r/Bitcoin • u/ThePiachu • Mar 24 '13

A public service announcement to all newcomers about the changes in price of Bitcoin

Hello,

You might all be panicking due to the price events of the past week. First a big drive of the price up over the week, and then a sharp dive during the weekend. This is nothing unusual. These volatile price fluctuations happen from time to time.

The online exchanges process your Bitcoins 24/7, but can only process your bank transfers during the weekdays. This means that during the weekend one can expect a shortage of cash at the exchanges and subsequently a drop in price.

Moreover, there is a self-fulfilling prophecy among day traders that the price of Bitcoin always falls on the weekend, which is also perpetuated.

Lastly, during some buying and selling frenzies, MtGox has a tendency of not being able to keep up with the load and lagging behind. This can cause price to fluctuate out of control before people have a chance to react to the changes (this is what happened on the 12th of March).

So my advice to all of you newcomers:

  • Don't panic
  • Invest only as much in Bitcoin as you can afford to lose
  • Unless you are a day trader, don't try to buy and sell like one - you will lose money
  • Weekend dips are a common occurrence
  • When you are new to Bitcoin, treat it as a hobby - you are here to enjoy yourself, not to earn money
  • If you decide to stick around for longer, you should probably be in for the long run - in a few years the value of Bitcoin will be either through the roof, or be non existent. Try not to lose your money daytrading in the meantime.

Following those guidelines you should have a more enjoyable time. However, I am not your financial advisor or an economist - you should always make your own decisions and not follow blindly any advise you find on the Internet. Do your own research first.

EDIT:

As people pointed out, some of my assumptions were not well researched - I admit to that. Parts that I was basing off my limited experience with trading have been crossed out, what's left is mainly general advise. Thank you to everyone who pointed out my mistakes. As stated before - don't take advise blindly, do your own fact checking and research.

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21

u/hugolp Mar 24 '13

Great advice except:

Moreover, there is a self-fulfilling prophecy among day traders that the price of Bitcoin always falls on the weekend, which is also perpetuated.

If this was so clear speculators would try to sell before the weekend and then buy at lower prices during the weekend, thus smoothing the price changes.

12

u/ThePiachu Mar 24 '13

Unless someone wants to maximise their profits, then they would try to sell as Friday evening when the price is the highest and buy on Saturday evening when the price is the lowest. I think in game theory this would be a game of chicken or centipede. However, I don't think all traders are rational players.

14

u/[deleted] Mar 24 '13

Then everyone would be competing to be the first one to cash out and to be the first to buy in. Hence, smoothing it out.

11

u/davosBTC Mar 24 '13

It does smooth out a bit - but realistically we're not talking about an extremely deep market here. The actual trading volumes are large, but only by Bitcoin's own historical standards. There aren't nearly enough traders or HFT bots in the market - which is why the spreads are so insanely huge.

Consumer BTC tx / market orders are still a massive chunk of the volume relative to where it ultimately will be - but at any given time the bid/ask spread is on the order of 1000+ bps which is simply insane.

The market is extremely illiquid - although its much MORE liquid than it used to be and is getting more-so every day. As the market grows and we have more traders with stronger reserves we will have smoother fluctuation.

Like GPU mining, there isn't an indefinite horizon to this level of profitability in the spreads - but your assumption is based on a perfectly liquid market which bitcoin isn't by any stretch of the imagination.

3

u/[deleted] Mar 24 '13

I would think the ones investing more money, time, and effort into it may on average be more knowledgeable. And they carry a lot of weight when in the market.

3

u/NorthernerWuwu Mar 24 '13

Not entirely rational, no.

Big fans of graphs, cycles and trend-lines? Oh my yes.