Crypto Trading for Beginners

Oct 30, 2018

I'm so miserable. Been trying to get healthier so I decided to lose weight by fasting, ugh. I get one good meal a day, but then ruminate helplessly about eating small animals for the subsequent 23 hours till my next meal, and then once a week I hold out as long as I possibly can. Not fun. I will say this though, when I finally do get to eat, everything tastes unbelievable! That spinach is the best goddam spinach I ever had in my life, like the hand of God picked holy spinach from his private holy garden and delivered it personally to my tongue as I lick every morsel from his holy fingers. Mindblowing. Then there's the succulent tuna, the glorious avocado, and don't get me started on the vanilla yogurt laced with cinnamon and tender flakes of chocolate.. Man, I need a cigarette and a shot of tequila after that.

I've been a cranky ass the past couple months and haven't been in the mood to write, but I continue to see the verbal defecation of 589'ers, spinning their latest meme concoctions, so I'm here to once again shed some light on their dark magic. What I've come to realize is that it all comes back to basics. Simple concepts, poorly understood, lead to gigantic tinhat theories; so, I'm just going to start at the beginning and try to build a foundation for people to understand the bigger picture from.

What is a fiat/crypto pair?

This is a combination of something you'd like to trade one for the other. For example, if I wanted to convert my USD to XRP, I'd be looking for a pair named something like USD/XRP (or XRP/USD). This also works for traditional fiat/fiat (e.g. USD/EUR), or crypto to crypto (e.g., BTC/ETH). Sometimes, there are no direct conversions between the source and target currencies you are interested in, and you'll be forced to "Double Trade", for example if you wanted to go from MEX to INR, you may have to buy XRP via MEX/XRP, and then sell your XRP via XRP/INR to get the desired results.

What is a 'base' currency?

In order for XRP to be a base currency on a given exchange, that exchange would offer XRP pairings in most popular fiat currencies (e.g. USD/XRP, USD/GBP, USD/EUR, etc.), and also offers pairing to most crypto (e.g. XRP/BTC, XRP/ETH, etc.). The major advantage of XRP being one of an exchange's base currencies is it becomes much easier to trade XRP without the need to Double Trade, and thus XRP gets traded more easily. The easier XRP trades, the more "liquid" it becomes.

What is liquidity?

Liquidity most fundamentally is the ease of which something can transfer value. The more liquidity you have, the more value you can transfer. Liquidity for a specific coin is determine by the formula: Volume times Price. Think of it like, well, a faucet. Let's say you have to fill up a giant barrel (e.g. cross-border money transfer) with water (XRP) from your water supply (an exchange). If you have a small spout (low volume) and low pressure (low price), then it will take you forever to fill the barrel. If you massively increase the pressure (price going up), you'll fill the barrel a lot quicker. And if you increase the spout size (volume increase), now the barrel fills in no time. More volume, and higher price, equals more liquidity available to fill the barrel.

What is an exchange?

Many people think of an exchange like a store, where you can go to buy or sell your crypto. It's not. For each and every "Pair", there's actually two simultaneous auctions taking place.

To make it clear, imagine you are in the middle of a huge industrial campus (an exchange) looking at numerous independent warehouses (pairs). On the outside of the warehouse right in front of you is painted "XRP/USD". On the dozens of other warehouses you see different pairings painted on them.

You have a pile of cash on you so you step into the XRP/USD warehouse. In the middle of the warehouse is a wall that divides the warehouse into two halves. In one half of the warehouse, the word "Buy" is painted on the walls, and in the other half of the warehouse the walls are painted with "Sell". There is a buy auction happening in in the buy side, and a sell auction happening in the sell side.

You want to purchase some XRP, so you need to find someone selling it right? You go over to the Sell side of the warehouse, and on the auction stage are quite a few sellers (ordinary people just like you but they are publishing their desire to sell) lined up with their bags of XRP for sale with prices marked on their bags (this is the sell-side of the XRP/USD order book). They are sorted by increasing price. The auctioneer's, "hibbidy bibbidy do I hear 46 cents 46 cents each for 100 zerper derpers blabiddy blobiddy". You put your hand up. "SOLD to the gentleman eating a meat-lovers pizza with extra cheese and a side order of garlic bread!"

You swap for the XRP. Now, just for fun, you walk over to the Buy side to see what's going on. Same situation almost, except the sellers on stage are carrying bags of USD marked with the desired number of XRP they wish to trade for, and they're sorted in descending order. Auctioneer, "bedebede bladablah do I hear 100 zerper derpers for 43 cents each". You put your hand up. "SOLD to the gentleman eating a 12-inch hoagie sandwich and bowl of chili!"

