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How To Make Money Trading Alt Coins

An Introduction to Alt Coins

The success of Bitcoin has opened many people’s eyes to the possibility that virtual currency could gain mainstream acceptance. It offers a wide range of potential advantages over regular currency. These include lower fees for merchants (hence cheaper prices for consumers), the ability to transfer money to anyone, anywhere in the world without high bank transfer costs, the fact that it is international and not controlled by a national government, the opportunity to wrestle power and profits back from the wealthy bankers and put it into the hands of ordinary people, and the additional benefit that it is not inflationary – meaning that it does not lose its value over time like the dollars, pounds or other fiat currency which you own.

Bitcoin itself, however, is far from perfect; it is the trailblazer, but perhaps not the finished product that will hit the big time. The distributed nature of Bitcoin, with no owners or central management team, whilst providing many benefits also means that there are limits to how much Bitcoin can be changed to reflect our growing knowledge of how virtual currency can be used and how we would like it to work. Problems include potential security concerns, slow transaction times, uneven distribution, the fact that one coin costs so much – a result of the limited number available – which means that small payments end up being a tiny and hard to read fraction of one coin, and limited functionality compared to what we now know is possible.

As a result of this, a range of other virtual currencies have emerged which aim to solve the problems with Bitcoin and extend its functionality. Most have very small user-bases currently, but some are growing fast and could easily provide real competition for Bitcoin. If a virtual currency does become mainstream, it may well be one of these new alt coins rather than Bitcoin.

How To Be A Successful Market Maker

Obviously the above description of how a market maker operates is somewhat simplified. This is because making markets in this way exposes you to ‘currency risk’. That means that you may buy Bitcoins, for example, as slightly below the market price – but then the price may fall before you can sell them leaving you out of pocket.

There are two things that you need to do to be a successful market maker, reducing your risks and increasing your profits. The first is to find currency pairs with a large spread. Because the alt coin markets are new and undeveloped there are still not enough market makers, there are often times when the spread becomes fairly large for some markets.

The second is to post small offers close to the market price, but larger offers further away. If a market only has small offers close to market price, then someone wishing to exchange a larger amount will have to also take offers further down the orderbook and therefore pay more. One of the main roles of the market maker is to make sure that there are always enough offers on the table no matter how much somebody wants to exchange – and the more they want to exchange the larger the spread you will be able to charge. To extend on my previous example, you may offer to buy 0.1 Bitcoins at $598, 0.25 at $597.5, 0.5 at $597, 1 at $596 and so on.

Analysing Trends

If you have any experience of trading in the traditional financial markets then you can use the exact same skills and apply them to the new alt coin markets. Technical analysis – the art of analysing price graphs to look for trends – is a huge subject. There are literally hundreds of different strategies, tools and techniques; but fortunately there are also plenty of resources available which you can use to learn how to identify support and resistance lines, use moving averages, and so on. The book I’ve included a link to on the right was written for traders working in the traditional financial markets, but the lessons and techniques can easily be applied to any market.

* Article courtesy: http://www.bitcoinalliance.in/

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