When a seller has a limited supply of an item in high (or uncertain and possibly high) demand, they frequently set a price far below what "the market will bear." As a result, the item sells out quickly, with lucky buyers being those who tried to buy first. This has happened in the Ethereum ecosystem, particularly with NFT sales and token sales/ICOs. But this phenomenon is much older; concerts and restaurants frequently make similar choices, resulting in fast sell-outs or long lines.

Why do sellers do this? Economists have long wondered. A seller should sell at the market-clearing price if the amount buyers are willing to buy exactly equals the amount the seller has to sell. If the seller is unsure of the market-clearing price, they should sell at auction and let the market decide. So, if you want to sell something below market value, don't do it. It will hurt your sales and it will hurt your customers. The competitions created by non-price-based allocation mechanisms can sometimes have negative externalities that harm third parties, as we will see.

However, the prevalence of below-market-clearing pricing suggests that sellers do it for good reason. And indeed, as decades of research into this topic has shown, there often are. So, is it possible to achieve the same goals with less unfairness, inefficiency, and harm?

Selling at below market-clearing prices has large inefficiencies and negative externalities

An item that is sold at market value or at an auction allows someone who really wants it to pay the high price or bid high in the auction. So, if a seller sells an item below market value, some people will get it and others won't. But the mechanism deciding who gets the item isn't random, and it's not always well correlated with participant desire. It's not always about being the fastest at clicking buttons. Sometimes it means waking up at 2 a.m. (but 11 p.m. or even 2 p.m. elsewhere). Sometimes it's just a "auction by other means" that's more chaotic, less efficient, and has far more negative externalities.

There are many examples of this in the Ethereum ecosystem. Let's start with the 2017 ICO craze. For example, an ICO project would set the price of the token and a hard maximum for how many tokens they are willing to sell, and the sale would start automatically at some point in time. The sale ends when the cap is reached.

So what? In practice, these sales often ended in 30 seconds or less. Everyone would start sending transactions in as soon as (or just before) the sale started, offering higher and higher fees to encourage miners to include their transaction first. Instead of the token seller receiving revenue, miners receive it, and the sale prices out all other applications on-chain.

The most expensive transaction in the BAT sale set a fee of 580,000 gwei, paying a fee of $6,600 to get included in the sale.

Many ICOs after that tried various strategies to avoid these gas price auctions; one ICO notably had a smart contract that checked the transaction's gasprice and rejected it if it exceeded 50 gwei. But that didn't solve the issue. Buyers hoping to game the system sent many transactions hoping one would get through. An auction by another name, clogging the chain even more.

ICOs have recently lost popularity, but NFTs and NFT sales have risen in popularity. But the NFT space didn't learn from 2017; they do fixed-quantity sales just like ICOs (eg. see the mint function on lines 97-108 of this contract here). So what?

That's not the worst; some NFT sales have caused gas price spikes of up to 2000 gwei.

High gas prices from users fighting to get in first by sending higher and higher transaction fees. An auction renamed, pricing out all other applications on-chain for 15 minutes.

So why do sellers sometimes sell below market price?

Selling below market value is nothing new, and many articles, papers, and podcasts have written (and sometimes bitterly complained) about the unwillingness to use auctions or set prices to market-clearing levels.

Many of the arguments are the same for both blockchain (NFTs and ICOs) and non-blockchain examples (popular restaurants and concerts). Fairness and the desire not to exclude the poor, lose fans or create tension by being perceived as greedy are major concerns. The 1986 paper by Kahneman, Knetsch, and Thaler explains how fairness and greed can influence these decisions. I recall that the desire to avoid perceptions of greed was also a major factor in discouraging the use of auction-like mechanisms in 2017.

Aside from fairness concerns, there is the argument that selling out and long lines create a sense of popularity and prestige, making the product more appealing to others. Long lines should have the same effect as high prices in a rational actor model, but this is not the case in reality. This applies to ICOs and NFTs as well as restaurants. Aside from increasing marketing value, some people find the game of grabbing a limited set of opportunities first before everyone else is quite entertaining.