Well that kinda sucked. You're right back where you started, all in cash, but less of it. Seems the SPREAD of 3 cents took some money away. Won't do that again.

And that's it! There no magic to it, but what's important to understand is that there's no store involved. The warehouse owners (exchange) didn't sell you the XRP, you just bought someone else's XRP, or money. The warehouse just provides the venue for trading to occur. This should make it obvious that if you were in another warehouse that is empty, like ZRX/USD for example, you might not have anyone to sell your massive pile of ZRX shitcoins to, and that's called being a 'bagholder', as in holding a bag of worthless crap coins you can't unload.

What is "Supply and Demand" all about?

Many many many things contribute to the price of XRP, but they all ALL coagulate into these two ultimate parameters:

  1. Supply - is the availability of tradeable XRP (not hoarded or escrowed, but immediately tradeable)

  2. Demand - is every single reason one can think of why someone would want to buy XRP from someone else

Putting these together, you can determine the direction for XRP's price. If Demand outstrips supply, then more people are fighting for the same increasingly scarcer XRP, and so they pay more for it. If Supply increases (say a whale sells a pile of XRP on the markets), then there's more XRP to go around, and competition for buyers increases, meaning they can get away with paying less, and the price drops.

Likewise, if Demand drops for whatever reason, then relatively speaking, it's the same as if Supply increases, then the price drops. If Supply decreases, then it's relatively the same as Demand increasing, so the price increases. Simple!

Why doesn't the price go up every time there's good news?

For the exact same reason you're not buying more XRP every time you hear good news; you're maxed out. At some point, all investors are as 'convinced' as they'll ever be, and no more money is available. The illusion is that more good news will continuously bring in more new investors, but there is such a thing as good news fatigue, where great news is so normal, that it's just normal news now.

One other thing I'll caution against is the idea that anything looking and feeling like a news source can be trusted. Absolutely the worst thing you can do is blindly trust any news article. After religion and politics, trading is by far the most deception-riddled paradigm ever legalized by humankind. Virtually every news article you read, every YouTube, every blog, every picture clipping, every mined quote, every "prophet", every financial "expert", every technical-analysis "expert", every conspiracy theorist, every troll, every Jamie Dimon, every McAfee, every weight-loss meal that tastes like petrified SHIT, is a dirty stinking liar, trying to emotionally manipulate you into buying someone else's shitcoins or to click on their ads. Trust no one. Verify everything.

Will future gains repeat the past?

NO! This seems to perplex people because they don't understand the significance of compounding versus linear, so let me explain the difference. Virtually everything follows a 'maturity', which is a curved line that looks like the top-left part of a circle. Your height at various ages for example. Your intelligence growth. You car's acceleration curve. Etc. You won't be twice as tall at 40 as your were at 20, and you won't be twice as smart at 80 as you were at 40, and your car won't go faster infinitely. Different stages of maturity introduce new resistances to growth, with very few exceptions in reality.

The first XRP gains were obscene because there were hardly any sellers to cash out and suppress the price. The second wave to $3.80 was also obscene...but "not quite" as obscene as those first gains, nor did they happen as quickly, understand? So if history really is to repeat itself, it means the next wave "also" won't be as obscene as the last one and won't happen as quickly. The trend is: less obscene and slower growth. This isn't to say that earlier gains won't be met 'eventually', but they will require more patience.

Why does this happen? Because of supply and demand. In the beginning, nobody had XRP, so there wasn't any supply to counteract demand, and the price shot up like a rocket. Then on the second run, a lot of people had XRP and sold their XRP and crashed the price from $3.80. you can expect the next super runup to face similar mad resistance because SO MANY MORE PEOPLE HAVE XRP NOW, keeping the price from hitting insane values. Take a look here and here to see how money is distributed in the XRP ledger to understand the kind of money we're talking about.

This is the process of maturation, and will continue to add time and resistance to price gains.

What is arbitrage?

Let's go back to the warehouse example. If you'll remember, I lost 3 cents per zerp because I bought higher than I sold. Now if everyone here suddenly decided they want all the XRP they can get their hands on, then the price will go up at this auction because of "increased demand".

You call your friend 100 miles away, who's at a completely different industrial campus (different exchange) with its own warehouses (pairings). They tell you that the price of XRP is still pretty low there. This means the XRP-increase event is localized to this exchange only (which happens all the time, like a whale is buying a lot), and now there's a chance to make a profit off the spread.

