Quote from: PirateHatForTea on June 25, 2014, 05:01:25 AM

Quote from: AdamSmith on June 24, 2014, 11:57:48 PM

They have auto liquidate function to liquidate over leveraged users also.

In the event that auto liquidate function not operated as intended, they also have the ability to partially reverse and forward the transactions started from certain point.

I don't think you understand what I wrote. Of course they have ability to auto liquidate - it is a key component of margin trading. There is no guarantee that prices cannot fall so fast that when the liquidation is triggered, they haven't already falling past the point where liquidating would recover the lent amount. In fact this has already happened once, on Feb 10 2014.In that instance BFX rolled back the trades, justifying this action by the fact that they had lost the additional liquidity of Bitstamp (I think they ran out of BTC on stamp) and that the cascading margin calls on the resulting thin order book would have taken the price on BFX to zero and wiped everybody out.

Because the price on other exchanges (ie Stamp) never went so low, but remained around the 500s, after a trading halt BFX were able to resume at prices that did not result in underwater margin positions, so the liquidations could be avoided. However, if all exchanges had tanked, this would not have been possible, and many margin positions would have been liquidated, possibly at a loss.

There is nothing preventing a similar flash crash to that of 10 Feb from occurring. Bitcoin is incredibly volatile as we have seen, and nothing is off the table. Reversing trades is not a panacea - not only that but BFX will only do it when it is in THEIR interests to do so. They rolled back trades in Feb because doing otherwise would have killed the entire platform - as Raphael said at the time liquidating every position in the platform and filling the orderbook down to zero.

In the case of a real, market-wide crash, don't expect BFX to roll back trades (how can they when the market has moved on without them?). And don't expect them to reimburse out-of-pocket lenders. They simply don't have the money to be able to do so, and their extremely vague promise to insure loans appears nowhere in the site terms and conditions or other binding contract. This would leave lenders to enforce such a promise through legal action (hint: google promissory estoppel), but then tell me, who do you sue? And where?

I see the promise to insure all loans as motivated by two reasons:
1) To remove the hassle of offering the (mostly useless due to extremely small pool size) optional insurance on loans
2) Needing to justify their desire to capture a greater share of the lending business profits, aka GREED
It is not a promise that is backed up by anything.

Finally, all this is before you even consider counterparty AND regulatory risk - there is still a very real possibility that something could go badly wrong at BFX, a hack, mismanagement, a court case, termination of banking relationships, government crackdown; the list goes on. This could lead to insolvency and loss of funds a la Gox and numerous other exchanges. This additional risk should not be understated.

So AGAIN: DON'T LEND (OR KEEP ON BFX) MORE THAN YOU CAN AFFORD TO LOSE.

PS: BFX staff, I am just trying to highlight the risks inherent in dealing with a platform such as yours, no offense intended. I am actually quite a fan, and have used the platform for trading and lending for some time and am yet to find one better. But I always deal in amounts I'm willing to lose.

Thanks for the wise analysis.
What you write makes a lot of sense.
For the sake of clarity: on February 10th transactions were not cancelled because Bitfinex run out of funds on Bitstamp, but because a smart ass found out a way to artificially push the ticker price to very high levels ( over 10,000 usd per btc) and this caused some people to take leveraged positions that should never have occurred.
As this erratic behavior was due to a technical problem and not to a normal market condition we decided to revert the transactions.

This is common practice also in major markets, such as the NYSE or the NASDAQ.

You can find more details about it if you go back to that date on this thread.

I hope this helps

Have a good day

Giancarlo
Bitfinex Team