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Can you say more about how buying at an exchange influeces the price and why that's bad?

bhaak 9y ago
The price we usually see for any traded asset is a weighted average of public exchanges. It's a somewhat artificial number insofar as it only tells you that somebody in the past was willing to pay that much for the asset. There's no guarantee that you'll find a seller in the future for that price. Consider if you wanted to buy a large amount of Bitcoins, like 10000. If you look at exchanges, you will see that the sell and buy offers are public and you can only buy as much Bitcoin right now as are offered on the orderbook. If there are more than 10000 BTC for selling, you can just drop your money on it. But those Bitcoins will be with different price tags. The cheapest offer will sell 1000 for $2400, the next 1000 for $2450, etc. If you blindly buy, your average buy price might be much more than the average price was! Now that you cleared a portion of the orderbook, you have cause a price imbalance. On this exchange A, the cheapest sell offer might be now $3000 but on other exchanges B, it is still around $2400. Now bots and people will scramble to take advantage of that price imbalance. You've create a volatility wave that affects all public exchanges. And you never know how people will react to that. Will the price keep increasing as people think "the price is skyrocketing" or will people start selling massively because "oh, better cash out before the price drops again". So, you bought an asset which you payed more for than the market thought it was worth before you bought it and you are uncertain what price it will settle on afterwards. Also, you might want to buy more in the future, so you don't want to let people know that you are interested in acquiring it. If you buy publicly, people will notice. If you do an OTC, that is much more hidden and you don't create volatility, especially if your OTC agents get them from miners directly and are not accumulating them from exchanges in small amounts themselves.
- lprubin 9y ago
  Thank you! Great reply.

The price we usually see for any traded asset is a weighted average of public exchanges. It's a somewhat artificial number insofar as it only tells you that somebody in the past was willing to pay that much for the asset. There's no guarantee that you'll find a seller in the future for that price. Consider if you wanted to buy a large amount of Bitcoins, like 10000. If you look at exchanges, you will see that the sell and buy offers are public and you can only buy as much Bitcoin right now as are offered on the orderbook. If there are more than 10000 BTC for selling, you can just drop your money on it. But those Bitcoins will be with different price tags. The cheapest offer will sell 1000 for $2400, the next 1000 for $2450, etc. If you blindly buy, your average buy price might be much more than the average price was! Now that you cleared a portion of the orderbook, you have cause a price imbalance. On this exchange A, the cheapest sell offer might be now $3000 but on other exchanges B, it is still around $2400. Now bots and people will scramble to take advantage of that price imbalance. You've create a volatility wave that affects all public exchanges. And you never know how people will react to that. Will the price keep increasing as people think "the price is skyrocketing" or will people start selling massively because "oh, better cash out before the price drops again". So, you bought an asset which you payed more for than the market thought it was worth before you bought it and you are uncertain what price it will settle on afterwards. Also, you might want to buy more in the future, so you don't want to let people know that you are interested in acquiring it. If you buy publicly, people will notice. If you do an OTC, that is much more hidden and you don't create volatility, especially if your OTC agents get them from miners directly and are not accumulating them from exchanges in small amounts themselves.

lprubin 9y ago
Thank you! Great reply.