You hop in your car, drive like a lunatic to the other industrial campus, find the XRP/USD warehouse, and buy as much as you can (causing the price to come up there because of the increased demand you just created), then drive back to the original industrial campus and XRP/USD warehouse and sell everything you got. This kills the high price here because you are now increasing the "supply" that was missing before when the demand increased. This is the act of arbitrage rebalancing prices between exchanges by affecting supply and demand.

Arbitrage happens between all exchanges, even OTC exchanges, and this is why all XRP is roughly the same price around the world. And no, one exchange going up in value will NOT automatically increase XRP everywhere else. The effect of arbitrage is to average out the price, not push everyone to the same high price. Neither will FOMO make that possible because the supply and demand at all the other exchanges hasn't changed, so there's no way they can all suddenly start charging higher XRP prices. It just doesn't work the way, there's no increased demand to support it.

What is OTC?

Stands for over-the-counter. Think eBay for whales. It's here that large purchases and lump sum sales of large quantities of crypto can occur, but usually out of sight, unlike normal markets where you can see all the trade activity. Despite the rumours, OTC is not a private market where insiders get discounted XRP. It's just a large-scale exchange, no different in principle than a regular exchange. What makes it popular is it allows for large purchases without suffering from the huge expense of consumption slippage (explained in detail further down)

The confusion often stems from the fact that Ripple, Inc., 'also' has their own OTC exchange where they sell their XRP to institutional buyers, sometimes at a discount if the purchaser contractually agrees to spend the XRP in a manner conducive to building out the XRP ecosystem. This means that Ripple will NOT sell XRP at a discount without conditions that PREVENT MASSIVE XRP DUMPS. Let me say it another way. RIPPLE WILL NOT FACILITATE ANOTHER COMPANY'S XRP DUMP!!! In case that still doesn't make sense to you, RIPPLE DOES NOT SELL DISCOUNT XRP WITHOUT RESTRICTIONS THAT PREVENT DUMPING. And if you're still saying, 'but but but, what if some company dumps their XRP...', then THEY DIDN'T GET IT FROM RIPPLE AT A DISCOUNT!! I swear I will steal the lunch of the next person that tries to tell me Ripple is giving their money away so other companies get rich dumping their XRP on the markets; that's just fucking ridiculous.

Another OTC rumor is that the prices on OTC markets are different than the open markets. This is also of course absurd, because of arbitrage. If someone fills a large XRP buy order on OTC for 10 cents less than the open market, then for certain they are going to instantly sell that XRP in every other market they can. There's no way a huge disparity between OTC and open markets can form for very long before arbitrage closes the spread.

Take the tinhat off, OTC is not a den for insider whales to continuously source cheaper XRP to suppress or rob our open markets with. In fact, if all OTC markets were closed, then all of those OTC buyers and sellers would move over to the open markets, and because BOTH the buyers AND the sellers would move, then the price would still remain the same because the relative strength of the supply versus demand hasn't changed in intensity, just relocated to a different exchange, and instead of bulk purchases, they'd just spread their purchases out to avoid the consumption slippage (explained further below), and that would limit price increases.

If you want the price to change, you have to change either the amount of supply or demand, and just relocating buyers/sellers to a different exchange alone, doesn't change that ratio. Sure, it may increase volume on that exchange, but it's just the hidden volume we couldn't see on the OTC, so really, nothing's changed at all except visibility.

What are Market-Makers and Liquidity-Providers?

The terms are largely interchangeable, at least in the crypto-space. Market-Makers/Liquidity-Providers perform the role of providing perpetual liquidity. They create buy and sell orders when needed to keep the market from stalling, essentially guaranteeing there will always be a buyer and or seller. This creates liquidity and confidence in the market because generally traders will be able to move in and out of positions quickly.

MM/LPs can operate on an exchange by buying/selling in currency pairs, or they can be accessible directly as 3rd party providers. This is not to be confused with OTC where traders trade with other traders. When you buy XRP from MM/LPs, you are buying 'their' XRP from them, for prices that are presumably contractually calculated to be predictable relative to market conditions so that sourcing can happen very quickly. This is the magic sauce required to make ODL (On-Demand Liquidity) work like a hangry demon that hasn't eaten for a fucking week.

What are stablecoins?

First off, whoever started calling them "stablecoins" is a dumbass (probably Tushar). The proper term is 'pegged' coin, meaning that a counterparty guarantees the value of the coin will stay consistent with whatever fiat it is supposedly 'pegged' to. This is accomplished by the issuer of said pegged coin by a combination of further issuance, and very tight market-making on their coin in the markets. It is profitable because they effectively hold millions of real dollars that people gave them when they purchased the pegged coins from them, so now they have those real dollars invested in a hedge fund and are making millions in profits. They have just enough reserve liquid cash to meet expected daily sales demands, in an ideal world.

