Topic: Having Fun: Bitcoinica 24-Hour Spread-Free! (Read 3690 times)

Oh, OK, I totally get it now, thx for the succinct explanation!  

It has flashed off a couple times.  If we go much further, buying will become more available.

I'm thinking that with bitcoinica out of reserves, they're out of the speculation equation, and this is a good thing.

Most of the volume is not visible in the order books.

You'll get no level X BS here... The smart traders hold back their hand.

How it relates to trading? Look at the order stack, bids and asks - think of the BTC shares as the water molecules, and the level in the glass marks the current price, roughly.  In a liquid, many more molecules exist at any given level in the container, and movement between levels happens smoothly.  With ice, there's lots of air between cubes so fewer molecules at any given level.
This 'liquidity' analogy is useful in any market, thats why it arose.

In a liquid market eg for bonds there will be lots and lots of shares available at most any current price level... you would not see the 'step' like shapes which appear on the visualization of mtgox live, price level would vary smoothly and not my much as you look 'up' the Ask stack and 'down' the Bid stack.  One individual would have no hope of buying ALL the units available at the current Ask, for example - not even with leverage.  to exaggerate even more: I can borrow a bigger bucket, but I still can't personally change the level of the ocean by with it.

In the BTC market though - you'll see offers of just 1, 2, 5, 100, 400, BTC on the inside spread... if someone can afford to buy those up, they will actually move the spread.  

Let's say there's an offer stack (exaggerated but not too far)

$7.00 - 10
$6.99 - 10
$6.96 - 20
$6.97 - 30
$6.96 - 10
$6.95 - 10
$6.91 - 40
$6.88 - 50
$6.87 - 60
$6.81 - 30
$6.75 - 50

Well now if I own just say 100 BTC I can crash that stack by dumping my shares, right?
I can move the inside bid from $7.00 to $6.91 by just liquidating - that's a 1% swing with only say $700!    And the other side of the spread will normally fill the vacuum, allowing me to profit by filling to cover. However when I try to cover, I now swing the price back up since so few shares available per price level.

Now suppose we add leverage to the same picture - one individual can now borrow say 3:1 and now can crash that stack by dropping 300 shares on it, swinging it even further....  that's like removing ice cubes from the glass, the price hops around a lot more.  So my multiplying the ability for individuals to impact price, you multiply the possible volatility.  Leverage does not increase the total number of shares available to trade - only the ability for one individual to control more of them.

In a more liquid market the stack  looks like

$7.00 10,000 <- perhaps composed of hundreds of bids at this one level
$7.001 100,000 <- Market-maker bot  
$6.999 -200,000 <- institutional market maker

So this is more like the water molecules, the ocean.  An individual isn't going to yank that price around no matter how big a bucket the kid can borrow...

Perhaps he's saying using leverage is like freezing your funds before throwing them in the market or the glass of water.  I believe his complaint is if you throw your ice in at the wrong time, you have to thow in some anti-ice when it moves against you to protect your margin, or if you wait to long, Zhoutong will take your margin and either liquidate it or transfer it to someone else.  However, the anti-ice provides the very liquidity he is seeking.  Additional liquidity comes from proper use of ice.  When the market spikes up, you sell some of your long.  When it spikes down, you rebuy.  Do this every time it pops out of the bollinger bands and you'll make money... unless there's not enough liquidity in that direction and there is huge pressure that has built.  Of course, check multiple time frames.  Currently, there is obvious liquidity on the buy side, but the ask is more iffy.  At this point, it's all about what profits the bulls are willing to accept.  I, for one have a break even point well below current prices, and so I will just hold and buy more if we correct.  However, the ask wall has been very well drawn out by this bear turn, and we may see some bulls by some "cheap" (in their mind) bitcoins.

Pretty sure all he is trying to say is less market depth = more volatility

Right; I totally understand the physics of water expanding upon freezing, and the volume and all that.  I am not seeing how this is an analogy for our market, though.