But there are some blockchain-specific factors. One argument for selling ICO tokens below market value (and one that persuaded the OmiseGo team to adopt their capped sale strategy) is community dynamics. The first rule of community sentiment management is to encourage price increases. People are happy if they are "in the green." If the price drops below what the community members paid, they are unhappy and start calling you a scammer, possibly causing a social media cascade where everyone calls you a scammer.

This effect can only be avoided by pricing low enough that post-launch market prices will almost certainly be higher. But how do you do this without creating a rush for the gates that leads to an auction?

Interesting solutions

It's 2021. We have a blockchain. The blockchain is home to a powerful decentralized finance ecosystem, as well as a rapidly expanding set of non-financial tools. The blockchain also allows us to reset social norms. Where decades of economists yelling about "efficiency" failed, blockchains may be able to legitimize new uses of mechanism design. If we could use our more advanced tools to create an approach that more directly solves the problems, with fewer side effects, wouldn't that be better than fiddling with a coarse-grained one-dimensional strategy space of selling at market price versus below market price?

Begin with the goals. We'll try to cover ICOs, NFTs, and conference tickets (really a type of NFT) all at the same time.

1. Fairness: don't completely exclude low-income people from participation; give them a chance. The goal of token sales is to avoid high initial wealth concentration and have a larger and more diverse initial token holder community.

2. Don’t create races: Avoid situations where many people rush to do the same thing and only a few get in (this is the type of situation that leads to the horrible auctions-by-another-name that we saw above).

3. Don't require precise market knowledge: the mechanism should work even if the seller has no idea how much demand exists.

4. Fun: The process of participating in the sale should be fun and game-like, but not frustrating.

5. Give buyers positive expected returns: in the case of a token (or an NFT), buyers should expect price increases rather than decreases. This requires selling below market value.
Let's start with (1). From Ethereum's perspective, there is a simple solution. Use a tool designed for the job: proof of personhood protocols! Here's one quick idea:

With the per-person mechanism, buyers can get positive expected returns for the portion sold through the per-person mechanism, and the auction part does not require sellers to understand demand levels. Is it race-free? The number of participants buying through the per-person pool appears to be high. But what if the per-person pool isn't big enough to accommodate everyone?

Make the per-person allocation amount dynamic.

Here's another idea if you like clever game mechanics with fancy quadratic formulas.

The quantity allocated to each buyer is theoretically optimal, though post-sale transfers will degrade this optimality over time. Mechanisms 2 and 3 appear to meet all of the above objectives. They're not perfect, but they're good starting points.

One more issue. For fixed and limited supply NFTs, the equilibrium purchased quantity per participant may be fractional (in mechanism 2, number of buyers > N, and in mechanism 3, setting C = 1 may already lead to over-subscription). With fractional sales, you can offer lottery tickets: if there are N items available, you have a chance of N/number of buyers of getting the item, otherwise you get a refund. For a conference, groups could bundle their lottery tickets to guarantee a win or a loss. The certainty of getting the item can be auctioned.

The bottom tier of "sponsorships" can be used to sell conference tickets at market rate. You may end up with a sponsor board full of people's faces, but is that okay? After all, John Lilic was on EthCC's sponsor board!

Simply put, if you want to be reliably fair to people, you need an input that explicitly measures people. Authentication protocols do this (and if desired can be combined with zero knowledge proofs to ensure privacy). So we should combine the efficiency of market and auction-based pricing with the equality of proof of personhood mechanics.

Answers to possible questions

Q: Won't people who don't care about your project buy the item and immediately resell it?

A: Not at first. Meta-games take time to appear in practice. If they do, making them untradeable for a while may help mitigate the damage. Using your face to claim that your previous account was hacked and that your identity, including everything in it, should be moved to another account works because proof-of-personhood identities are untradeable.