The reason why 'stable' coins are so bad is that it implies there is inherent stability to these coins, as in lack of volatility relative to the market as a whole, but that's certainly not true because the underlying fiat itself may crash (Lira?) and so there's no guarantee of stability any more than the underlying fiat can offer.

But that's not even remotely the greatest stability risk. Remember that there's a centralized profit-oriented organization responsible for the tight administration of the market price of these so-called 'stable' coins, and that means all the regular risks of insolvency applies to these coins that aren't implicit to regular decentralized crypto. It's anything but stable. Be very careful not to sit in stable coins for longer than necessary; it's not real fiat.

What is slippage?

The biggest source of confusion I've ever seen. Man, have I been raked over the coals because of some people's inability to grasp this concept. There are two primary applications of the concept of slippage. The first, and more common application is:

1) Volatility slippage

The 'volatility' definition, where time passing introduces variability into a trade. For example. If I want to send money from Mexico (MEX) to India (INR) using ODL, I'd like to know before I pull the trigger what that's going to cost. I'm given some quotes by the Liquidity Provider and hit the send button. A few minutes later the transaction is complete, but unfortunately for the LP, the price of INR moved ever so slightly up, costing the LP a bit extra that wasn't charged to me up front, and this is the 'volatility' SLIPPAGE, meaning things changed over time after the price agreement was made.

Volatility slippage is a known risk for LPs, that some of the transactions are going to cost more than they quoted for, BUT.. keep in mind, it's just as likely that the next trade, any currency fluctuations might work IN their favor, making it 'more' profitable for them. Over time, and thousands of transactions, the losses/wins ZERO OUT!!! Which means it doesn't cost them anything, which is why they are PERFECTLY WILLING to take the hit once in a while, knowing that they'll get just as many WINS in other trades. This is also what Ripple is referring to when they say the Market-Makers will absorb any 'volatility' SLIPPAGE losses, which ultimately is no loss at all.

Applying this to the warehouse example. I'm trying to pay someone in India from Mexico. If I'm in the Mexican XRP/USD warehouse, and I'm talking to my friend in India, who's in their Indian XRP/USD Godown, and she quotes me a certain amount of INR for XRP. I then pay with Pesos to buy a certain amount of XRP, I send that XRP to my friend, but when she tries to convert it to INR, she discovers that the price of INR has increased, and she ends up with less INR than was expected. She agrees to eat the loss, because she knows the next time I send her XRP, it may work the other way around such that she gets more INR than expected. Over time, ZERO SUM, ZERO LOSS!!

2) Consumption slippage

Ok, for this explanation, please pay attention! I have no idea why so many people simply cannot get this; it's really super easy. Unlike volatility slippage where the loss occurs because the exchange rates changed during the transaction. 'Consumption' slippage occurs because the exchange purchases 'themselves' are too large and consumes many of the orders in the order book, causing the price to increase.

Applying this to the warehouse example. Remember that the published sellers are on the auctioneer's stage in increasing order. So, if I need to buy 5000 XRP, and the cheapest seller is only selling 1000 XRP, then I consume his sale, and then the next guy's only selling 2000 XRP for slightly more money, and the the next guy's only selling 1000 XRP for even more yet, and then finally the last 1000 out of the 3000 that the next expensive guy's selling.

This all means, even though I quoted only the first guy when negotiating the price, obviously that first guy didn't have 5000 XRP, so as I kept buying from more and more of the sellers, I was paying more and more for the XRP, until finally I had all the 5000 XRP, but at a greater cost than what the first seller was selling for; my average price per XRP is much higher. This is 'Consumption' slippage.

What's even worse about this is that once I send this XRP overseas, presumably their market is about the same (due to equalization effect of arbitrage), and thus she would similarly have to sell XRP to multiple buyers, each paying less than the one prior, until all 5000 were sold. Her average XRP sell price was much lower than the quoted price.

In summary, between my higher average buy price, and her lower average sell price, the SPREAD was much higher, and if you recall, that's lost money. Therefore, the larger the amount needed to transfer, the more consumption slippage occurs, and the greater the cost from the spread of the transaction. There may not even be any volatility slippage involved here at all, other than what this transaction caused.

