Bitcoin Climbs as Futures Debut Fails to Incite Attack by Shorts | Hacker News Reader

Bitcoin Climbs as Futures Debut Fails to Incite Attack by Shorts

bloomberg.com

91 pointsmancerayder93 comments

You’ve been able to short bitcoin on okcoin, bitfinex, bitmex either via margin or through futures products for years.

Secondly, newly launched futures products will have very thin liquidity due to the lack of market makers. There is no way a short/long position on CME will move the market in a meaningful way for a while.

I wish Bloomberg et al will stop repeating this “you can’t short” meme because it you can and you could for years.

Counterparty risk makes those venues practically useless for shorting. If Bitcoin goes up, you lose on the short. If Bitcoin crashes, the exchanges likely get compromised and you lose on counterparty risk. The only time you "win" is if Bitcoin goes down a little. Those aren't savvy trading parameters.

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.

> 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/2...

[2] https://www.bloomberg.com/news/articles/2017-12-05/mystery-s...

[3] https://www.theguardian.com/technology/2017/jul/11/gox-bitco...

[4] https://www.bloomberg.com/news/articles/2017-12-14/goldman-s...

[5] https://www.cmegroup.com/education/files/balancing-ccp-and-m...

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)

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.

> 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-dela...

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.

> 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-...

https://www.bitmex.com/app/insuranceFund

And cascading margin calls are possible, but it seems like all exchanges except for gdax/coinbase have a strategy to handle it.

> https://www.bitmex.com/app/insuranceFund

That isn't an insurance fund. It's BitMEX's reserves, re-branded. In the event of a crash the value of these assets would fall. If the price drop is large enough, it could burn through these reserves.

It is prudent that BitMEX seems to be holding reserves. This is what good exchanges do! But consider why Goldman Sachs is requiring 100% margin while Bitfinex is doing the same at 30% [1]. The additional risk is borne by the exchange's (or in GS's case, broker's) equity. When that runs out, the exchange (or broker, as applicable) busts. We separated broker-dealers, who can lend on margin, from the exchanges in the equity markets for a reason.

> it seems like all exchanges except for gdax/coinbase have a strategy to handle it

Based on what?

[1] https://support.bitfinex.com/hc/en-us/articles/115004555165-...

Lending rates on bitfinex imply a huge counterparty risk. Somehow I believe what that tells me more.

Prices can move without filled orders no problem as orders get cancelled. If market makers start pulling out, the order book can become extremely thin. For the passive traders that stay in they'll probably react much more strongly to trades on the book, so even if some liquidation makes it through much won't.

Look at the GDAX ethereum crash for a recent real-live crypto example.

I would not want to trade on an exchange that claws back profits.

It is called the woodchipper for a reason

I upvoted you even though I disagree with your final statement since I saw you were being thrashed down. Hope this comment doesn't get buried because “does some weird stuff” is a pretty perfect summary of the borderline-criminal behaviour of that particular exchange.

Shorting requires two parties. Someone has to loose the bet. If either that person doesn't hang around or the escrow fund disappears mtgox-style, your savvy short position also goes up in smoke. Or maybe, during the crash, the exchange decides to settle up with you by giving you bitcoins. That transfer should only take a few days/weeks during the panic of a real crash. Enjoy the ride.

Wall Street is correct in saying that you cannot short bitcoin because the massive regulatory infrastructure that backs such transactions doesn't really exist.

One of my favorite websites is running an add: "Buy bitcoins by credit card, before it's too late!" That too late thing is coming sooner than later.

> That too late thing is coming sooner than later.

Not saying it's not coming, but can you estimate the time frame? Otherwise, this statement basically contains zero information.

A month. Bitcoin has in the last few weeks become next to useless as a currency. 30+$ to get a trade executed within an hour is unacceptable. So it isn't currency anymore. It is now just an investment vehicle. Skyrocketing price + no underlying use/value means this looks more and more like a pyramid. When the pure investors start pulling out their profits (a monthly thing) only to find that more difficult than anticipated, the panic selling will start.

Also I’m afraid it will be hit harder than before this even begun, because now we know Bitcoin doesn’t scale.

Theoretically. In reality - real traders couldn't even trade this thing as there was no infrastructure and too much system risk. If I fund my speculative 100-500k trading account who guarantees I'll be able to close out and cash out when I want? Noone could so far. Futures market will add much needed liquidity and confidence that one could actually trade this thing actively and with apropreate position sizes.

