So you wanna be a crypto trader eh?
Today I'm going to go over how to make a solid plan when buying into a crypto to help you maximize your gains and not panic-sell. I'm also going to introduce you guys to arbitrage, and why it doesn't work most of the time. This article will be shorter than the previous 2, because I'm only going to be telling you a method of thinking about crypto and show you one little thing about markets and liquidity. If you're new, please see my previous posts so you can get up to speed:
https://steemit.com/cryptocurrency/@j0z0r/getting-started-in-cryptocurrency
https://steemit.com/crypto/@j0z0r/so-how-exactly-do-you-do-your-own-research
The vocab word we're going to introduce today is arbitrage. In general, arbitrage is buying something for one price in one location to take advantage of a price difference in another location. This is done in cryptocurrency just as in any free market, and it is a good thing for the long-term health and growth of the underlying assets. Today I'm going to show you many of the pitfalls to watch out for when attempting arbitrage on your own. I'll also introduce you to a few exchanges that you may not be familiar with in the crypto ecosystem. Let's go back to the "Markets" page on CMC for our low-marketcap moonshot, Ethbits:
The astute among you may be looking at those different prices and saying "Why not buy a bunch of Ethbits at Coinexchange and then sell them at HitBTC and (almost) double your money instantly?" This is what's called arbitrage. It can be done successfully, but you have to lookout for many things if you want to try this. The main things are:
- Liquidity
- Order book depth
- Bid/Ask spread
- Transfer time of the asset/confirmations to be available
- Exchanges send/receive wallet not in maintenance mode
Liquidity:
If an asset is "liquid", it can be easily bought or sold without changing the price much. In other words, there are plenty of buy orders and sell orders around the same price. Liquidity matters in an arbitrage attempt, because you must make sure there are sufficient sell orders on the books to buy up the amount you need to make your arbitrage attempt profitable, as well as the opposite; making sure there's enough buy orders on your target exchange at good enough prices to liquidate your holdings at an advantageous price. This can be determined from our next criteria.
Order book depth:
The order book is part of any exchange, which allows people to set bid/ask (buy/sell) orders for different cryptos at different prices. It's a free market, so there's always someone with a different objective. Someone wants to buy at the lowest cost and sell at the highest, and someone else wants to hold, while a third person wants to sell because he got in early. So the order book is constantly changing and evolving. Let's check the order book depth at CoinExchange and EtherDelta really quick to get an idea of if this arbitrage attempt is profitable enough to be worth our time messing with it.
Here's the ETBS/BTC market on CoinExchange.io:
The highest buy order is 0.00013001 BTC per ETBS, which is $1.95 at the current rate. Also important to take note of is that this Buy order is only for 6.9 EBTS, so not of much use when selling a large amount.
The lowest sell order is for 0.00019000 BTC per ETBS, which is $2.85 at the current rates.
So what was our master plan again? Buy here at Coinbase and sell over at HitBTC? The lowest sell order is for $2.85, which is only slightly less than it is currently selling for over at HitBTC. But it's still less, right? So why not do it... First off, this order is only for ~50 ETBS, and the twenty percent difference in price on that many is only about $20. Still might be worth it, but let's look at the HitBTC orderbook and see if we could even liquidate at that price:
Looks like the highest "Buy" order here is for 0.00019... the exact price we would be paying at coinexchange.io... So there's no dice on this arb opportunity. However, we're going to continue moving through the steps of this investigation so you can see what else we have to watch out for if we had identified this as a money maker.
Bid/Ask spread
The Bid/Ask Spread is the separation between what the lowest buy order and the highest sell order is. They can't be the same number because then something would be bought or sold, instead of just offered at that price. Let's refer back to that order book from coinexchange:
The spread here is 0.00005999 BTC. That's about $0.90 at current rates. Pretty huge, and something we could take advantage of with day trading perhaps. You could set a buy for one satoshi over than the lowest buy. If anyone comes in to sell, your order will be hit first and then you can sell your stack over for one less than the lowest sell order. Then if someone buys, they will be buying off you and you just made whatever percentage that spread is. There isn't a lot of volume/action going on in this particular market, so it might be more like week trading, with you battling bots to get the lowest sell order or highest buy order for only a few dollars a day. For now, it's just important to know that the spread exists and what it is.
Transfer time of the asset, plus number of confirmations needed for it to be accepted:
Every time you withdraw from an exchange, you're paying a fee on top of your regular network transaction fees for the use of their market. The fees depend on each coin and each exchange. If you're looking to do arbitrage, you need to know what the fees are in advance so you can calculate that in your cost. The fees and confirmations page on Coinexchange.io:
What are confirmations? You proably know that when you send a transaction on, for example, the ETH network, you pay a fee and the miners verify your transaction. This happens every block, but for each different blockchain it is a different amount of time. On the Eth network, it is around 15 seconds, with some blocks being mined faster and some slower. When you send a crypto to an exchange, they want to be extra certain you really own it, so they wait a few blocks after your transfer comes in to confirm those funds swapped place in the blockchain. The "Confirmation" statistic is exactly that; how many blocks have to pass after your funds arrive before they are approved to be spent. Our chart tells us it's 50 confirmations for an Ethbits transfer:
The withdrawal fee is 1 whole Ethbit though! So if we were just moving 10, it would cost us 10% to move them. Conversely, if we were moving 1000, it would only cost 0.1% to move them. This is just another of the many calculations of losses you have to account for when arbitrage hunting. The confirmations are also important, because sometimes when an opportunity arrises, it's because one exchange is doing maintenance, so they up their confirmation number required to be extra certain that the coins coming in are legit. I have seen 800 confirmations on incoming deposits before. Also note that this takes a block being mined for it to have +1 confirmation. Once I transferred a coin and it needed 20 confirmations, but it was on it's own blockchain that was hard to mine. So each confirmation took over 6 hours. It was over a week before I could access my funds that I had moved.