Also, unlike volatility slippage, where sometimes you win, sometimes you don't (zero sum), consumption slippage is 'always' a loss, for both sides! It's a major barrier and no self-respecting Market-Maker/Liquidity-Provider in their right mind is going to voluntarily 'absorb' these losses! They are not charities! The larger the transactions, the exponentially larger the consumption slippage fees. A few million dollar orders can incur tens of thousands in fees, and would easily wipe out a generous market-maker in no time.

To expect any LP market-making company to absorb massive consumption slippage costs is just ignorant, it really is. Ripple's primary contribution is 'seeding' LPs, meaning they 'loan' the XRP to the LPs to start profiting from. They don't give it away, and they certainly don't encourage multi-million dollar transfers and pay thousands in slippage. If you're paying attention, Ripple has stated many many times they are going after SMEs and remittance companies, those that specialize in SMALL-VALUE transfers, small enough that they won't incur consumption slippage.

You may hear over and over that banks can make any size transfer they want because LPs will absorb the slippage, but that's because clueless people are confusing the fact that LPs will absorb volatility slippage, thinking this also means LPs will eat the considerably more expensive consumption slippage on larger money transfers, which they just won't do, and more-or-less can't do.

Also, you WILL hear over and over and over and OVER and OVER and fucking OVER that ODL demand will hysterically PUSH the price of XRP up to meet demand, not understanding that the consumption slippage that comes with this approach can make larger transactions nonsensically expensive very quickly and it would make zero sense for a bank to spend maybe thousands of dollars in consumption slippage just to send a multi-million dollar transfer..

Don't believe this bullshit of XRP rocket launches to $500, don't buy into 'credential-waving', and don't follow the hopium-junkies. These $589 EOY morons are leading you down their path of impossibly stupid ignorance and perhaps causing you to invest more than you can afford to. Always keep it real, and plan for total loss, because it can happen.

Don't Liquidity-Providers remove the effect of consumption slippage?

To a degree. And yes, that's what they are there for, particularly in the context of ODL/RippleNet, but even they have limited resources, and at some point if the volume or transactions become too large, the LPs won't have enough XRP available, and they will have to source from the exchanges like everyone else. Think of LPs like a 'buffer' against the markets, but not isolation from them. Though they make large buys/sells from their customers, LPs also buy/sell some XRP on the exchanges over time to rebalance their holdings, but done slowly to avoid the consumption slippage. In order to remain profitable, those risks of volatility over time and even the menial slippage is priced into their bulk customer buys/sales, so either way, customers buying from an LP or direct from market, those customers are paying for volatility and consumption slippage.

What is the price of XRP going to be?

It's simply impossible to pick a price with any accuracy. If you are looking for someone to answer that question for you, then you are looking for a liar, and holy shit there's no shortage of megalomaniac sociopaths out there, creating clickbait pseudo-news junk articles, commercial-laden tubes, etc. It's all to take your money buddy; are you really going to trust somebody that's pushing products and ads and taking streaming tips while they regurgitate the same echo chamber propaganda out of their asses for hours? Wake the fuck up! They'll tell you whatever you want to hear to keep you coming back for more ad clicks and tips. Nobody can ever give you an accurate future value for XRP, I promise, so this question is meaningless. I know if I was a $589 tuber that got a lot of people worked up and invested far over their heads, I'd be reflecting upon the wisdom of continuing to perpetuate this nonsense for personal gains.

Take this advice. Forget about trying to predict the future, or trying to find someone that can, the only decision you ever need to make is, "have I made enough?" Ask yourself this question many times a year, because the answer fluctuates with your situation in life, so the same amount might not be enough now, but in the future it may be. If the answer is yes, get out. If not, weigh the risks of losing what you have and see if it's worth it to keep hodling, or maybe even taking some out. If your future financial security depends on profits, then you're in too deep.

I believe in Ripple, I believe in XRP's promise, and it's just a matter of time before ODL's virtues prove themselves and the network effect really takes hold, allowing the platform to make significant moves. I don't cry when the price drops, and I don't get excited when the price climbs. I'm in it for real, for the long haul. My math shows nothing but blue skies ahead. No need for the moon. So before we get to $589, let's talk about getting to $1. If we get to $1 by EOY, that's over 200% gains in two months, and if that's disappointing to you, you're definitely not living in reality.

Ahhh... I'm imagining I'm at a fine restaurant eating a 48-ounce aged prime rib, with all the trimmings, marinara-topped baked potato, glazed sauteed asparagus with a hint of lime, some biscuits dripping with sea-salt butter you little bastards, and a glass of 2016 Malbec. Some of you might say that's enough for anybody, but it's my dream so I go ahead and also order the Tiramisu, which I don't even like. Mmmm...

Comments welcome at Twitter (No tips please :)

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