Understanding runaway markets
As Bitcoin and Ethereum continue their
record-breaking run over the past few weeks,
we’d like to take a moment during this
euphoria to explain the dynamics of runaway
markets and how to protect yourself against
transactions you might come to regret.
Investment decisions don’t start with deposits
or purchases, they should start with
education.
The price you see
The price of digital currencies like Bitcoin and
Ethereum is determined by supply and
demand: people who want it (buyers) and
people who have it (sellers). Luno is the
platform connecting these buyers and sellers;
Luno does not determine the price of Bitcoin
or Ethereum.
During surge periods, like over the past week,
demand is much higher than supply since
more and more people want digital currency
and, something most people prefer not to see,
just because the price is going up.
Recent price increase on Luno
When you buy BTC or ETH on the Luno
platform, you are buying it from someone else
(called the “counterparty”). This counterparty
is a little more complicated than just saying
“someone else”, since we are often connected
to multiple sources of liquidity (i.e.
marketplaces where people buy and sell digital
currencies). You could just be making one big
purchase, but you’re buying from multiple
sellers, who, depending on which country you
are in, could even be from multiple other
countries. However, the same rule of supply
and demand still applies.
Supply and demand on Luno
Digital currency platforms, like Luno, also
operate independently from all other digital
currency platforms:
Supply and demand on Luno, independent from
other platforms
You can see here how the price of Bitcoin
(when measured in USD) is technically
different on each and every Bitcoin platform
around the world. This is simply because
supply and demand are different on each of
those platforms.
Arbitrage
If the price is slightly higher on one platform,
traders (i.e. external parties, not Luno) will
sell on that platform and buy on another
lower-priced platform. This process is called
arbitrage and exists in almost all markets,
financial or otherwise. In theory, this is meant
to create price parity across platforms, but in
practice, it doesn’t always work that way due
to constraints like capital controls, the
difficulty of moving of local currencies, market
timing, fees, liquidity and so on.
On runaway prices
Downswings
Sometimes we may witness an event that
triggers a big event on a certain platform. If,
say, Platform B sends out an email that they
are experiencing many technical issues, their
customers might panic about the safety of
their funds and immediately sell all their
Bitcoin (so, supply will be higher than
demand). This will push the price down on
that platform, whereas it might stay
unchanged on other platforms.
Upswings
The opposite also holds true: customers on
one platform might be very enthusiastic about
the price of digital currency and this increase
in demand will push up the prices on that
platform, whereas it might stay unchanged on
other platforms or in particular countries.
The differences in price between platforms
vary: sometimes it’s a small amount,
sometimes it can be much more substantial.
Eventually, the price again reaches some sort
of equilibrium with a smaller difference
between them.
Markets are efficient, but they aren’t always
rational. It could be argued that the faster the
surge or plunge in price, the less rational the
market becomes, with many people taking the
same action at the same time.
Understanding supply and slippage
When you buy digital currency on Luno (or on
other platforms) it’s important to realise that:
- You are buying from another person or
multiple people (the counterparty) - There isn’t an unlimited amount of digital
currency available at the current price
If you put a hundred people, each with one
Bitcoin (1 BTC) that they want to sell (the
supply side) in a room and you bring in a
buyer with unlimited money who wants to buy
100 BTC (the demand side) the 100 sellers
will quickly start arranging, each seller setting
their price. Some sellers might set their price
close to the market rate of $10,000, some
might set it at $11,000 and so on. Some might
even say, “No, I think this thing I have is worth
more, I’m only selling at $100,000 or even
$1m”.
If the single buyer just says “I agree to buy
100 BTC at the current market rate” they will
automatically buy all the bitcoin from all the
sellers, some of it at $10,000, some of it at
$1m.
This might seem like an extreme example, but
digital currencies are much, much smaller than
other financial markets. Even relatively
modest buy or sell transactions using digital
currency could see the effect of slippage.
It is therefore crucial that you closely review
the final price you are quoted when buying
Bitcoin or Ethereum. We will always show you
the price you will pay and the amount you will
receive in return before you confirm the
transaction - it is shown right at the top of the
Luno app or screen.