So far all BTC trading was done mostly by hobbyists who have no clue how markets function.

Market makers will have to trade on these unregulated exchanges so that they can hedge. So all you have done is unload the risk to the MMs. Which means if the MMs operate on the same risk model as you. Then you can expect the futures products to be highly illiquid.

100% correct. It's painful to see how little otherwise intelligent tech people know about investing...

Personal investors/prop traders have been able to short for years. Investors who aren't allowed/don't want to have direct custody of assets haven't been able to short until now.

So what do you guys think of this?

I believe all BTC trading spikes are driven by some of the existing owners swapping coins and cash every now and then to keep the trading volume high. It is in their best interest to get the prices bounce back higher whenever it goes down.

Once the price is manipulated higher, they can sell and keep the cash when someone who thought BTC is the next "I-Dont-Know-What-It-Is-But-Its-Going-Higher-Everyday" buys it. Since there are no regulators to protect against market manipulation, it's a fairly easy thing to do 'legally'.

As per GDAX you only need 10s of millions of dollars worth of coins to manipulate and mint money on this. Ordinary folks can't do it, but those who have been holding a few thousand or tens of thousands of coins can easily do this. The bitcoin billionaire brothers for example can do this. Buy every low priced limit order until it hits the price they want and then sell it off based on the frenzy buying on the back of the "always-bouncing-back-safe-harbor-currency".

Rinse and repeat every time price takes a dip.

I hope at some point someone will step into regulate things around bitcoin so that the real market demand will determine its prices. I read an article that people are mortgaging their homes to buy BTC.

If nothing changes, we might be looking at a sequel of the movie "The Big Short"

Cryptocoin exchange rates are largely defined by pump and dump whale gangs spreading rumors and luring in novice investors.

[0] https://news.ycombinator.com/item?id=7126153

Couldn't your theory be validated by seeing large sums repeatedly moving to or from the same wallet IDs?

You would have to be nuts to short when there's an exchange printing billions of dollars of unbacked tokens they can use to drive up the price at will.

If you want to short cryptocurrency, short tethers.

How would one do that technically? The value doesn't fluctuate. How would you time when tether goes to 0? If it ever goes to 0, that is.

> there's an exchange printing billions of dollars of unbacked tokens they can use to drive up the price at will

Can you explain? What's the exchange? How do they print Bitcoin (I presume that's what you mean by "tokens")? How does that drive the price up rather than down?

The token is called "Tether" and it's run by the Bitfinex exchange. It's supposed to be backed by US dollars, but they've refused to release any third-party audits to support that statement and it says this on their website: "There is no contractual right or other right or legal claim against us to redeem or exchange your Tethers for money. We do not guarantee any right of redemption or exchange of Tethers by us for money. There is no guarantee against losses when you buy, trade, sell, or redeem Tethers." So, basically, it's Monopoly money.

Bloomberg recently did a story on it:

https://www.bloomberg.com/amp/news/articles/2017-12-05/myste...

And the market cap is over a billion! I wish I could print a billion in monopoly money and exchange it 1:1 for real dollars...

https://coinmarketcap.com/currencies/tether/

Ah, so we're into fractional reserve territory. Never mind, I hear there are cryptocurrencies that will save us from that.

Of course, there's SeriouslyGuysUseThisLimitedCoinOnlyNoOtherCoinsCoin.

That is not how market caps work. No one can exchange all the Tethers for the market cap in USD.

No, I'm saying the market cap is the number of tethers that tether.to has printed so far.

To be fair, no one can exchange Tethers for any amount of USD. Bitfinex and all other Tether-using exchanges only allow people to cash out with Bitcoins. (Instead of the weakness of tethers being reflected in lower prices, it is reflected by inflated the tether-denominated prices for Bitcoin inside Bitfinex)

I'm consistently confused as to who is buying all the tethers in such crazy amounts. It's not like they are appreciating in value. They are sort-of pegged to the dollar, but why not just hold the real dollars?

>why not just hold the real dollars?

Some exchanges don't accept fiat, so if you want to trade USD/BTC you settle for USDT/BTC.

Do you know if any of these exchanges are part of the index CME uses?

Out of the constituent exchanges only Kraken has USDT markets. Though I am not sure if they have difficulties in cashing out USD or not.

No one is buying those tethers. Bitfinex is printing them and using them on their own exchange's margin trading market. They use it to wash trade the price up or down as desired. There is some evidence they have been wash trading down to trigger stop loss sell orders and buying the cheap coins. Then they wash trade up and sell.

