It is possible to make money on Cryptocurrencies, in an interesting but short window post ITO (Initial Token Offering). In this second of three installments we get to it!
In part 1 we set the scene, and I left you with this teaser - the key to this is liquidity, or rather the lack of liquidity. It’s also about information, and we’ll get to that too.
Let’s pick it up there. What do I mean by liquidity?
Efficient markets are those where pretty much everything is known about the value of something, and it is factored in to the price.
Inefficient markets are not like this. Not all information is known so cannot be factored in.
So markets become efficient through perfect and timely information - and liquidity. When I say liquidity, I really mean transaction volume. More transactions, whether buy or sell, will mean the price you see something for sale at is likely its current worth in the market. It also means the price at which someone is prepared to buy something from you, is likely a fair price.
Less efficient markets have less perfect information, which is not as timely, and lower liquidity - so fewer transactions.
It’s hard to beat an efficient market if you’re intent on profiting from it. In the world of share dealing you might have to resort to insider dealing, but that would make it inefficient (information that is not in the share price), so is quite rightly illegal.
You might try to beat the market by other means, using better hardware, software and networking to have legitimate information reach you, more quickly than it can reach the next person.
This is why good software and systems are so important in fields like stockbroking and sports betting, for example.
Imagine as a gambler, having better access to information on sporting event outcomes or in-play scenarios, than the next person, or the betting company. You’d have an advantage. Checkout “Sports Arbitrage” when you get a moment!
Betting companies are in a technology race of sorts. Not just to be available to their customers more of the time, but to make sure they have information faster than their customers, and their competitors - or at least as fast.
Long story short, if you can “know” faster, then the market becomes inefficient, Similarly where there’s low liquidity it’s difficult to form a view on what price should be. Demand and supply isn’t doing its bit.
It’s getting a bit dry this!
I know, but stay with me.
A good indicator of an efficient market is where the price you can buy something at is also the price a seller will buy from you. You see this as a bid/offer spread in finance with stocks and shares. Often there are reasons for the bid and offer prices to be different, for instance a dividend is due to be paid. However, often the bid price and offer price are not the same and this is the market maker, creating a differential in the two prices which will provide a margin for him (or her).
Or, you could just be looking at an inefficient market, it will correct itself eventually, but for now either information or low liquidity means the price feels a bit “out-of-sorts”.
We should. We’ve concluded that it is hard to make a profit in an efficient market.
We’ve already concluded it’s hard to trade crypto for profit, and it’s hard to make mining wipe it’s face (see part 1 of this blog post).
So, we need to be looking elsewhere, for an inefficient market instead. A market with not enough information or information that cannot be relied upon, or information which isn’t available fast enough (at least not to everyone), and with low liquidity.
Where could we find one of those…. ;)
I see what you did there! That’s why we need an ITO?
Yes, you’ve got it, we need an ITO. But we need something else too - the ability to trade our tokens when the ITO launches.
Otherwise, we’re impotent.
We’ll hold our tokens, we’ll listen to the project updates - the frequency of which tail off rapidly post ITO - and we’ll compare progress to the whitepaper, thinking WTF are they doing?
And there’s nothing you can do if you can’t sell your tokens.
We might even make the observation that something about a particular picture - showing progress - doesn’t look right. Like it was photochopped, expertly. But if you can’t sell your tokens you’re still stuck as a pig.
And here’s the thing. You can’t (easilly) sell your tokens.
Why not just go to an exchange? Sell them there?
Great question, but we can’t. We don’t have coins to trade, we have tokens. It is possible to get a token listed on an exchange, but apparently its expensive. It doesn’t happen immediately post ITO, and it’s very likely it will never happen.
Plus….we spoke about exchanges earlier, in the first post. They’re pretty efficient markets, with fees strapped on, and plenty of liquidity.
That’s not what we want is it? I thought we’d agreed on that bit? Even if we could sell on an exchange, where’s the opportunity?