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by Tepix
1970 days ago
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I had this rather simple idea the other day: Why not create an artificial index over the last X days and trade that instead? No matter how crazy the price changes of a crypto coin are, the X day average will always be dampened because today's changes will only be 1/X of the change of the average. |
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Consider the following scenario: your index (let's call it BTCEMA) tracks BTC at $30k but BTC does a crypto thing and drops $5k in a day, so it's now below the index. A lot of traders would sell your BTCEMA tokens to buy more real BTC expecting a recovery or get into stable coins expecting a further drop. At any rate, the exchange price of BTCEMA would drop due to sell pressure.
Your indicator has "broken peg" which is an ugly situation that threatens every artificial instrument in that space. The whole miracle mixture for algorithmical and asset-backed stable coins is to prevent such a situation to happen for a longer time. It's a bit too much to explain but they try to defend against this in different ways, e.g. reducing supply to hike price.
In your case, you'd need to buy BTCEMA from the market to prop up price for as long as it takes the moving average to digest the sudden price jump. You'd find yourself in the situation of the Bank of England trying to defend the Pound in 1992 and only making Soros rich instead.