Coinsetter raises $500k to bring leverage, shorting to Bitcoins | Hacker News Reader

Coinsetter raises $500k to bring leverage, shorting to Bitcoins

techcrunch.com

78 pointschangdizzle66 comments

An unregulated leveraged options platform with essentially no assets and what will undoubtedly be super senior debt deals with their prime broker writing naked contracts on something that moves 30% based on one website lagging out for a hour or two?

what could go wrong

bitcoins was babby's first forex trading platform. I guess it's time for nerds everywhere to get a crash course in options (emphasis on the word crash.)

god this is going to be good

Edit: Is anyone actually recording the market movements? It'd be really neat to see minute-by-minute how this goes down.

Bitcoin Charts [1] keeps history for dozens of exchanges (which all float at slightly different values) and has a free API to let you request any period of interest. Beyond just market price, I think you can get records of every individual trade. If nothing else, this whole bitcoin thing is a fascinating experiment!

[1] http://bitcoincharts.com/charts/

No legitimate prime broker is going to touch this thing.

Coinbase, a YC company, recently raised 600k[1]. It was crowdfuneded though:

Having completed the FundersClub (YC S12) crowdfunding round, Coinbase raised $268,700, a little over its goal of $250,000, from 61 FundersClub members

[1] https://www.privateinternetaccess.com/blog/2012/09/coinbase-...

The people here talking about shorting bitcoin to moderate the bubble have no idea what they're talking about. Shorting a bubble is about the stupidest thing you can do. Here's how that math works:

1) You open a margin account with $10,000.

2) You borrow 25 BTC from your broker and sell them on the market at $200. You hope that the price crashes to $0 and your net profit will be $5,000.

3) What actually happens is that the price doubles to $400. It would now cost you $10,000 to close your position (buy the 25 BTC back at market prices).

4) Your broker realizes this and decides -- without asking -- that it doesn't like this state of affairs and closes the position for you, wiping out your margin.

5) You are now $10,000 poorer.

But that would moderate the bubble somewhat, would it not?

We're talking about opening a short position in the face of manic buying. Buyers will still vastly outnumber sellers, and in the end you'll be forced to buy back at a higher price in a so-called short squeeze which will drive prices even higher.

Lots of reasonable people thought they could short the dot com bubble only to get creamed as prices moved higher.

And? This is the very definition of a margin call. Retail investors ought to RTFM when it comes to financial services products, especially when it comes to forex.

Yes I was just walking through the mechanics of a margin call on a short position that goes sour. Lots of people understand that shorting helps you profit when prices decrease, but not everyone understands the risks, especially in the face of manic bubble buying.

All I ever hear about shorting is that it's risky. It's literally lesson #1[1].

*[1] https://www.khanacademy.org/science/core-finance/stock-and-b...

You've got the right idea, but I think your numbers are off. If you shorted 25 BTC at $200.00 would you not be credited with $5,000?

So when the price rises to $400 you would have to buy back the equivalent amount with $5,000 of your own dollars and $5000 from the original short.

Math fail on my part. Thanks.

5) You are now $10,000 poorer.

You are now $5,000 poorer. You received $5k from selling the BTC in step 2, which must be netted out against the $10k cover cost.

Yep. My bad.

Don't forget that the short squeeze also feeds the runaway price of BTC and props it even higher.

Is there no scheme for shorting an asset over arbitrary timescales whose maximum possible loss is capped?

You BUY PUT options -- you buy the right to sale at a given price for some period of time. The most you can lose is what you paid out for the put option. If the price of the underlying commodity falls below the strike price, you essentially get the difference -- you buy at the new lower price and sell at the higher price.

Ahh I've of course heard of these. Thanks. This sounds like something Coinsetter would do. The only problem is that it puts the seller of the put option on the hook for an uncapped loss. Presumably there is some way to combine these techniques to allow downward pressure on a stock/index while making sure no one has to be so exposed.

I talked about shorting bitcoin to moderate the bubble, and I have some idea what I'm talking about. Don't confuse "shorting will stabilize the price" with "it's a good idea to short bitcoin".