Exchange's send/receive wallet not in maintenance mode:
Many times an arb opportunity comes up and everything is perfect. But then you go to deposit to the receiving exchange or withdraw from the source exchange and you see that the wallet is suspended for maintenance. This happens frequently, as wallets for over 1000 different crypto assets are constantly being updated by their respective teams. Sometimes a wallet will be in maintenance for months, not allowing withdrawals or deposits until some bug is fixed. I have one that never came back, when the devs saw their wallet had a flaw, they just abandoned the project completely.
Alright, so now that we went over what arbitrage is and what you have to factor in to be successful at it, I'm going to go over how to trade with a plan and be successful. First, always form a plan for when you're going to buy and sell before you actually buy or sell and become emotionally attached to your coin of choice. The things you should try to get straight:
- Price entry point
- Price exit point
- Plan if it goes up a certain amount
- Plan if it goes down a certain amount
- STICK TO THE FUCKING PLAN!!!!
Price entry point:
If you're just starting to research something and have found a coin you would like to get into, the first thing you should do is decide how much of your portfolio you want to dedicate to this coin. I usually have about 10 coins each at around 10 percent of my portfolio. If I'm looking at something and decide to get in, I'll pull out of my profit stack or out of some of my coins that have already performed well. Usually if I'm FOMOing (Fear of Missing Out), then I'll buy 20 percent of the stack I want immediately. That way, if it takes off to space and goes 5x instantly, at least I have a ticket for the moon ride. I try to spread out the rest of my buys so I can get the best dollar cost average for my position. Most of the time, the price you see something at isn't the lowest it's ever going to be, so if you spread out your buys over a few hours/days, you can get in at the lowest price over that time. So put in 20%, and if it goes down significantly, put in another 20%. After that, buy any dips 10% at a time until you are up to your desired amount. Perhaps leave a few buys set really low in the order book, some order you never expect to be hit. That way if the price tanks, you can at least be happy you expanded your position for cheap.
Price exit point:
Just as you should be picking what price you get in at, you should also know what your target is in terms of time to sell. You can formulate this when you're doing your initial research and compare the market cap to your coin's competitors. Once it has gotten close, maybe sell off a small portion of your stack and put the profits back where you originally took them from, or put them on one of your long-term safer holds. My plan is usually this; When I'm doing research, I'm looking for potential 10x coins. That's just what I do, and that's my minimum target, you can work my percentages around your strategy if you wish. SO if the coin I get into goes 5x form my initial buy-in, I'll sell off 10-20% and put that back in safe things. That way I have mostly free money in the coin. If it goes 10x, I sell another 10-20% to put in safe long-holds, leaving the rest of the money in there as only profits. If I still believe the coin has potential or there are other incentives to hold, I might just make it a permanent part of my portfolio. That means I'm 100% in profit on it, and I can sell it off anytime to go on other moon missions or just let it keep accruing in value. It's important to make the plan before any price action happens though, because once something is going parabolic, it's easy to get greedy and think it will never stop pumping, but nothing goes up forever.
Plan if it goes up a certain amount
When you buy in, you should have formulated a plan for what you will do if the coin goes up 10%, 30%, and 100%. If I'm not done with my buying, my plan is to keep buying at 10-30% increases. 100% and I just hold what I have and hope it dips again.
Plan if it goes down a certain amount
When you're buying in, you should also have a plan for when the price goes down. If it drops 10-20%, buy more. If it drops 50%, try to double your stack to dollar cost average down. If it tanks 90%, maybe you should put even more money into it. It seems counter-intuitive, but the lower you pay on average for your stack, the more you'll make once it rises. That being said, it's really hard to watch $1k turn into $500 and be happy about throwing more good money after bad. That's why it's important to make the plan ahead of time, so you're more likely to follow through and not panic sell at a major loss.
STICK TO THE FUCKING PLAN!!!!
Once you have made a plan, FOLLOW IT! Religiously. Buy the dip with a smile on your face. Sell off when it looks like mega-moon is coming if it hits your pre-determined sell points. If the price has lowered, but the fundamentals are the same, you should just keep buying. A plan will help you know when to sell/when to buy and keep you from holding bags forever when you should have sold the top.
I said this one would be a short one, but after typing that out, it seems just as long as the others, lol. As always, feel free to tell me what you think of this series of articles, tell me ways to improve or be better understood, and if you're a crypto expert and I've missed something obvious, let me know! Thanks for reading, please share if it helped you.