Having Fun: Bitcoinica 24-Hour Spread-Free!

[Crypt_Current]

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

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 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.

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.

[SkRRJyTC]

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

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 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.

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.

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

[notme]

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.

[tickets]

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...

[notme]

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.

[old_engineer]

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. 

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

[notme]

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. 

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

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

[Crypt_Current]

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.

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