A shorting mechanism makes it possible for people who are not bullish to participate in the price discovery process. Without a way to short, there are only two participants in the price discovery mechanism -- those who previously acquired bitcoin and now think that they're overvalued and those who think they will continue to appreciate and want to buy more. There is no way for someone who bought at $20 and got out at $100 to express an opinion that $200 is an unsustainable bubble.

Kid Dynamite wrote a good post about how an inability to borrow can keep a market irrational for a long time here: http://kiddynamitesworld.com/on-misinterpreting-pslvs-premiu...

It's irrelevant whether shorting bitcoin is going to make anyone money, or when shorting will make people money vs. when it will wipe you out on a margin call. I'm only talking about how the ability to short will make the market more efficient.

The implicit assumption that there is a bitcoin bubble, is not a fact.

Was the .com speculation the last two decades a bubble? Is Facebook stock circa 2007 a bubble? etc

Rational arguments can be both ways and I'd be wary of anyone selling certitude on either side the fence.

The more likely scenario is getting the timing wrong, e.g. price goes up to, say $300 before falling down to $100. If you don't have enough to cover it when it hits $300 or the balls to stay in until it goes down, you can still end up with a lot of pain. In the end it's the simplest to either go long or stay out, and let those who know how to manage the risk do the shorting work.

As a former trader (FI arb), I absolutely love this... for all the wrong reasons. I always wanted to DDOS my way to higher profits.

And who says there isn't any innovation in online gambling?

Are there some 0s missing? $500K doesn't sound like any amount of money to open a "mature" trading platform.

On the Bitcoin Software Maturity Scale, where hundreds of thousands of dollars routinely gets entrusted to 17 year olds coding bucket shops in Ruby on Rails and 80% of the global transaction volume is run through a company in Tokyo set up to trade Magic: The Gathering cards, a guy with financial industry and experience and enough money to pay for a single professional security audit is practically IBM.

Your point is true, but fyi the M:tG aspect was long gone by the time gox was sold to Tibanne. It just happened to be a domain the original founder had around.

And yet look at how the one YC-funded, quant-founded Bitcoin company is doing in terms of security and stability.

Bitcoin Software Maturity Scale

Ah yes, that scale that's numbered from 0 to 0.8 and then back to 0.7.

> and 80% of the global transaction volume is run through a company in Tokyo set up to trade Magic: The Gathering cards

Gasp! You're right! What other companies have I foolishly entrusted parts of my life to?

/looks at his video game console, run by a company in Kyoto set up to sell handmade hanafuda cards

Not you too, Nintendo! ;_;

I don't know what to believe in now.

Video game console != currency exchange company.

That was not my point at all. My point was that patio11 is, shamefully, engaged in well-poisoning by bringing up the distant origins of MtGox, which have zero relevance to any consideration of MtGox's current professionalism, security, regulatory compliance, risks to users etc. (A point that you would think would be obvious to anyone on Hacker News, who is aware of how companies 'pivot' all the time.) It has changed too much, isn't even owned or run by the same people, and has a long enough and spotty enough track record to judge on its own.

I illustrate the irrelevance and fallacy by applying the same well-poisoning to a pleasingly symmetrical example: another Japanese company which was also set up to deal with playing cards - Nintendo. No one would dream of judging Nintendo by its playing cards origin, because that was a long time ago, different people are involved now, and it has ample room to judge it since. Just like MtGox.

For example, MtGox shutting down trading is a great argument against its competence! But it shutting down trading has nothing to do with its origins as a card trading site. Bringing that up is pure rhetoric.

Long overdue. I've done some research on trying to short Bitcoins and could not come up with anything better than a naked short position or something with tremendous counterparty risk. I'm more interested in Bitcoins as a legitimate means of exchange rather than as an investment, and a service like this would enable me to protect against volatility, the same way similar services in existing ForEx markets protect borrowers and lenders in foreign markets.

How does the ability to short protect you? Genuinely curious, I don't know anything about markets beyond traditional buy and sell.

