Bitcoin margin trading is back. A new trading platform, BTC.sx, is offering investors the chance to take short and long positions on future bitcoin price movements against the dollar. The platform, which is in private beta, enables a position is to be opened for varying lengths of time, from a few hours to weeks.
Founder Joseph Lee, a Brit-based in Australia, works in the finance industry. He developed the trading platform himself, having used his own scripted trading bots to generate a $150,000 profit in bitcoins, he said.
Like other margin trading sites, BTC.sx uses leveraged positions. This means that when you "bet" a certain amount of bitcoins on Bitcoin movements against the US dollar, the site effectively lends you money to increase your position. These "geared" trades are placed at approximately 100 times the value of your bet. If you bet a hundredth of a bitcoin on a position, the site bets approximately one bitcoin for you.
In conventional margin trading, a broker would require a maintenance margin reflecting a certain percentage of the leveraged amount to sustain the account. BTC.sx requires users to put down a deposit covering each position. The deposit is the size of their trade multiplied by 1500. If you bet one hundredth of a bitcoin, you have to make a deposit of 1.5 bitcoins to support the bet.
The site protects itself by automatically liquidating a position if the loss gets too close to the deposit amount. In the above example, if you came close to losing your 1.5-bitcoin deposit because the price of bitcoins moved against you, the site would execute an automatic stop on your trade and liquidate the position.
On the other hand, if your position moves in your favour and you make money, you stand to make a lot, because you'll be betting with BTC.sx's bitcoins. The site charges a daily funding amount based on the trade. In the example trade above, the daily funding cost would be 0.1010 bitcoins.
The deposit requirement will naturally restrict the size of a trade, but Lee also imposes a limit, both on the size and number of trades that a person can place at any time.
The numbers are slightly more complex than this. The actual available leverage, in addition to the stop amount, varies based on market volatility. In some cases of extreme volatility, the site may also force liquidations to limit growth broker and client loss.
Users don't have to maintain a fiat currency balance, says Lee - everything can be held in bitcoins.
"At any point in time, the bitcoin in their wallet has an intrinsic US dollar value," he said. "I take that trade at that point in time, I execute the trade, and then when the trade is liquidated I recalculate what it is worth at the new value."
Bitcoin veterans will remember the drama surrounding Bitcoinica, a margin trading platform launched in 20011 by teenager Zhou Tong. The site was hacked several times, and traders' bitcoins were lost. Tong issued a public apology after the site closed down. Lee is eager to ensure that this doesn't happen again, and isn't yet sure when his private beta will be publicly available.
"My motivation is to add liquidity into the Bitcoin market in general -- the more liquidity there is in a market, the faster it will grow," Lee said. "My site can be used to make a quick profit, but I'd more encourage users to only do it if they know what they're doing."
In short, in a volatile market frequently stymied by DDoS attacks and exchange hacks, never bet more than you can afford to lose.