MPOE, February 2014 Statement
Overall trade 26`208 contracts, of which -1`554 +0 Call, -4 +24`650 Put.
Revenue : 19`769.10256165 BTC, of which :
- contracts sold : 34.20256165 BTC
- contracts exercised : 19`734.90000000 BTC
Expenditure : 11`800.61618062 BTC, of which :
- contracts bought : 10`594.58980562 BTC
- contracts exercised : 0.0 BTC
- capital expenses : 1`205.526375 BTC (10`715.79 × 11.25%)
- exceptional settlement : 0.50000000 BTCi
Profit : 7`968.98638098 BTC
Revenue : 139.62178334 BTC, of which :
- Revenue from sales fee : 69.62178334 BTC (Total trade : 34`810.89167308 BTC)
- Revenue from new accounts : 70 BTC
Expenditure : 8.262335 BTC, of which :
Profit : 131.35944834 BTC
Total shares : 1`000`000`000, of which :
- Mircea Popescu, 838`159`714 shares,
- Third parties 161`840`286 shares.
Total dividend : 8`100.34582932 BTC.
Total capital : 10`715.79 BTC, of which :
- 1D7YtrxnyK3ug3Rvp9jX66T8kVzWww9Jr8 2`992.58925325
- Mircea Popescu (creditor of last resort) 7`723.20074675
Loss applicable to bond capital : 0.0 BTC
Loss per BTC : 0.0.
As has been widely reported, on February 4th the MPOE bot purchased on the open market a large volume of very deep in the money Put options. As the bot hadn't previously sold these, this obviously means the seller had underwritten them.
Underwriting on MPEx relies on locking a set collateral, in Bitcoin. This works splendidly if underwriting Calls, as the absolute highest value a Call option on 1 BTC could possibly reach would be that 1 BTC, and so Call underwriting can be perfectly covered by this mechanism. If one underwrites Puts, however the situation is a lot more problematic, because should the price reach zero the BTC value of any Put contract is then infinite.
There is no ready solution to this problem. The patch used by MPOE for these past two yearsiv was an insurance scheme, whereby the underwriter of Puts was charged a little extra non refundable fee, and in exchange allowed to walk away from the underwritten contracts in any case. The fundamental thinking behind this system being that a Put is simply a promise to deliver strike dollars, and fiats being extremely easy to obtain it's not particularly difficult for a well connected, well capitalised party to simply cover this risk. Since unlike pretty much anyone else participating in Bitcoinv I am that well connected, well capitalised party, it'd then behoove me, went the theory, to offer this as a transparent service in the interest of market stabilisation and general welfare of our beloved BTC. And so I have.
Generally, the nets involved were trivial, and didn't require any significant coverage if at all : the variations in my own personal private tradebook far exceeded any delta in either direction coming from my obligations as per the workings of MPEx Put underwriting.
This changed on the 4th, when I suddenly found myself with a hefty load I had to immediately sterilise, something to the tune of 25k Puts. To think things through : 25k Puts struck at ~4700 dollars per BTC represent an unilateral obligation to pay up to infinity Bitcoin, or else perhaps through a settlement as much as 12 million dollars. In cash. Which means that should Bitcoin have gone to zero in the month of February, I would have been on the hook for more than the sum of all investment to date in all Bitcoin ventures. And guess what : I would have covered it, too.vi
Obviously I wasn't going to simply ride that out naked, and so over the course of the coming days I reached out through my extensive network of correspondents, entering in swap agreements and other instruments that'd allow me to cover no matter what. Now let's look at a graph together :
You can almost taste the aftershocks of my efforts, can't you. I guess now we know I'm a well connected financial node in this space. Anyway : the panic seems to have inadvertently been the last straw for dead man walking exchange MtGox, which apparently was exposed the wrong way or who the hell even knows what happened there. But to put at rest all the people harping about technical approaches to the floundering of that turd : they were sunk by financial, not technical woes.
This inadvertent positive result aside, it is quite clear to a balanced examination, and it is the considered and quite unanimous opinion of both my board and myself, that the present system of Put insurance can not continue going forward. What originally was intended and designed as a means of creating, supporting and enhancing stability is definitely working quite the other way, and of such nonsense I will have no part.
MPOE had, since its inception, used the bitcoincharts feed for acquiring data. This was not the only feed the bot relied on internally, as astute observers well pointed out, but it was the official, settlement value employed.
This venerable arrangement encountered two major problems this month. The first, perhaps anecdotal, is best explained by the following quote :
nanotubevii mircea_popescu: bitcoincharts average got messed up one day, because anx.hk accidentally pushed dogecoin trade data in place of bitcoin - thus producing high volume at really low price, and screwing things up. I think charts has removed anx.hk for the moment.
Obviously this could have been a quite serious problem had it happened at the wrong time, and obviously this is easily exploitable. More significantly, bitcoincharts continued to report trades from MtGox, artificially depressing the average used as a reference to settle tens of thousands of Bitcoin worth of financial instruments.
As per the terms of the option contracts, MPOE bot would have been entitled to execute the respective Puts at any point, about as low as 350 dollars per even. After all, the feed is the feed and that's that. Nevertheless, it wouldn't actually be fair, which obviously is a complicated discussion, and more importantly it wouldn't really be good for Bitcoin.
As such, I have taken the unilateral, arbitrary decision to close this exercise at 500 BTC/USD. All outstanding options, held by the MPOE bot or not, will be exercised at that price.