This is pure speculation.

The relationship between Bitfinex and Tether is real though, executives have positions and board seats in both companies.

That answer doesn't make any sense. Bitfinex is buying bitcoins from itself?

Could you please explain in more detail?

People get upset when you print USD, so Bitfinex instead creates USDT out of thin air and then uses it to buy BTC on its exchange. This would be OK if the Tether was actually backed by USD reserves dollar for dollar, but there is zero evidence that this is the case.

I understand that, but my question is why would anyone buy USDTs in such quantities? The total is now close to a billion dollars, as far as I understand.

Exchanges make it cheaper/easier because they're all light on USD and banking/tax rules make all sorts of sketchy characters want to avoid USD. There are also probably a lot of people who don't know any better and think that it's as safe as USD.

How have they not been sued for this yet? They're advertising monopoly money as being backed by real money.

They actually say on the website that they're not redeemable.

Bitfinex isn't buying Bitcoin from itself. It is buying from customers that use their exchange, using fake money that they are printing out of thin air.

And why are the customers buying USDTs in such large volumes?

Technically all cryptocurrencies are "fake money printed out of thin air", so that doesn't bother me. I just don't get the appeal of holding USDT.

> And why are the customers buying USDTs in such large volumes?

Tethers purchasing is currently unavailable for general consumers[1]. The only way for new customers to trade in Bitfinex is to purchase cryptocoins elsewhere and then transfer them to Bitfinex.

Bitfinex claims that there are unnamed "institutional investors" that are purchasing all those tethers [2]. I find that hard to believe. Most likely, the vast majority of tethers in circulation are printed out of thin air and haven't been purchased by anyone.

> Technically all cryptocurrencies are "fake money printed out of thin air"

Assuming a perfectly competitive environment, the bitcoin mining rewards should converge to the cost of mining, which leaves a smaller profit. On the other hand, Tethers are unilaterally printed by Bitfinex, with no mining cost. All the printed tethers go straight towards purchasing Bitcoin and defrauding Bitfinex customers.

> I just don't get the appeal of holding USDT.

Bitfinex attracts speculators because they allow leveraged trading (including shorting), trade lots of different cryptocurrencies in addition to Bitcoin and have lax know your customer / anti-money-laundering requirements. But I agree with you -- I am baffled why any sane person would want to come anywhere near Bitfinex.

--------

[1] https://wallet.tether.to/app/#!/signup

[2] https://medium.com/@bitfinexed/https://medium.com/@bitfinexe...

Tethers are used on exchanges that don't deal in dollars. Traders who want to sell Bitcoin for USD sell them instead for USDT (Tether). Theses are the people who are buying the newly issued Tether. New Tethers are issued so that USDT stays very close to $1. This works great as long as Bitcoin continues to go up relative to the dollar. If/when Bitcoin goes down significantly theses same exchanges would need to buy up Tether to keep the price near $1. But that means the issuers of Tether will have to give up the massive profits they are currently reaping. If they don't the house of cards comes crashing down.

> New Tethers are issued so that USDT stays very close to $1.

That's the problem, new Tethers should only be issued when $1 USD is sent to the issuer and deposited in its audited bank account.

Think of it like casino chips. The house is giving them out instead of money when you win, hoping you'll lose them playing instead of cashing out. That way they only need the money they expect to have to cash out instead of the value of the chips on the floor.

But you buy casino chips, because you don't have a choice. With crypto you have tons of options, especially on Bitfinex.

Sorry, but what? What exchange is printing billions of $ of unbacked Bitcoins?

He's right. It's Bitfinex and it's been going on for a while now. A ton of people have called them out and they've largely ignored everyone. They've promised an audit and no audit has materialized in the years since they've promised one.

There's a fantastic anonymous twitter account that's been calling them out for months now and gathering pretty damning evidence: https://twitter.com/Bitfinexed

Bitfinex prints Tethers, not Bitcoins.

> Bitfinex prints Tethers, not Bitcoins

"Yeah, but he's our bastard" [1]! Joking aside, you deposit a coin with Bitfinex and get some pixels saying "one Bitcoin". You then trust those pixels can be exchanged for Bitcoins or dollars down the road. If they're playing fast and loose with one, it's a funny argument to make that they aren't doing the same with the other.

[1] https://en.wikiquote.org/wiki/Talk:Franklin_D._Roosevelt

They make claims that Tether are 1:1 redeemable with USD.

