How Can A Trader in this Business Protect Themselves Against Volatility Risk?
Hi Bitcoin Talk,
Im trying to understand the mechanics of how a small OTC? trader makes income through cash trades on LocalBitcoins, HodlHodl, LocalCoinSwap etc.
I want to start making these trades myself. Can anybody give some comments or notes if my understanding is correct?
Exercise: The goal of Trader A is to increase his holdings of BTC and USD, while minimising losses.
Lets assume the current exchange rate is 1 BTC = $10,000 USD
Lets say Trader A currently has a balance of 1 BTC and $10,000 USD.
On HodlHodl, Trader A sets his:
SELL price of BTC for 10% OVER the spot rate, so he is selling 1 BTC for $11,000 USD
and
BUY price of BTC for 10% UNDER the spot rate, so he is buying 1 BTC for $9000 USD
Now, heres where im confused
How does Trader A protect himself against volatility in the price of BTC?
Lets say he meets someone who he sells 0.5 BTC to, for $5500 in Cash, USD
So he currently has 0.5 BTC and $15500 USD in his possession.
Now, between trades, the price of BTC raises by 25%. Now, 1 BTC = 12500
Trader A still has 0.5 BTC and $15500 USD in his possession.
Now, he meets someone to buy 0.5 BTC from them at $5625
Now his portfolio consists of 1 BTC and 15500-5625= $9875.
Trader A has a smaller portfolio than he began with.
I spoke to an individual making money through trades with a 5% spread on LocalBitcoins. He explained that he has so much volume going through him (almost 50/50 buyers and sellers) that he does not worry about volatility risk because of the spread + volume. I am afraid he may be caught out by one of BTCs sudden price appreciations. Am I missing something vital here?
How can a trader in this business protect themselves against volatility risk?
Is the solution to have a Cash & BTC balance on an exchange, which they use to quickly realise their spread, once a sale in real life is executed to protect against volatility risk (with the expense of exchange fees and slippage)?
Any comments, questions or discussions are welcome. Or if this has already been covered in a thread, could anyone point me towards the adequate reading material?
My goal is to accumulate as many BTC as possible for my HODL stash.
Thanks.
Im trying to understand the mechanics of how a small OTC? trader makes income through cash trades on LocalBitcoins, HodlHodl, LocalCoinSwap etc.
I want to start making these trades myself. Can anybody give some comments or notes if my understanding is correct?
Exercise: The goal of Trader A is to increase his holdings of BTC and USD, while minimising losses.
Lets assume the current exchange rate is 1 BTC = $10,000 USD
Lets say Trader A currently has a balance of 1 BTC and $10,000 USD.
On HodlHodl, Trader A sets his:
SELL price of BTC for 10% OVER the spot rate, so he is selling 1 BTC for $11,000 USD
and
BUY price of BTC for 10% UNDER the spot rate, so he is buying 1 BTC for $9000 USD
Now, heres where im confused
How does Trader A protect himself against volatility in the price of BTC?
Lets say he meets someone who he sells 0.5 BTC to, for $5500 in Cash, USD
So he currently has 0.5 BTC and $15500 USD in his possession.
Now, between trades, the price of BTC raises by 25%. Now, 1 BTC = 12500
Trader A still has 0.5 BTC and $15500 USD in his possession.
Now, he meets someone to buy 0.5 BTC from them at $5625
Now his portfolio consists of 1 BTC and 15500-5625= $9875.
Trader A has a smaller portfolio than he began with.
I spoke to an individual making money through trades with a 5% spread on LocalBitcoins. He explained that he has so much volume going through him (almost 50/50 buyers and sellers) that he does not worry about volatility risk because of the spread + volume. I am afraid he may be caught out by one of BTCs sudden price appreciations. Am I missing something vital here?
How can a trader in this business protect themselves against volatility risk?
Is the solution to have a Cash & BTC balance on an exchange, which they use to quickly realise their spread, once a sale in real life is executed to protect against volatility risk (with the expense of exchange fees and slippage)?
Any comments, questions or discussions are welcome. Or if this has already been covered in a thread, could anyone point me towards the adequate reading material?
My goal is to accumulate as many BTC as possible for my HODL stash.
Thanks.