I wasn't around during the Bitcoinica fiasco so don't really know the details of how they operated their liquidity. I only know that they were hacked and lost a great deal of Bitcoin.

From: Zhou Tong <>
Date: Thu, May 3, 2012 at 5:54 AM
Subject: Re: I want to deposit money on Bitcoinica
To: Tihan Seale <>
Cc: Donald Norman <>, "
<>, "

 
 
 Hi,
 
I'll look into the problem too. To my surprise (and maybe yours), it seems
that we bought some Bitcoins at too high prices. This might be an
explanation for the drop in equity for recent week.
 
I'll take these actions to try to rectify the problems:
 
- Increase the confidence level to 2500. Since the increase in guaranteed
liquidity, our percentage hedge has increased a lot. It makes sense to
"play big" since the market is more mature and much less volatile. We can
always revise this decision if anything changes.
 
- I don't really want to increase the spread, but I can keep adjusting it
based on my observations. If you permit, I will adjust between the range of
1.003 to 1.008. If our Mt. Gox fee is 0.25%, we can at least "break even"
with such settings.
 
We actually made a lot of money from position liquidations (except for the
huge and forced ones), because they often take place at relatively
unfavourable prices for the trading range. We have a huge open interest
right now (about 180K BTC for both sides) so our potential profit is high.
The biggest problem right now is that the market doesn't move. We did make
some profits when the price rose to $5.5 last time, but we lost them again
due to the bad investment decision.
 
Also, I propose a new feature to increase our revenue:
 
- Secured loans. We don't have to "settle" for our customers. We can allow
them to settle themselves at the prices they like. However, we are going to
charge the Sell interest when they have negative balances. A
forced-settlement system will be implemented instead.
 
They can borrow USD against their BTC balance, and vice versa. We may
require 200% mortgage (borrow up to $1 against $2 worth of BTC), and a
default reserve of 10% (if I borrowed $100 against 40 BTC at BTC/USD=5, the
default rate will be BTC/USD = 100 * 1.1 / 40 = 2.75).
 
The benefit of this system is to make the money flow faster within the
Bitcoin economy and we can rely on Mt. Gox less. It's like the bank's
overdraft facility that charges insane interests. But Bitcoin needs this.
 
Lastly, I have lowered the spread for the Exchange feature in a previous
git commit. The next thing I'm going to do is to limit the number of
exchange transactions each minute to prevent abuse, and then make the
spread more reflective of actual market liquidity. Then, we can offer the
Exchange feature to the mass audience because they can pay less to exchange
money on Bitcoinica. Exchange transactions will move the "surplus". They
are always some nice small market orders that generate profits for us.
 
Summary: strategies to make more profits:
 
- Less hedge.
- Faster money flow.
- More volume.
- More trades within the boundary (surplus is between -confidence_level to
+confidence_level).
- More open interest and more deposits (the interest differentials can
generate $1000+ revenue every month currently).
 
I can make a living without the salary, so skipping a few months before
resolving the problem completely isn't really the problem. Anyway, I'll try
to squeeze some time to implement these changes as soon as possible.
 
PS. I've traded almost A$20,000 with BitPiggy now. (And if it's
unprofitable for them, they shouldn't continue dealing with me.) They're
legit and what they are doing is viable. BitPiggy has much more starfish
than us, but this makes them look legit.
 
 
Best Regards,
Zhou Tong

MPOE-PR appears to be doing something known as "unfounded accusations and trolling". I advise you disregard them, their Ignore button is gold for a reason.