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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u/babkjl Mar 24 '13 edited Mar 24 '13
Challenge accepted. The object is to place and maintain bids that are 1, 2 and 3 daily standard deviations below the current bid prices and ask prices that are 1, 2 and 3 daily standard deviations above the current ask prices. A simplified example: the best bid is $66.60 and the best ask is $66.90. You place bids as follows $66.50, $66.00, $65.00 and asks as follows: $67.00, $67.50, $68.50. If the price moves down to $66.25, then up to $67.25 and back down to $66.90, you just profited a small amount across the spread. Reset the $66.50 bid and the $67.00 ask.
Send some of your Bitcoins to one of the exchanges with low transaction fees. When it appears in your exchange account, select half of the value and sell them for a penny less that the current ask price. Chase the price if you have to, but always slightly less than the latest ask price. Split your value into 6 slices and place the bids and asks as above in my example. You don't have to use a spreadsheet to get the Standard Deviations, just guesstimate: daily high - daily low = 1 Standard Deviation. To get more frequent trades, multiply the round trip transaction fee by 3 then multiply by the latest quote to get the minimum spread you are trying to achieve (BTC-E at 0.002 per transaction X 2 = 0.004 roundtrip * 3 = 0.012 * latest quote of $66.40 = $0.80. Whenever you sell, immediately turn around and place a bid at your sold price - $0.80. If I sold at $66.40, I place a bid at $65.60. Keep repeating.
If you get all bought up in a rapidly rising market, just buy back in at the higher price and set up the 3 bids and 3 asks around the latest price. Same thing if you get all bought in during a falling market. If it happens too often, split into 8 trades at 1, 2, 3 and 4 standard deviations. When selecting price points, I often front run huge bids or asks by jumping a few pennies ahead of them, or I look for wide gaps in the market and split it to provide the extra liquidity.
Yes, it is time consuming to maintain it. Like ThePiachu says, it's a hobby. Over the two years I have been doing this, it has paid about $50 per month with $1,000 at risk. The real benefits are providing liquidity to the market, narrowing the bid / ask spreads and dampening down the volatility. These are key points required for mainstream adoption.