Sat Apr 13 2019
It was a conversation I was having a couple of weeks ago that got me thinking "Damn, I really wish I knew how that worked a few months ago when I started doing this. I could have saved myself a lot of trouble and confusion." One thing I can say is that at least I didn't lose any real money due to my inexperience. That's a good thing.
In my last blog entry concerning exchanges, I more or less covered how exchanges work, and some things to watch out for. But then I went off the rails telling a story about how exchanges can be heartless pricks, and never got to what I really wanted to say. So in part II of this story, I will explain how trading works. I will tell you how to actually make money. Keep in mind, everything I'm going to tell you is still a big gamble, and you could lose money too. But at least you'll have an understanding what happened.
One of the things that pisses me off to no end about this sort of thing is the legions of people that will line up with their ideas about how to "get rich quick", and how their way is the best way of all. If that's what you're looking for, then you are reading the wrong article. I'm not here to bullshit you or fill your head with inflated ideas about how easy this is. Because where it may be easy to make money, it's even easier to lose it.
Let's get to it... How does it work?
Here is what the trading screen on a typical exchange looks like.
Holy mother of all things!!! What the hell does that mean?!
I know, right? It's overwhelming at first. But let's just break that thing down so you know what it all represents. The top graphic is a chart showing the high and low prices for this trading pair for the given period. The green and red bars show the trend - green is up, red is down. The boxes below show the current Buy price and current Sell price. The numbers in the boxes relate to the last transactions, so you can see the last price. The taller box on the right is the list of completed transactions. All of this goes on in real time. And the exchange never closes. You could walk in here at 2:30AM and it will be just as active as any other time. Usually because it's the middle of the afternoon somewhere in the world.
Now that you understand what the exchange looks like, lets do something practical with it
Exchanges show you the values of coins as they relate to each other. Most exchanges use Bitcoin (BTC) is the base for which the overall value of all your coins are measured. But to see what a coin is really worth for trading purposes, you have to look at how it compares to one of the primary trading pairs. If you don't remember what a trading pair is, or what coins are usually used as the primary coin in a pair, please click that link above for Part I of this story. In short, you can only trade agains BTC, ETH, LTC, or DOGE, usually. So whatever coin you are looking to trade must be bought with one of those coins. Then, when you are ready to sell, you must sell for one of those coins.
Here is an actual example of a couple of trades:... In this example, you are buying MOON using BTC.
Price of MOON in BTC: 0.00000140
How much BTC you are spending: 0.00019740
How much MOON you will buy: 141
Fees in BTC: .00000039 (0.2%)
From the graphic above:
So now you have .00019779 less BTC than you did before, but you have 141 more MOON. The object now is to wait until the exchange rate between BTC and MOON changes in your favor. This happens over time. Sometimes it happens in a few minutes. Sometimes it happens in a few days. Sometimes, the price goes the other way and you end up holding 141 MOON and not able to sell it without taking a loss. That sucks when that happens, of course. So let's just go with it working in your favor.
Now, the price has changed, and it's time to sell
Price of MOON in BTC now: .00000150
Sell your MOON: 141
How much BTC you will now have: .00021150
Fees in BTC: .00000042 (0.2%)
The sell from the graphic above:
So with this trade you now have .00001328 more than you had before (after fees). A gain about about 6.73%.
Now that part was easy enough.
But there is still one problem. I noticed that the buy and sell prices are always separate by a wide margin. In many cases, when you buy any coin, you can see immediately that the sell price, at the exact same time, is some percentage cheaper. I've seen them be as far offset as 20%. That is clearly ridiculous. It means that the moment you make a purchase, you already are down 20%. So now you have to wait until it comes up that 20% before you can break even, let alone make a profit.
I opened this story by mentioning a conversation that I was having... This is what the conversation was about. I was complaining about exactly that. And it was pointed out to me that the exchange works on people setting up trades in advance. That is why when you set up a Buy for the last current price, it goes through instantly. It is because someone out there set up that price at some point, and was just waiting for someone to buy. They could have initiated that trade 2 seconds ago, or last Tuesday. The end result is, you met their price, and bought their coins.
So it appears that the object is to go ahead and make your buy, then, right away, set up your sell for whatever price will make you the profit that you want. Again - sometimes this happens in a few minutes, sometimes it takes a few days. But at some point, the price will fluctuate and your sale will go through. And you don't even need to be there to see it happen. In case you are wondering how so many people are making so much money with this sort of thing it is because they set up not 1 or 2 of these trades, but 100s of them. And then they wait for the trades to mature. They hedge their bets in that they know they will win some, and they will lose some. But remember one important thing... You don't really lose money until you sell at a loss. Unless the coin collapses and is delisted by the exchange. Once again I refer you to Part I for that story.
A final point
The numbers I am showing in this example are laughably small. At the current rate of BTC against the US dollar, we were working with a whopping $1. So the gain on the trade above was about $0.06. The point is, that is how it works, and that is how you are able to actually make money by trading. If you were to move the decimal place to the right, and work with $10, your gain would have been $0.60. You get the point. And many of the trades going across the exchange every second are in the $100s. Much like the stock market or any other form of gambling, the more you are willing to risk, the more you stand to potentially gain.
Some helpful insight concerning exchanges
BTC sinks below $3800 this weekend
An Explanation of Wallets and how they work