Re: The Volatility Reduction Group (Market Makers)

I don't think market makers are a solution to the problem you see. Market making might reduce some liquidity spikes, but it wont stop the big price swings. First of all, the function of a market maker is to provide liquidity and reduce the bid/ask spread. Second, a market maker has to be nimble. A market maker that tries to block price swings by putting up big walls is just going to lose a lot of money.

A market maker with a lot of bitcoins can MAKE a lot of money by putting up walls to prevent the price from changing too fast. Consider what I'm doing with my meager stash of bitcoins, then imagine what would happen if someone with 1000 times as many bitcoins did similar.

The price around $145 as I write this. I currently have buy orders for 0.5 bitcoins at every $1 increment from $100 to $141. I have sell orders for 0.5 bitcoins at every $1 increment from $145 to $200. Whenever one of my buy orders executes, I immediately place a sell order $3 higher. Whenever a sell order executes, I immediately place a buy order $3 lower. As long as the trading range stays between $100 and $200, I make $1.50 (after commissions) on every buy/sell pair. If it goes outside of this range, I wait for it to return. History says it will return.

I haven't been trading this method for long, but it looks like I could average at least $5 per day, or $1825 per year, on an investment currently worth about $7200. That's 25% return on investment per year. Might turn out to be more.

Now imagine the effect someone with 10,000 times as many bitcoins, putting 100 BTC buy and sell walls at every $1 increment from $10 to $1000. They would probably not make nearly the same return, because their action would dramatically reduce the volatility. That would ruin things for us day traders, but would make Bitcoin a viable alternative for housewives in Argentina, which is awesome because it makes my "buy and hold" stash MUCH more valuable!

No, with 10k as many bitcoins, their actions would add enough liquidity that a whale would eat them and they would be royally fucked.

What you are doing is not without risk, as you acknowledge by restricting the range you are willing to trade.

"A whale would eat them?" What does that mean? Please explain.

I had to limit the trading range because I have a limited number of bitcoins. When the price goes above $200, all my assets dedicated to this system are tied up in fiat. Then I must simply wait for the next crash to buy back in.

I know there are risks to my system:
1. The price of Bitcoin could go below my trading range and stay there forever. I'm left fully invested in bitcoins that have little value. This is the same risk as "buy and hold."
2. The price of Bitcoin could go above my trading range and never crash back down. I don't actually lose anything, as I still have the fiat. This is the same risk as not investing, except that my reserve stash of coins goes up in value.
3. The exchange could fold and not return my fiat and/or bitcoins.

I choose this method because I believe Bitcoin is most likely to continue to show extreme volatility around an aggressive uptrend. The best predictor of future behavior is relevant past behavior. I was interrupted while writing this post by a flash crash, from $146 to $137.5 to $142.8 in 9 minutes. I'm still testing my algorithm with manual trading at this point. I closed out 7 open trade pairs and opened 3 new ones. It's good to know that my assumptions are still valid.

I also choose it because price stability is good for Bitcoin. If lots of people start taking advantage of the volatility, we can make Bitcoin much more viable.

A whale is a large trader. When a large trader wants to take a position, they wait for a large enough portion of what they want to be available on the order book. This helps them to make their trade without creating the types of trading patterns that TA can pick up on. If the TAs catch on to you before you trade a good chunk of what you want to move, they will move it against you.

I'm wasn't dishing on your methods. In fact, it's essentially what I do with my bot. I just don't believe the risk/reward ratio would stay low enough at the 10k BTC level for it to be worth it.

But, now that we're here, I'll warn you that you're competing with bots who can automatically set up the new bids and asks when an order is taken. Without some type of automation, you'll be missing out on most of the profits to be had.