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Cryptocurrency trading is, because of market fees and mining fees, a negative-sum game. That means that on average, you will lose money if you play. Unless you

Cryptocurrency trading is, because of market fees and mining fees, a negative-sum game. That means that on average, you will lose money if you play. Unless you are a miner or run an exchange, of course.

mrtranscendence 5y ago
Help me out here. I know nothing about cryptocurrency, but as something in limited supply that is exchanged for money it seems that on average people could earn money as long as the price keeps rising. Say there are four people in the crypto market. Joe buys crypto for $50, sells it to Steve for $75, who sells it to Sarah for $100, who sells it to Dale for $125, who holds it. Three people have earned $25 each (minus fees) while one is either even or has lost $125, depending on how you look at it (maybe he's happy holding his crypto permanently). This looks like on average people have earned money. I'm not saying that this reflects how real cryptocurrency markets work, but it seems at least nominally possible that most people have earned money.
- user-the-name 5y ago
  You already stated it yourself: He has lost $125, until he sells. That is an average negative. Money in: $50+$75+$100+$125 Money out: $50+$75+$100-3*fees You can continue this chain indefinitely, and the missing final term will get smaller and smaller in relation to the total. The limit of (money out - money in) / transactions goes to simply minus the average cost of the fees. So, a net negative.
  - perl4ever 5y ago
    >He has lost $125, until he sells Everyone who owns an asset is not selling it at this exact moment, so it is worth nothing and there is a 100% loss according to you? This is a possible definition of "loss", but I think it's clearly non-standard, and not useful. You can't just pretend that's what other people mean when they talk about losses.
    - user-the-name 5y ago
      Read the rest of the comment, please. This has no effect on the outcome of the calculation if the trading continues over a longer time.
  - lexapro 5y ago
    He has "lost" $125 but gained the crypto, which might be worth more than $125 if the market goes up.
  - mrtranscendence 5y ago
    I was responding to the proposition that people will, on average, lose money trading crypto. I guess it depends on what you're averaging over, but I took it to mean people, not money, and in that interpretation people could on average earn money.
    - user-the-name 5y ago
      The average of the sum of money gained or lost by each individual person is negative. Whether a larger number of people gain any amount money than those that lose any amount of money is less easy to analyse, but, given that a person can only lose 100% of their money (not taking into account massively unwise loans people might take out, for simplicity) but some people do gain much more than 100%, it is likely that average person has lost or will lose money.
      - mrtranscendence 5y ago
        > given that a person can only lose 100% of their money [...] but some people do gain much more than 100%, it is likely that average person has lost or will lose money. But with a long enough time horizon and generally rising prices, we can make the probability of any one person losing money as close as we want to zero. For a given unit of crypto only the last person in its chain of buyers loses money, left holding it when prices finally drop.
        user-the-name 5y ago
        That is not something that happens in reality.
tick_tock_tick 5y ago
I mean in that sense so is the normal stock market....
- user-the-name 5y ago
  It is not. Dividends, stock buybacks and the value of voting rights change the situation. Trading some stocks might still be a negative-sum game, but not all. However, all cryptocurrencies are.
  - lexapro 5y ago
    Alphabet Inc. Class C stock has no voting rights and has never paid a dividend. On average buyers of this stock still made money, because the stock price kept going up. The last person to hold it owns a valuable asset that is generating a lot of cash, so they are also doing well and probably won't have any trouble selling it for a profit. Btw there are cryptocurrencies who pay out staking rewards.
    - user-the-name 5y ago
      Even if a cryptocurrency pays out staking rewards, you still have a negative-sum game, because all of those rewards come from other people buying in.

mrtranscendence 5y ago

Help me out here. I know nothing about cryptocurrency, but as something in limited supply that is exchanged for money it seems that on average people could earn money as long as the price keeps rising. Say there are four people in the crypto market. Joe buys crypto for $50, sells it to Steve for $75, who sells it to Sarah for $100, who sells it to Dale for $125, who holds it. Three people have earned $25 each (minus fees) while one is either even or has lost $125, depending on how you look at it (maybe he's happy holding his crypto permanently). This looks like on average people have earned money. I'm not saying that this reflects how real cryptocurrency markets work, but it seems at least nominally possible that most people have earned money.

user-the-name 5y ago
You already stated it yourself: He has lost $125, until he sells. That is an average negative. Money in: $50+$75+$100+$125 Money out: $50+$75+$100-3*fees You can continue this chain indefinitely, and the missing final term will get smaller and smaller in relation to the total. The limit of (money out - money in) / transactions goes to simply minus the average cost of the fees. So, a net negative.
- perl4ever 5y ago
  >He has lost $125, until he sells Everyone who owns an asset is not selling it at this exact moment, so it is worth nothing and there is a 100% loss according to you? This is a possible definition of "loss", but I think it's clearly non-standard, and not useful. You can't just pretend that's what other people mean when they talk about losses.
  - user-the-name 5y ago
    Read the rest of the comment, please. This has no effect on the outcome of the calculation if the trading continues over a longer time.
- lexapro 5y ago
  He has "lost" $125 but gained the crypto, which might be worth more than $125 if the market goes up.
- mrtranscendence 5y ago
  I was responding to the proposition that people will, on average, lose money trading crypto. I guess it depends on what you're averaging over, but I took it to mean people, not money, and in that interpretation people could on average earn money.
  - user-the-name 5y ago
    The average of the sum of money gained or lost by each individual person is negative. Whether a larger number of people gain any amount money than those that lose any amount of money is less easy to analyse, but, given that a person can only lose 100% of their money (not taking into account massively unwise loans people might take out, for simplicity) but some people do gain much more than 100%, it is likely that average person has lost or will lose money.
    - mrtranscendence 5y ago
      > given that a person can only lose 100% of their money [...] but some people do gain much more than 100%, it is likely that average person has lost or will lose money. But with a long enough time horizon and generally rising prices, we can make the probability of any one person losing money as close as we want to zero. For a given unit of crypto only the last person in its chain of buyers loses money, left holding it when prices finally drop.
      - user-the-name 5y ago
        That is not something that happens in reality.

tick_tock_tick 5y ago

I mean in that sense so is the normal stock market....

user-the-name 5y ago
It is not. Dividends, stock buybacks and the value of voting rights change the situation. Trading some stocks might still be a negative-sum game, but not all. However, all cryptocurrencies are.
- lexapro 5y ago
  Alphabet Inc. Class C stock has no voting rights and has never paid a dividend. On average buyers of this stock still made money, because the stock price kept going up. The last person to hold it owns a valuable asset that is generating a lot of cash, so they are also doing well and probably won't have any trouble selling it for a profit. Btw there are cryptocurrencies who pay out staking rewards.
  - user-the-name 5y ago
    Even if a cryptocurrency pays out staking rewards, you still have a negative-sum game, because all of those rewards come from other people buying in.