Say I sell you a house and allow you to finance it with a mortgage denominated in Bitcoins. The house would normally sell for $250,000, so as of yesterday, I would have accepted 1,000 bitcoins for it. Let's then say that over the course of the next year the price tumbles to $5 per bitcoin. You can now go out and spend $5,000 to pay off the mortgage entirely. However, if I shorted bitcoins by buying put options(the right to sell them at a certain price at some point in the future) which enabled me to sell 1,000 bitcoins at $230, I would effectively insure that I will only ever lose a maximum amount of $20,000 because of the volatility as opposed to the $245,000 I would lose if I was not able to hedge my position. Similarly, if I had a price for something i wanted to sell truly denominated in bitcoins, (i.e. not dynamically changing to always reflect a constant price in USD or some other currency), there would be a similar risk, particularly if I'm keeping my earnings in the form of bitcoins instead of immediately selling them. You can start to see why options are a very important step in something becoming a true currency. It allows you to safely deal with it somewhat more independently of volatility.

Yes that acts just like purchasing an insurance policy! I guess I was imagining the case where you short and then the price doubles when you need to buy, and not considering that you could buy an option and only use it if the price falls. Thank you for taking the time to explain it.

This is a big deal. With leverage and shorting, the only people who will have use for BitCoins (as opposed to a long position in a margin account) will be the small set who need the specific type of liquidity that BitCoin offers... and that will prove to be a small set. (People who need regular anonymous liquidity have other means.)

I will also remark that, even when a bubble is underway, shorting is dangerous. If you don't know what margin calls are (and how much it sucks to get hit by one) then stay out.

The real value in bitcoin is that it provides settlement from anywhere in the world to anywhere in the world in at most a couple of hours. Very few other options exist for such rapid settlement.

Whatever happens with bitcoin, that pace of commerce exists in the world now.

To me, the interesting thing to be doing at this point is figuring out how to take advantage of that speed with new business models.

No, the real value in bitcoin is the blockchain. It shows us a method to use to create and mutate an agreed-upon public state history using a p2p network. Namecoin shows that this can be used for other purposes than merely currency.

Blockchain based coordination and provision of public goods is the future.

Hmm, that's an interesting point. I wonder if it could be adapted for secure online voting somehow? Perhaps we could finally have a system that's anonymous but prevents double voting?

Voting is an incredibly hard problem. For instance, your description "anonymous but prevents double voting" is ripe for fraud: I go around paying people to vote for me (or intimidating them into doing so). The secret ballot, cast in public, is resistant to that attack.

More generally, one requirement of a voting system is that people trust it. Any elaborate system, no matter what it's theoretical advantages, can have a hard time meeting this hurdle because there are many people in the population who are NOT experts on cryptography and won't be comfortable with any elaborate system.

If you need further evidence on how dangerous shorting is, even for something that everyone thinks will go down, consider the "Widowmaker" bond trade.

Essentially, most traders agree that the Japanese Government (JG) will have to soon increase the yield of their new bonds (which have historically been very low) because of Japan's huge and growing national debt (200% of GDP) and the slowly increasing risk of defaulting. Once this happens, the value of the current bonds in the market will drop because who wants to buy bonds with a lower yield at the same price? After the Fukushima disaster, investors thought for sure that the JG would increase yield to get more money to repair infrastructure, deal with a weakened economy, etc. Many, many hedge fund managers have shorted Japanese bonds and all of them have lost money. Yet, the idea persists and every day, traders are shorting JG bonds, convinced that it can't stay low forever. No doubt, one day it will pay off, but will you be the lucky one to cash in? Unlikely.

Haven't the bond yields, and hence prices, been flat? If so, why did anyone loose money?

You miss the big picture. Digital currencies will exist as an instrument to hedge against currency fluctuations, commodity manipulation, and to let you deploy liquid money into assets with calculable appreciation/depreciation rates.

It won't take much more than a large industry coalition to settle the price fluctuation around bitcoins, which will follow the basic organic market coalition... i.e. vendors accepting bitcoins.

In the future, we may not be using bitcoins, but you can bet we're going to be using coins made of bits. I don't know if my bitcoins will be worth anything eventually, but they will be an artifact of great change at least.