Exchange rates —on Luno and elsewhere— are
always just indicative. This is why we show
you a confirmation screen before you
complete a transaction.
Buyer’s remorse
Occasionally during these runaway prices —up
or down— we find that some customers are
upset about the high price they paid (or the
low price they received) for their digital
currency.
We want to make it clear: Luno doesn’t set
the price and we don’t benefit from individual
transactions that are higher or lower than the
expected market price. Luno only levies a
small fee for each successful transaction. The
‘higher’ or ‘lower’ values paid are a function of
the market and is settled between these
respective counterparties.
Since transactions aren’t between, say, a
buyer and Luno, but between a buyer and a
seller, it is impossible to reverse or refund a
transaction. Reversing a Bitcoin purchase
would mean we need to reverse transactions
not just on the buyer’s account, but on one,
two or one hundred sellers’ accounts, who all
already agreed to the price on that transaction
in the first place.
Again, this is not just the case with Bitcoin,
but with other financial instruments such as
stocks, bonds, the housing market and so on.
People who trade a lot of these instruments
are very familiar with these dynamics and if
you are not an experienced trader or investor,
it’s very important that you familiarise yourself
with this.
Easy does it
Some people say that when the market is
buying (moving up) that you should sell and
when it is selling (moving down) you should
buy. We can’t and won’t give trading advice,
but it’s important to highlight a few things: - Learn as much as you can
As the adage goes: don’t invest in anything
you don’t understand. The more you want to
invest, the more you should know about the
subject matter. If you’re only spending the
equivalent of a meal, you can probably go
ahead and buy some without over-thinking it.
If you lost that amount, it wouldn’t be the end
of the world. But, if you’re investing a
substantial amount, you must arm yourself with
some information on how things work. - Take it easy
People tend to make irrational decisions when
things are moving fast. Consider slowing down
and setting a few rules in place, such as:
I will only allocate x% of my investment
portfolio to digital currency each month
I will only buy digital currency with money I
can afford to lose
I will never buy digital currency at an all-
time high, only sell ;-)
I will only buy or sell after closely
reviewing what the final price is
If you’re investing without a strategy, you’re
not investing, you’re gambling. - Expect delays
The price of Bitcoin has increased by over
1200% in the past year, Ethereum even more
so. No matter how fast digital currency
platforms like Luno grow, it’s impossible to
grow your staff at the same rate. The wheels
will simply come off if you tried that.
Just by way of example: if we have one
customer support agent that can help a one
hundred customers, and we suddenly have
hundreds of thousands of customers signing
up (as has been the case), there is no way to
hire customer support staff at the same rate
as the influx of new customers, no matter
how hard we try. This is why so many
customers unfortunately experience support
issues in periods of high volatility and in fast-
growing industries such as ours.
Also note that it’s critical that we only employ
the best and brightest for Team Luno because
it’s a highly complex industry that requires a
lot of training and checks to make sure you
are given the right advice, the right help and
that your money is safe with us. We can’t
simply employ anyone and everyone. We are
hiring as fast as we can to clear the
bottlenecks that come with an influx of
customer signups, community and social
engagements, resolution of queries and
improving the performance of our platform to
our customers across the world.
We’re really sorry about the delays you
experience during these times of runaway
prices. We’re working as hard as we can —
until late at night and through the weekend—
to get to your issues. It will get resolved, but
it may take longer than normal.
When there is an exponential increase in
traffic on our platform, you also may
experience degraded performance with the
occasional delay as we upgrade and ensure
stability in the system. Again, we working hard
at smoothing out these technical kinks, too.
We’ll send more communication about our
scaling roadmap for 2018 later this year.
Summary
We’d like to say thanks to all our customers,
all over the world, for your continued support.
We’re witnessing a time of unprecedented
interest in digital currencies and we’re proud
to have so many people form part of this
wave; something we ultimately see as the
future of finance.
We’re planning on increasing the number of
educational resources for our customers in the
coming months to always be the easiest way
to buy, sell (and yes) learn about digital
currencies.
To the moon.