I didn't say they were.

How did you think your comment that "you would have to be nuts to short" on an article about shorting Bitcoins would be taken? Please explain how Tethers can be used to manipulate and increase Bitcoin price.

Don't short tethers. The margin rates might just eat your gains from it going to 0.

It's $1.15b[1] and most likely to be the result of incoming USD wires. The Tether USD in circulation accounts for 0.36%[2] of the Bitcoin (BTC) market cap.

- [1] http://omniexplorer.info/ask.aspx?api=getpropertytotaltokens...

- [2] https://coinmarketcap.com/

Could someone with some forex knowledge explain how cash-settled futures do and don't affect spot markets?

I and some others explained this in another thread [0] about a week ago. The basic explanation is that because of a simple arbitrage relationship between futures and spot, prices in these markets are tightly linked regardless of how the futures contracts are settled.

0. Read the replies to this comment: https://news.ycombinator.com/item?id=15895477

I dont think there are any experienced shorters sane enough to short something with this much upward momentum. Once we get a decent downtrend though watch out.

That's not how it works... If you believe that "upward momentum" or "downtrend" mean something, why don't you go long now and sell at the first signs of weakness? Easy money, right? In reality, there are no simple and exploitable rules like this.

Literally drops after the article is published. From ~19,338 to now ~18,469

Authors probably shorted bitcoin before publishing the article.

I have to admit that I'm quite surprised by this, I had expected that the debut of futures would have caused an almost-instant disruption of supply and demand.

Still, any time now...

The problem is that all of the Bitcoin futures are cash settled contracts.

This means that they are not resolved with delivery of the commodity and have no direct influence on the underlying markets.

Today BTC futures are gambling.

In China based on Bet365 data the most popular wager is direction of the market going i.e. up/down.

Short term betting (for or against) Bitcoin is unlikely to result in much profit.

It is not so much a directional play as it is a force for arbitrage opportunities.

True, but those arbitrage opportunities will stabilize the price and make other similar opportunities less profitable. I suspect that the real reason these haven't all been ironed out (exploited already) is because Bitcoin exchanges lack the infrastructure guarantee that transactions close when they are expected to, and thus the fee levels wash out much of the arbitrage (for now). But arbitrageurs operating outside the exchanges can use this to their advantage and probably harvest a bit of profit on the chaos for the time being.

Yeah - exactly.

Yep, this is a good explanation of how it's done, https://en.wikipedia.org/wiki/Convergence_trade

What goes up must come down. What goes up fast and hard usually falls faster and harder. Market 101.

That's not how it works.

What do you disagree with?

When was the last time gold was traded for < $10? Not everything that goes up is surely to go down. At least not in a lifetime. Nobody really knows what's going to happen, that's market 101.

Everything goes to 0 eventually. The statement is true. Gold is obviously much less likely to go to 0 unless the human race is either on the brink of extinction or extinct, but when you're talking about stocks or currencies a huge percentage will go to zero in less than human lifespan.

Something as simple as Apple shares doesn't follow your pattern.

its not my pattern. its just the way markets work. of course it applies to apple as well as any other asset class. its just a matter of your time horizon and time frames. in any stock or asset there is time to be bullish, there is time to be bearish and there is time when no position is a position as well.

Did not read the article, looks like someone is writing to boost the rise. As of this writing BTC is about $18.6k. It was hovering around $19.5k this past weekend.

This seems to be the case with most of the articles about Bitcoin. I suspect there are a number of large holders and exchanges paying PR firms to get stories like this published/upvoted/etc and keep the train going.

I don't view Bloomberg as a paid-to-write-articles-to-sell type of place [edit: other than advertising space]. Otherwise no one would be taking them seriously, least of all financial professionals sitting in front of their expensive terminals.

Call me skeptical about the alleged claims about Bloomberg's motives.

Also the article doesn't contain mind-blowing information, it's just pointing out that shorting isn't happening yet.

I'm not suggesting Bloomberg is accepting money, but individual writers would be a much softer target.

It's also possible that the writers are invested in Bitcoin themselves.

Anything is possible, but an accusation of bad faith requires more than the off chance that the accuser is correct. Some argumentative support for the accusation, for example.

You didn't read the article but people had to read your comment. I'm not sure why people do this, isn't Reddit available for that?

I don't see why Bloomberg journalists (or the corporation responsible for selling terminals, software, datafeeds and such) would care one way or another about the rise. Or drop.

Reply on news.ycombinator.com