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> The biggest issue with using Bitcoin is the price volatility. In the time between when Robin sends Joseph payment for goods in Bitcoin and they arrive in Keny

by gavazzy 12y ago

> The biggest issue with using Bitcoin is the price volatility. In the time between when Robin sends Joseph payment for goods in Bitcoin and they arrive in Kenya, the price can fluctuate wildly and cause losses for Joseph. To eliminate the price risk, Joseph hedges Bitcoin payments by selling BitMEX futures contracts that lock in the USD value. Someone shorting Bitcoin will buy the contract, while someone going long will just buy Bitcoin directly. How do they guarantee that enough people will be shorting Bitcoin to cover all transactions? And how do they convince others to buy Bitcoin through their site? This is very important, because if the volume of merchant transactions exceeds the contracts, then they really won't have reduced volatility Finally, how do they enforce/verify contracts?

davidgerard 12y ago
The hardest thing with shorting Bitcoin is expecting the exchanges to actually cough up when it comes due ... because exchanges have been failing left, right and centre this year, if not just taking everyone's money. Statistically, trusting Bitcoin exchanges is a terrible idea.
- Animats 12y ago
  Right. That's especially bad for a futures exchange. A cash Bitcoin exchange doesn't have any trading risk exposure. It can fail only through incompetence or criminality. A futures exchange/broker has trading risk - they have to be able to collect from losing traders. They say "BitMEX stands behind all trades." That will probably break when someone suffers a big loss and doesn't pay up. The exchange is in the Seychelles, or at least claims to be. Collecting may be difficult. There's no exchange control problem buying goods from China - that's both allowed and encouraged.
  - STRML 12y ago
    Hey Animats - Sam here, CTO of BitMEX. We don't assume that anyone suffering a big loss can or will pay up - instead we proactively take steps in real-time to liquidate traders in a controlled manner to ensure that no trader can reach bankruptcy. This way, traders are force-exited from their positions well before they are able to reach anywhere near negative equity. We are indeed incorporated in the Seychelles, but we are open about who we are, unlike some others. Arthur Hayes (our CEO) and I are very proactive about risk, and we use our team's significant experience in finance to ensure that our exchange is constantly minimizing its risk. This is a gain for our customers as well. If BitMEX does not sustain any systematic loss, it can guarantee settlements. And since it guarantees settlements, it is finally an exchange where businesses and traders can actually hedge risk in Bitcoin, without having to simply sell coins.
waterlesscloud 12y ago
Bitcoin futures is the fastest growing segment of bitcoin trading at the moment. Mostly it's traders wanting the high (10x-50x) leverage that's available with the futures products that are out there now. And it's mostly on the Chinese exchanges, though it might well be westerners making most of the volume. It's still a very immature segment of a relatively immature market, but the price for contracts generally stays within a dollar or two of the spot price (well, an index of several spot prices). There are several problems using it as a valid hedge at the moment, but the main one is liquidity. Anything over a couple hundred BTC (leveraged value) becomes a challenge to move in and out of the market. And that's for futures that are weekly in nature. The longer term products are even less liquid. Still, it's a relatively young market, and it's already growing quickly. It'll probably get there. As far as using cryptocurrency for international trade, there was (is?) a coin trying the interesting experiment of a hard peg in value. Urocoin was created by an international trade company to be pegged at 1 URO = 1 metric tonne of urea. In other words, they were guaranteeing that whatever the market price, they'd deliver 1 tonne for one coin. They claimed a few deliveries and held a conference in Hong Kong explaining their plans for the future, but they seem to have faded out. There were a lot of claims they were a scam, but that seemed unlikely. A lot of work for a scam when you can do much much less and scam successfully with an altcoin. More than likely they just failed. But the idea of pegging a coin to a commodity to reduce the overhead of international trade was an interesting one, and one that will likely see more experiments down the road.
STRML 12y ago
Hey - Sam here, CTO of BitMEX. We aren't a spot market, we are derivatives only. So if you are shorting Bitcoin futures, someone else is going long on Bitcoin futures; you never take a position against the exchange itself. Therefore all contracts are verified by the central counterparty; us. There is risk involved for the exchange when you offer leverage, which is why we offer sane leverage (3.3x to 5x, not 10-20x like our Chinese competitors). There are a few schools of thought for managing this risk. Our competitors simply do their best to liquidate users when their equity gets too low. This is tough to do without loss; on 20x leverage, a 5% move will wipe out all value in an account. Bitcoin moves by more than 5% in a day very regularly. These exchanges simply take the loss and spread it out among all their customers. The customers that have made money on a given (weekly,monthly,quarterly) settlement simply have their winnings deducted by the amount of money the exchange has lost. This method is great for gamblers and unscrupulous investors, but in the end it is not much more than a slot machine. It is utterly useless for businesses; you can't properly hedge if your profits can be docked at any time because other users have gone bankrupt. Our view at BitMEX is that Bitcoin needs a proper derivatives market so businesses can hedge. Most Bitcoin companies simply sell at spot exchanges to hedge risk, but this has significant downsides. We manage our risk through limited leverage, limits on price movement, and with an advanced liquidation engine that can incrementally liquidate positions in a safe way to prevent major price movements. Our competitors simply place a market order for the full position's value, which leads to the dreaded "margin call cascade" (of course, "margin call" is the wrong word here, but on most Bitcoin exchanges there is no distinction between "margin call" and "liquidation"). These and other unique buffers give us the ability to guarantee settlements.

by gavazzy 12y ago

davidgerard 12y ago

The hardest thing with shorting Bitcoin is expecting the exchanges to actually cough up when it comes due ... because exchanges have been failing left, right and centre this year, if not just taking everyone's money. Statistically, trusting Bitcoin exchanges is a terrible idea.

