should be (and cost to borrow but not trying to be too pedantic)
- verroq 9y ago
  These exchanges will automatically liquidate your position in order to avoid causing a loss to the exchange. Okcoin uses socialised losses (clawback), bitmex uses ADL with their insurance fund. Bitfinex does some weird stuff. They hold up pretty well during large price crashes.
  - JumpCrisscross 9y ago
    > These exchanges will automatically liquidate your position in order to avoid causing a loss to the exchange In a crisis, prices move discontinuously. On one side of the discontinuity, you have adequate reserves. On the other side, you're broke. There is no moment in between when one gets to gently liquidate collateral. > They hold up pretty well during large price crashes Usually I'd say past performance does not guarantee future results, but in this case, we haven't had the past performance. Every Bitcoin has responded to even intraday crashes by pulling the plug [1]. [1] https://news.bitcoin.com/coinbase-customers-suffer-from-delays-as-withdrawal-period-ends/ https://news.bitcoin.com/coinbase-customers-suffer-from-dela...
    - verroq 9y ago
      Prices only move because of successfully filled orders. It is extremely unlikely that the bid side of the orderbook is completely empty. The worse case is that longs may get liquidated substantially below their liquidation price, depending on the exchange, loss is either socialised or paid thru the insurance fund. At no point would the exchange be bankrupt. Coinbase/gdax is a joke of an exchange and handles nowhere near the volume of bitmex or bitfinex.
      - JumpCrisscross 9y ago
        > It is extremely unlikely that the bid side of the orderbook is completely empty It still happens quite often. In practice, the buy-side order book doesn't vanish. It just goes from $19k, $19k, $19k to $17k, $9k, $2k. The liquidating exchange hits the $17k, and then the $9k. Now you have a trade at $9k which (a) prompts further forced liquidations and (b) causes everyone to panic. > loss is either socialised or paid thru the insurance fund Insurance fund? Who is insuring Bitmex? [1] https://support.bitfinex.com/hc/en-us/articles/115004555165-Intro-to-Margin-Trading https://support.bitfinex.com/hc/en-us/articles/115004555165-...

by verroq 9y ago

JumpCrisscross 9y ago

> If bitcoin price crashes, how does it imply exchanges will become compromised??? The same way every market before central counterparties (CCPs) failed: exchange participants default and leave the exchange holding the bag [1]. If an exchange permits shorting, then it permits margin accounts. When prices drop, margin borrowers have a habit of defaulting. This is in addition to the risk of lightly-regulated exchanges having fewer Bitcoins than they claim to have [2][3]. > Counterparty risk also exists for established exchanges It's better managed. Goldman Sachs requires 100% margin on its Bitcoin trades [4]. This is only the first layer of protection. If you bust on a CME trade, your broker makes up the difference; if they bust, other CME members make up the difference; et cetera [5]. Central counterparties were created to solve this problem. [1] https://www.federalreserve.gov/econresdata/feds/2016/files/2016087pap.pdf https://www.federalreserve.gov/econresdata/feds/2016/files/2... [2] https://www.bloomberg.com/news/articles/2017-12-05/mystery-shrouds-tether-and-its-links-to-biggest-bitcoin-exchange https://www.bloomberg.com/news/articles/2017-12-05/mystery-s... [3] https://www.theguardian.com/technology/2017/jul/11/gox-bitcoin-exchange-mark-karpeles-on-trial-japan-embezzlement-loss-of-millions https://www.theguardian.com/technology/2017/jul/11/gox-bitco... [4] https://www.bloomberg.com/news/articles/2017-12-14/goldman-said-to-seek-100-margin-on-some-bitcoin-futures-trades https://www.bloomberg.com/news/articles/2017-12-14/goldman-s... [5] https://www.cmegroup.com/education/files/balancing-ccp-and-member-contributions-with-exposures.pdf https://www.cmegroup.com/education/files/balancing-ccp-and-m...

fineng123 9y ago
Hopefully this doesn't get buried as it's 100% correct and thanks for that. Counterparty risk is why shorting tether isn't free money even though it should be (and cost to borrow but not trying to be too pedantic)
verroq 9y ago
These exchanges will automatically liquidate your position in order to avoid causing a loss to the exchange. Okcoin uses socialised losses (clawback), bitmex uses ADL with their insurance fund. Bitfinex does some weird stuff. They hold up pretty well during large price crashes.
- JumpCrisscross 9y ago
  > These exchanges will automatically liquidate your position in order to avoid causing a loss to the exchange In a crisis, prices move discontinuously. On one side of the discontinuity, you have adequate reserves. On the other side, you're broke. There is no moment in between when one gets to gently liquidate collateral. > They hold up pretty well during large price crashes Usually I'd say past performance does not guarantee future results, but in this case, we haven't had the past performance. Every Bitcoin has responded to even intraday crashes by pulling the plug [1]. [1] https://news.bitcoin.com/coinbase-customers-suffer-from-delays-as-withdrawal-period-ends/ https://news.bitcoin.com/coinbase-customers-suffer-from-dela...
  - verroq 9y ago
    Prices only move because of successfully filled orders. It is extremely unlikely that the bid side of the orderbook is completely empty. The worse case is that longs may get liquidated substantially below their liquidation price, depending on the exchange, loss is either socialised or paid thru the insurance fund. At no point would the exchange be bankrupt. Coinbase/gdax is a joke of an exchange and handles nowhere near the volume of bitmex or bitfinex.
    - JumpCrisscross 9y ago
      > It is extremely unlikely that the bid side of the orderbook is completely empty It still happens quite often. In practice, the buy-side order book doesn't vanish. It just goes from $19k, $19k, $19k to $17k, $9k, $2k. The liquidating exchange hits the $17k, and then the $9k. Now you have a trade at $9k which (a) prompts further forced liquidations and (b) causes everyone to panic. > loss is either socialised or paid thru the insurance fund Insurance fund? Who is insuring Bitmex? [1] https://support.bitfinex.com/hc/en-us/articles/115004555165-Intro-to-Margin-Trading https://support.bitfinex.com/hc/en-us/articles/115004555165-...