March 5, 2014 in Dogecoin
Now that I've gone over most of the basics of what dogecoin is and what you can do with it, I'm going to go more into the details about markets
Right now, one of the biggest cryptocurrency exchanges that trades Dogecoin is Cryptsy. Cryptsy is a trading platform that allows users to trade cryptocurrencies in real time. Like most altcoins (forks of Bitcoin) Dogecoin can be bought and sold with Bitcoin. At the time of writing, the price of one Dogecoin is 0.00000165 BTC, or 165 satoshi.
Similarly to the stock markets, the DOGE/BTC market is run on a supply and demand basis. To buy DOGE, you would deposit BTC to your account and place a buy order. So if you had .1 BTC, you could place a buy order at 163 Satoshi for ~61300 DOGE. Once someone places a sell order at that price and with that amount (or a partial amount) your order (or part of it) will be filled.
Seems great right? Not always. The stock-like nature of trading for Dogecoin has made it vulnerable to market manipulators. Market manipulation is when someone with large amount of Bitcoin artificially deflates the price for their own gains. Lets take a look. Below you will find a typical orderbook from Cryptsy.
As you can see, the buy and sell line seems to be resting at about 163 satoshi. Now lets say that Jon comes along with 50 Bitcoins worth of Doge (yes, people have that many Dogecoins). Now, he has clients that are expecting him to turn a profit on their coins, so he gets to work. Seeing that there is a very thin wall at 162 satoshi, he begins to sell. He sells 5 BTC of DOGE at 162, waits for it to fill back up again, and dumps off another 5 BTC. At this point Jon has sold 10 BTC of DOGE at 162 satoshi.
With all of his selling, he begins to empty the buy orders and the price begins to drop. Lets say he sells 5 BTC of DOGE at each price on the way down. So he now has 50 BTC from selling doge. Here?s the breakdown
162: sold 10 BTC of DOGE
161: sold 5 BTC of DOGE
160: sold 5 BTC of DOGE
159: sold 5 BTC of DOGE
158: sold 5 BTC of DOGE
157: sold 5 BTC of DOGE
156: sold 5 BTC of DOGE
155: sold 5 BTC of DOGE
154: sold 5 BTC of DOGE
As you can see, Jon?s involvement in the market has eaten away at the buy orders very quickly to drop the price. He ended up selling 50 BTC worth of DOGE at an average of 158.4 satoshi. Now with the price down to 154, Jon will start buying back in as people begin to panic sell from the dropping price. He buys back in slowly, 5 BTC at a time working his way back up until the price settles at 156. Lets see how he does
154: bought 25 BTC worth of DOGE
155: bought 15 BTC worth of DOGE
156: bought 10 BTC worth of DOGE
This works out really great for Jon, because he just bought 50 BTC worth of DOGE for and average of 154.7 satoshi: less than what he sold for at 158.4.
Before Jon began his selling, he had approximately 30,303,030 DOGE which he sold at an average of 158.4 satoshi to get 50 BTC. Now with his 50 BTC, he bought back in, getting 31,565,656 DOGE. That means that just by his dumping so many coins into the market at once, he turned a profit of 1,262,626 DOGE or 1.96 BTC in just over a couple of hours.
Now one thing that you need to understand is that this may be a bit of an extreme example, but the truth is, things like this happen to all altcoin markets. The only thing we can do to stop them, is to not feed them. One reason that Dogecoin is doing so well is because (unlike other altcoins) it is truly being used as a currency, and not just a speculative investment. The more people begin to adopt it and accept it in place of dollars and euros, the closer we will get to the moon!
Special thanks to /u/BunnyDog for their help!