I think he's not getting how this relates to trading... that's where I'm failing too.  I'd hope we all know ice is less dense than water.

You're teasing me, right?

If not, do the experiment yourself.  Pour a gallon of gin into one container, put it next to a cup of ice cubes.  Then remove the equivalent of 1 oz liquid from each, and measure the change in level. 
Then, fedex me the remaining gin.

I understand smaller market = more volitility... but the only way we are going to get bigger is with the help of leverage and day traders.

I'm not getting this analogy.  Can you dumb it down a shade?

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Aren't "stable highly liquid commodities" also full of "leveraged speculation and daytraders"?
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Yes absolutely, but they profit from very small percentage fluctuations - large fluctuations don't happen due to the deep liquidity.  It's more efficient to do that type of trading using derivatives actually options, futures, etc.. even less capital is required to control large sums for temporary time frames.  

Think of a physical analogy - you have a glass full of ice cubes, vs a gallon of water.  The ice takes much more volume, and if you add or remove a few cubes it will change the level in the glass much more abruptly than if you remove the same amount of H20 as water.

Yea... please explain how we increase liquidity without leverage.  Sure, there are fund inflows, but we can't count on that.  And not everybody that holds BTC wants to waste the hours I do softening the spikes.

Aren't "stable highly liquid commodities" also full of "leveraged speculation and daytraders"?

So running out of reserve, and cause a dump.

Is this fun ?

Actually I've been trading since the late 90's thank you; at many times it was my primary income.
 
BTC is a very thinly traded commodity by any standard, volatility is not caused by 'newbies' it is caused by more supply and demand relative to the amount of commodity immediately available on the order stack.    Markets for currency or bond trading have deep liquidity meaning you can buy or sell as much as you like at the current price and it won't move price much.

This is in stark contrast to BTC or penny stocks, where if I were to liquidate a $1M position  on top of  the usual stack of BTC  bids in the $100-$1000 range at a given price, it will the stack past its equilibrium point... you see this on a daily basis with BTC and any illiquid issue.   

I'm not really saying this is a bad thing. It makes for fun sport if you want to speculate - my point was only that providing leveraged speculative trading opportunity works directly against the goal of establishing BTC as a widely held currency.  BTC can either 'stay small', locked up by leveraged daytraders, or it can grow big and become a stable, highly liquid commodity that functions as a currency - just not both. 

Works for me.

Volatility is caused by newbies who don't know wtf they are doing and jump in head first.  Learn to use the tools before you trade.

You complain about lack of liquidity, then complain about speculators.  How do you get better liquidity without speculators?  Businesses just want to buy orders off the books and be done with it.

Yes I lost money too, by trying to set a stop for a long position I had bought, using the Buy button I ended up with double the shares at a much-too-high price and had to liquidate some.

I've also Sold positions at a profit by hitting a stop and observed that no profit got added to my balance, and seen 'trailing stops' execute at odd prices not within the recent trading range.   Go figure.

Also the site offers 5:1 leverage to encourage 'advanced day traders' --- any experienced daytrader knows to avoid this kind of slippage, you start out with 1.5 % or more loss immediately from the spread.

I mean it's a nice student project, but just a few more paragraphs of text next to the functions and big red warnings about things that just don't work yet would cost nothing to add - and would help protect users who mistake it for a beta-quality site. 

Bitcoin is currently like a penny stock - it is illiquid and thinly traded, which means that small fluctuations in demand cause disproportional swings in price.  There are good reasons that financial firms will not allow margin for such stocks.

 What we have with bitcoin is something intended to operate as a currency, but in order to do so, it needs to have more liquidity, be widely held, have market makers etc.  Those things cannot happen if the units are being traded and leveraged which multiplies the volatility. Such premature speculation will discourage and likely prevent btc's wider adoption as a currency. 

Indeed the bad explanation of stops made me drop a long position when I wanted to set a stop if the price dropped. Was just 10BTC the * was already up so couldn't take same position again.