This decision negatively impacts some market participants to some degreeviii, and positively impacts some other market participants to some other degreeix, all in an effort to maintain some sort of semblance of order and sanity in the marketplace. Such would be the very nature of regulatory discretion, and I would propose that this little adventure is a fine example to illustrate why it must be they with a clue that make the calls, rather than any random selection of noobs no matter how accreted - be it the "forum community" or Senator X or Agency Y.
We have a major problem with data feeds. On one hand, feed providers do not generally have either the ethical maturity to understand the responsibility curating their feeds entails. On the other hand, feed providers do not have the intellectual complexity or professional experience to be able to actually curate their feeds. Consider :
mircea_popescu So TIL that bitcoinaverage uses a ton of fictitious volume from crap like bitfinex. "volume_btc": 17716.99, how the fuck is one to trust an avg which includes > 25% pure unadulterated crud. Herpderp we've taken out mtgox, but we count bitfinex. 23293.31 from bitstamp, 17237.53 from btc-e, basically this is a joke. There's officially no bitcoin average price signal out there. "Volume_percent": 30.15 gimme a break.
Even if one were to roll their own index : BTC-e is a rather dubious venture, still fondly remembered for their involvement in NovaCoin, the original altchain scamcoin and spotty reports of selective scamming. Bitstamp has two thumbs down from Matic for reasons I don't fully grasp but then again I don't really need to in that circumstance. I wouldn't trust Kraken to hold as much as my spit, especially after their recent bitdaytrade-esque failure and Jesse's enthusiastic support of the well known and universally reviled Jared Kenna scammerx. There are some others out there, and they pop up and down like flies.xi
To make a long story short : there's no way to obtain a price feed that could be relied on, currently. Most of Bitcoin trading was happening OTC at all points in history, but given the nonsensical noises made by the USG these days, and much more concerning idiocy spewing out of the Europe's bankrupt West, I very much doubt that anyone is seriously using exchange websites for any serious purpose anymore. Sure, there's all the hundred thousand noobs that lived under a rock somewhere all through 2013, and then there's all the self-trading (what - you thought MtGox was the only Bitcoin-fiat exchange with delusions of marketmaking ?), but if you look at the whole pie I'd be muchly surprised if a tenth of all Bitcoin trade ever sees a so-called exchange website. Then again... what do I know.
Whether indeed Bitcoin is headed into a "mystical" phase, where it doesn't in fact have any sort of clear relation to any fiat currency (a position I happen to support, incidentally) or someone will actually manage to spring up somewhere to allow us to trade in confidence (unlikely until and unless some sovereign somewhere explicitly puts specific, tailored guarantees in its legal system), the state of affairs is currently such that quoting options in the manner MPOE bot used to do is no longer feasible.
As a result, the MPOE bot will no longer quote options. Should the circumstances materially change, the matter will be of course revisited. Meanwhile, physically delivered futures seem to be a much better solution to the problem, and so if you think you can satisfy the requirements for any pair let me know.
This is a provisional statement. Will become definitive March 3rd, 2014, noon GMT.———
- There were a total of 2 N contracts held after this exercise. Instead of being transformed into Ts they were transformed into 0.25 BTC in cash each. They had been bought at about 0.17 and at the 500 execution would have been worth 0.18. [↩]
- Currently this means BitBet. [↩]
- As described in March 2013. Fortunately the exchange rate took most of the edge off it. [↩]
- Yes, pretty much, continuous operation for longer than most Bitcoin ventures, how's that. [↩]
- This specifically includes any name you've heard so far. Excepting me, nobody with any weight that is actually involved in Bitcoin has to date made their name known. [↩]
- I mostly specify this as a parting fuck you broadside to the MtGox troop of idiots, who thought that perhaps if they re-do the original MtGox "hack" I may have trouble. It's cute, I guess, in the sense of a bunch of ducks trying to work together to provoke waves that'll sink a neighbouring battleship. [↩]
- Nanotube is not related to either thing discussed. [↩]
- Principally the S.MPOE shareholders, me chief among them. Because that's what being involved in Bitcoin is all about : making losses. Whether you want to or not, always for the greater good and all that. The bondholders aren't losing anything from this measure. [↩]
- Too complicated to explain exactly how this works, but basically if you hold any Bitcoin or have anything in your life hanging on the continued success and survival of Bitcoin, this means you. [↩]
- That's right, it will never wash. Ever. All your Bitcoin Scamfoundation friends can stand on their head, you are not ever again going to be part of anything Bitcoin. Dream on, I've sunk your THv2 and I'll sink anything and everything you touch. Because scammers are still not welcome here. [↩]
- Worth re-quoting from that last link,
Earlier this year, I had this “genius” idea which led me to making a fatal mistake. I thought I could provide a hedge fund service for Bitmarket users. There were other sites providing this service so I guesses that it could be successful.
It's not just that these people are generally infantile idiots. It's that they're mentally retarded adults bereft of the metacognitive capacity that'd even allow them to understand why they shouldn't even be here.
Oh and since we're on the topic : the guy's proposed "solution" was actually implemented by the fabulous Shtylman boi, when his bitfloor thing went under. You know, another one of these exchange things. [↩]
Monday, 10 March 2014
Why not use the futures (X.EUR) offered on your exchange as the price signal for the options market? That way you would not have to worry about third party data feeds at all?
Monday, 10 March 2014
What now ?