> In the future, we may not be using bitcoins, but you can bet we're going to be using coins made of bits.

Well, in that most sovereign currency denominated accounts in the modern world exist as digital records, sure, we have been for many years.

I mean that it will be useful to have currencies allocated by computer programs in predictable fashions, and to be able to track the history of each "dollar." Today, we only have politically controlled currencies, and we can only track transaction history, not dollar history.

Digital currencies will exist as an instrument to hedge against currency fluctuations, commodity manipulation, and to let you deploy liquid money into assets with calculable appreciation/depreciation rates.

National currencies are much less volatile than Bitcoins have shown themselves to be.

In the future, we may not be using bitcoins, but you can bet we're going to be using coins made of bits.

I think we can agree there. "Bits" have nothing to do with it. It's this:

Money pre-1800: metal (usually gold or silver) that can be used to pay taxes and hire killers to defend land.

Money 1800-2075[?]: debt of large institutions, with equity a small player.

Money post-2075: access to talent (the new limiting factor on getting ideas into implementation). We're starting to see that. I put that at 2075 because people are very conservative when it comes to money, so even though that will be the definition of wealth decades before that, I think it will take a long time before we can come up with a reasonable talent-based currency. What would the proof-of-work model be? It's hard to say.

> National currencies are much less volatile than Bitcoins have shown themselves to be.

I think Zimbabweans, Argentinians, Russians, Mexicans, Romanians and a handful of other nationalities would disagree with you.

> National currencies are much less volatile than Bitcoins have shown themselves to be.

Huh? Based on what data? Timeframe? What's "volatile"? BTC hasn't even been around for more than a couple years, and isn't even accepted by merchants yet.

It's not risky if you know when and by how much it's going to go down. However, you need to have a time machine for that.

This is great news if it works out. The ability to short is an important part of moderating a bubble.

You can short now: icbit.se is a well-run exchange and derivatives market.

Congrats to Coinsetter! Hopefully this should lead to longer term price stability of bitcoins.

Under what scenario would this increase stability in bitcoins?

With the price soaring to new heights, how do you pay for things in bitcoins when a single bitcoin is worth so much? Can you pay in fractions of a bitcoin?

Yes, just like you can pay in fractions of a dollar or Euro.

Thanks - should have checked wikipedia first - "In trade, one bitcoin is subdivided into 100 million smaller units called satoshis, defined by eight decimal places."

Wouldn't this, ironically, stabilize Bitcoin, if others try to take advantage of its growth and try to bring it down again?

It would indeed stabilize Bitcoin, but I don't see what's so ironic about it. Short-selling and other derivatives substantially stabilize a lot of markets, popular delusion to the contrary notwithstanding.

But now there is double the incentive to artificially drop the value of BitCoin as much as possible, no?

I don't know how trading bitcoins work, but won't this increase volatility both ways in addition to overal stability (taken as an average).

Yes--basically, short-selling just creates the same kind of "flight to quality" gravity that kills markets when people start to feel pessimistic about them, but pulls in the opposite direction: so now, on average, everything will "draw a straight[er] line", but moment-to-moment you'll just have price spikes that kill the short positions in the same way price-plummets kill the long positions.

What Bitcoin really needs to smooth out its volatility, as far as I can tell, is HFT market-makers trading tiny amounts of BTC by the millisecond. Which should theoretically be easier with an all-digital currency--but, if done in "real" BTC, requires probably at least a million times the block-chain growth velocity Bitcoin currently has. It could still probably be done with "BTC liabilities" on a private exchange, though.

That's an interesting question and I think it's hard to say.

If by "stabilize", you mean reduce volatility, I would bet no. I would say we could possibly see even more volatility once leverage and shorting enter the picture.

But, if by "stabilize", you mean put some downward pressure on the price, then I would guess maybe or even likely.

Under the traditional rules I would have more confidence in the latter than just maybe, but with bitcoin, it seems like we've long ago tossed the traditional rules.

I just found out that IG Markets have added Bitcoin binaries to their trading platform. You can bet on the Bitcoin price being above / below $100, $150, $200 etc on MtGox at some point in the future.

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