Saturday, April 21, 2012
Bitcoinica LP announced today that their new corporate structure is finalized and they have completed registration as a Financial Services Provider in the legal jurisdiction of New Zealand. As the self-proclaimed 'bitcoin trading platform for everyone,' they offer margin trading, short selling, stop-loss orders, and guaranteed liquidity.
Bitcoinica burst onto the scene in September 2011 as the first consistent and reliable provider of bitcoin margin trading. To be sure, the young founder and lead developer, Zhou Tong, has had his fair share of challenges along the way but he has persevered and prospered.
According to the company announcement, "Bitcoinica began as an experiment to help investors trade bitcoins with the advanced trading features seen in traditional forex markets. The response has been overwhelming and we are very pleased that we've been able to meet this need." They further stated:
"We recognize that it's important to operate in a transparent manner and meet all the requirements expected from a legitimate financial services organization. Therefore we have taken the necessary steps to become a registered provider of the following financial services: (1) Providing credit under a credit contract, (2) Operating a money or value transfer service, (3) Issuing and managing means of payment, (4) Changing foreign currency, and (5) Entering into or trading on an exchange."
Bitcoinica is not the place to acquire bitcoin or to convert your bitcoin into national currencies, but it is the place to speculate and hedge on the price movements of the bitcoin exchange rate expressed in U.S. dollars as they offer short selling and guaranteed liquidity levels up to 100 bitcoin. They make bitcoin the base currency so it's quoted as BTC/USD. Other national currencies may be supported soon but Bitcoinica has to follow the liquidity of the physical exchanges, such as Mt. Gox, since that is where they lay off their risk. Currently, they operate a trading platform that is similar to the CFD market, but without the standardized contract sizes the experience is closer to foreign exchange trading and they maintain sufficient bitcoin inventory for all orders.
By responding swiftly to market demand, they have accomplished much in a short period of time. CEO of CoinLab, Peter Vessenes, commented, "They are essentially an online forex site but their current code base is what makes me uncomfortable. Rails platform is not ideal for financial trading due to the lack of auditing." Governmental registration, still controversial with some in the bitcoin and free banking communities, may resolve one of the issues for greater customer trust in Bitcoinica but a robust technical platform will ensure their ultimate success.
Regardless, Zhou Tong and Bitcoinica conservatively still pocket $54,060 a month from trading operations and here's how they do it. First of all, anyone can trade -- with just $1 or ฿1. As with forex trading, there is no commission -- only the bid/ask spread. Customers place buy or sell orders with a leverage variable selected anywhere from none to a factor of 10:1. With average monthly volume of approximately ฿1.2 million, Bitcoinica internally matches trades where they can. Given that their typical 'unmatched' hedge ratio is 50% and ignoring spread premiums on the customer-related Mt. Gox trading, Bitcoinica earns its internal 'weighted' average spread of 1.7% on ฿600,000 per month, or ฿10,200. Applying a U.S. dollar exchange rate of $5.30 per ฿1, we get $54,060 per month. It's good to be king.
The New Zealand jurisdiction is well known in the payments industry and although not a local bank license, this type of registered financial institution can carry out many similar activities for their own clients just like a bank. The structure is ideal for receiving third party funds for deposit, opening accounts for clients, and engaging in leveraged currency trading activities. Bitcoinica's registration details can be viewed here.
Bitcoin thrives as a protocol and a currency when multiple jurisdictions compete for innovative and unhampered bitcoin services as some jurisdictions are more forward looking than others. Without overly relying upon the State's seal of approval, jurisdictional competition can still have a net positive effect on those jurisdictions that continue to be overbearing.
Ultimately, if bitcoin currency amounts don't ever intersect with the formal banking system or fiat currencies, is there anything to regulate? As Max Keiser stressed on a recently televised Keiser Report, "I support Zhou Tong -- he could be a worthy adversary for Jamie Dimon or Lloyd Blankfein -- because he promotes the advancement of an anti-bank currency that can go to war with the JPMorgan Chase and Goldman Sachs banksters. We can only hope that he doesn't get bought out along the way!"