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> One day, Mr. Shark sells 100,000 BTC all at once on the Mt. Gox market. He cashes in at BTC's high price, then BTC crashes. If the the daily volume is about

by nandemo 14y ago

> One day, Mr. Shark sells 100,000 BTC all at once on the Mt. Gox market. He cashes in at BTC's high price, then BTC crashes. If the the daily volume is about 100,000 BTC, how do you expect to sell 100,000 at once at "the high price"?

dragontamer 14y ago
On the contrary. Mr. Shark doesn't want to sell BTC at the high price. He just wants BTC to crash. Mr. Shark makes his money from options trading and short-selling. The $5 million / 100k BTC is seen as an investment, its the cost that Mr. Shark pays to have unilateral control over the market for a day. Short Selling is when Mr. Shark comes up to you and says "Hey, I'll give you $100 right now if I can borrow 10k bitcoins for a week. I promise I'll give the bitcoins back". Mr. Shark can now build up 100k BTC to sell without actually risking $5 million USD. Call options is when Mr. Shark comes up to you and says "Hey, I'll give you a BTC on Wednesday next week if you give me $20 today". Since Bitcoins cost $40 today, its a good deal, so you buy these contracts. On Saturday, Mr. Shark crashes the market. He not only sells his 100k BTC, he short-sells more BTC. The BTC market panics, and BTCs drop down to pennies again. Come next Wednesday, Mr. Shark fulfills his contract. He buys a bitcoin for $1, and gives it to all of the people he sold Call options to, or participated in his Short-selling deal. Again, the $5 million is just the amount of money Mr. Shark is willing to lose to gain control of the market. Mr. Shark is making money through other means.
- nandemo 14y ago
  Your example still doesn't add up. AFAIK there's no liquid market for BTC derivatives, but let's assume it comes to exist. > Call options is when Mr. Shark comes up to you and says "Hey, I'll give you a BTC on Wednesday next week if you give me $20 today". Since Bitcoins cost $40 today, its a good deal, so you buy these contracts. That sounds... unusual. A more usual formulation would be "I give you the right to buy BTC from me for $20 on Wednesday if you give me $x today". The fair value of x (the premium) depends on other factors besides the current price. But, more importantly, there's no "good deal": if you set $x below the fair value then the buyers will arbitrage the hell out of you. E.g. if the fair price for the call option above is greater than $20 but you sell it for $20, then a buyer will happily take your offer: they sell 1 BTC short and get $40 in cash, pay you $20 and put the remaining $20 in the bank. Come Wednesday, they withdraw $20 (keeping the interest) and use that to cover their short sell: at worst they have to buy the stock from you for $20 (but they still make money on the interest), at best the stock has crashed and they make even more.
  - xyzzy123 14y ago
    There's also the small matter of liquidity. If you sell enough BTC to crash the price, you're still likely to get killed buying them all back to cover the short because: a) There's a lot more bids than asks. It's a lot easier to ratchet the price up than it is to lower it. If Mr Shark sold 50k BTC in one hit right now, he would move the price from $46 to $31. If he tried to buy 50k BTC in one hit, BTC would shoot up to $100 USD. b) Since the last crash and subsequent boom, there are lots of people now who yearn for the days of $5, $10 or even $15 BTC and will happily buy at those prices[1]. Mr Shark will be competing with their orders during his buyback. Strangely I think the first crash made bitcoin stronger. c) I'm not sure Mr Shark appreciates the psychology of the current bitcoin market. I think he assumes there are people sitting on a ton of BTC who are going to panic and sell at $5. Even a cursory reading of the bitcoin forums would show that this is not the case. [1] I sadly confess that the kool aid is delicious and I am one of them.
  - dragontamer 14y ago
    Any players who arbitrage BTC in that manner only helps BTC crash harder. So someone else makes money off of your scheme, thats fine. Both players contribute to the crashing of BTC and now profit off of it.

by nandemo 14y ago

dragontamer 14y ago

On the contrary. Mr. Shark doesn't want to sell BTC at the high price. He just wants BTC to crash. Mr. Shark makes his money from options trading and short-selling. The $5 million / 100k BTC is seen as an investment, its the cost that Mr. Shark pays to have unilateral control over the market for a day. Short Selling is when Mr. Shark comes up to you and says "Hey, I'll give you $100 right now if I can borrow 10k bitcoins for a week. I promise I'll give the bitcoins back". Mr. Shark can now build up 100k BTC to sell without actually risking $5 million USD. Call options is when Mr. Shark comes up to you and says "Hey, I'll give you a BTC on Wednesday next week if you give me $20 today". Since Bitcoins cost $40 today, its a good deal, so you buy these contracts. On Saturday, Mr. Shark crashes the market. He not only sells his 100k BTC, he short-sells more BTC. The BTC market panics, and BTCs drop down to pennies again. Come next Wednesday, Mr. Shark fulfills his contract. He buys a bitcoin for $1, and gives it to all of the people he sold Call options to, or participated in his Short-selling deal. Again, the $5 million is just the amount of money Mr. Shark is willing to lose to gain control of the market. Mr. Shark is making money through other means.

nandemo 14y ago
Your example still doesn't add up. AFAIK there's no liquid market for BTC derivatives, but let's assume it comes to exist. > Call options is when Mr. Shark comes up to you and says "Hey, I'll give you a BTC on Wednesday next week if you give me $20 today". Since Bitcoins cost $40 today, its a good deal, so you buy these contracts. That sounds... unusual. A more usual formulation would be "I give you the right to buy BTC from me for $20 on Wednesday if you give me $x today". The fair value of x (the premium) depends on other factors besides the current price. But, more importantly, there's no "good deal": if you set $x below the fair value then the buyers will arbitrage the hell out of you. E.g. if the fair price for the call option above is greater than $20 but you sell it for $20, then a buyer will happily take your offer: they sell 1 BTC short and get $40 in cash, pay you $20 and put the remaining $20 in the bank. Come Wednesday, they withdraw $20 (keeping the interest) and use that to cover their short sell: at worst they have to buy the stock from you for $20 (but they still make money on the interest), at best the stock has crashed and they make even more.
- xyzzy123 14y ago
  There's also the small matter of liquidity. If you sell enough BTC to crash the price, you're still likely to get killed buying them all back to cover the short because: a) There's a lot more bids than asks. It's a lot easier to ratchet the price up than it is to lower it. If Mr Shark sold 50k BTC in one hit right now, he would move the price from $46 to $31. If he tried to buy 50k BTC in one hit, BTC would shoot up to $100 USD. b) Since the last crash and subsequent boom, there are lots of people now who yearn for the days of $5, $10 or even $15 BTC and will happily buy at those prices[1]. Mr Shark will be competing with their orders during his buyback. Strangely I think the first crash made bitcoin stronger. c) I'm not sure Mr Shark appreciates the psychology of the current bitcoin market. I think he assumes there are people sitting on a ton of BTC who are going to panic and sell at $5. Even a cursory reading of the bitcoin forums would show that this is not the case. [1] I sadly confess that the kool aid is delicious and I am one of them.
- dragontamer 14y ago
  Any players who arbitrage BTC in that manner only helps BTC crash harder. So someone else makes money off of your scheme, thats fine. Both players contribute to the crashing of BTC and now profit off of it.