Animats 12y ago
Right. That's especially bad for a futures exchange. A cash Bitcoin exchange doesn't have any trading risk exposure. It can fail only through incompetence or criminality. A futures exchange/broker has trading risk - they have to be able to collect from losing traders. They say "BitMEX stands behind all trades." That will probably break when someone suffers a big loss and doesn't pay up. The exchange is in the Seychelles, or at least claims to be. Collecting may be difficult. There's no exchange control problem buying goods from China - that's both allowed and encouraged.
- STRML 12y ago
  Hey Animats - Sam here, CTO of BitMEX. We don't assume that anyone suffering a big loss can or will pay up - instead we proactively take steps in real-time to liquidate traders in a controlled manner to ensure that no trader can reach bankruptcy. This way, traders are force-exited from their positions well before they are able to reach anywhere near negative equity. We are indeed incorporated in the Seychelles, but we are open about who we are, unlike some others. Arthur Hayes (our CEO) and I are very proactive about risk, and we use our team's significant experience in finance to ensure that our exchange is constantly minimizing its risk. This is a gain for our customers as well. If BitMEX does not sustain any systematic loss, it can guarantee settlements. And since it guarantees settlements, it is finally an exchange where businesses and traders can actually hedge risk in Bitcoin, without having to simply sell coins.

waterlesscloud 12y ago

Bitcoin futures is the fastest growing segment of bitcoin trading at the moment. Mostly it's traders wanting the high (10x-50x) leverage that's available with the futures products that are out there now. And it's mostly on the Chinese exchanges, though it might well be westerners making most of the volume. It's still a very immature segment of a relatively immature market, but the price for contracts generally stays within a dollar or two of the spot price (well, an index of several spot prices). There are several problems using it as a valid hedge at the moment, but the main one is liquidity. Anything over a couple hundred BTC (leveraged value) becomes a challenge to move in and out of the market. And that's for futures that are weekly in nature. The longer term products are even less liquid. Still, it's a relatively young market, and it's already growing quickly. It'll probably get there. As far as using cryptocurrency for international trade, there was (is?) a coin trying the interesting experiment of a hard peg in value. Urocoin was created by an international trade company to be pegged at 1 URO = 1 metric tonne of urea. In other words, they were guaranteeing that whatever the market price, they'd deliver 1 tonne for one coin. They claimed a few deliveries and held a conference in Hong Kong explaining their plans for the future, but they seem to have faded out. There were a lot of claims they were a scam, but that seemed unlikely. A lot of work for a scam when you can do much much less and scam successfully with an altcoin. More than likely they just failed. But the idea of pegging a coin to a commodity to reduce the overhead of international trade was an interesting one, and one that will likely see more experiments down the road.

STRML 12y ago

Hey - Sam here, CTO of BitMEX. We aren't a spot market, we are derivatives only. So if you are shorting Bitcoin futures, someone else is going long on Bitcoin futures; you never take a position against the exchange itself. Therefore all contracts are verified by the central counterparty; us. There is risk involved for the exchange when you offer leverage, which is why we offer sane leverage (3.3x to 5x, not 10-20x like our Chinese competitors). There are a few schools of thought for managing this risk. Our competitors simply do their best to liquidate users when their equity gets too low. This is tough to do without loss; on 20x leverage, a 5% move will wipe out all value in an account. Bitcoin moves by more than 5% in a day very regularly. These exchanges simply take the loss and spread it out among all their customers. The customers that have made money on a given (weekly,monthly,quarterly) settlement simply have their winnings deducted by the amount of money the exchange has lost. This method is great for gamblers and unscrupulous investors, but in the end it is not much more than a slot machine. It is utterly useless for businesses; you can't properly hedge if your profits can be docked at any time because other users have gone bankrupt. Our view at BitMEX is that Bitcoin needs a proper derivatives market so businesses can hedge. Most Bitcoin companies simply sell at spot exchanges to hedge risk, but this has significant downsides. We manage our risk through limited leverage, limits on price movement, and with an advanced liquidation engine that can incrementally liquidate positions in a safe way to prevent major price movements. Our competitors simply place a market order for the full position's value, which leads to the dreaded "margin call cascade" (of course, "margin call" is the wrong word here, but on most Bitcoin exchanges there is no distinction between "margin call" and "liquidation"). These and other unique buffers give us the ability to guarantee settlements.