Q: What if I want to make my item available to a specific community?

A: Instead of ID, use proof of participation tokens linked to community events. Another option, also serving egalitarian and gamification purposes, is to encrypt items within publicly available puzzle solutions.

Q: How do we know they'll accept? Strange new mechanisms have previously been resisted.

A: Having economists write screeds about how they "should" accept a new mechanism that they find strange is difficult (or even "equity"). However, abrupt changes in context effectively reset people's expectations. So the blockchain space is the best place to try this. You could wait for the "metaverse", but it's possible that the best version will run on Ethereum anyway, so start now.

Historically, only large financial institutions, brokerages, and trading houses could actively trade in the stock market. With instant global news dissemination and low commissions, developments such as discount brokerages and online trading have leveled the playing—or should we say trading—field. It's never been easier for retail investors to trade like pros thanks to trading platforms like Robinhood and zero commissions.

Day trading is a lucrative career (as long as you do it properly). But it can be difficult for newbies, especially if they aren't fully prepared with a strategy. Even the most experienced day traders can lose money.

So, how does day trading work?

Day Trading Basics

Day trading is the practice of buying and selling a security on the same trading day. It occurs in all markets, but is most common in forex and stock markets. Day traders are typically well educated and well funded. For small price movements in highly liquid stocks or currencies, they use leverage and short-term trading strategies.

Day traders are tuned into short-term market events. News trading is a popular strategy. Scheduled announcements like economic data, corporate earnings, or interest rates are influenced by market psychology. Markets react when expectations are not met or exceeded, usually with large moves, which can help day traders.

Intraday trading strategies abound. Among these are:

• Scalping: This strategy seeks to profit from minor price changes throughout the day.
• Range trading: To determine buy and sell levels, range traders use support and resistance levels.
• News-based trading exploits the increased volatility around news events.
• High-frequency trading (HFT): The use of sophisticated algorithms to exploit small or short-term market inefficiencies.

A Disputed Practice

Day trading's profit potential is often debated on Wall Street. Scammers have enticed novices by promising huge returns in a short time. Sadly, the notion that trading is a get-rich-quick scheme persists. Some daytrade without knowledge. But some day traders succeed despite—or perhaps because of—the risks.

Day trading is frowned upon by many professional money managers. They claim that the reward rarely outweighs the risk. Those who day trade, however, claim there are profits to be made. Profitable day trading is possible, but it is risky and requires considerable skill. Moreover, economists and financial professionals agree that active trading strategies tend to underperform passive index strategies over time, especially when fees and taxes are factored in.

Day trading is not for everyone and is risky. It also requires a thorough understanding of how markets work and various short-term profit strategies. Though day traders' success stories often get a lot of media attention, keep in mind that most day traders are not wealthy: Many will fail, while others will barely survive. Also, while skill is important, bad luck can sink even the most experienced day trader.

Characteristics of a Day Trader

Experts in the field are typically well-established professional day traders.
They usually have extensive market knowledge. Here are some prerequisites for successful day trading.

Market knowledge and experience

Those who try to day-trade without understanding market fundamentals frequently lose. Day traders should be able to perform technical analysis and read charts. Charts can be misleading if not fully understood. Do your homework and know the ins and outs of the products you trade.

Enough capital

Day traders only use risk capital they can lose. This not only saves them money but also helps them trade without emotion. To profit from intraday price movements, a lot of capital is often required. Most day traders use high levels of leverage in margin accounts, and volatile market swings can trigger large margin calls on short notice.

Strategy

A trader needs a competitive advantage. Swing trading, arbitrage, and trading news are all common day trading strategies. They tweak these strategies until they consistently profit and limit losses.

Strategy Breakdown:

Type | Risk | Reward

Swing Trading | High | High
Arbitrage | Low | Medium
Trading News | Medium | Medium
Mergers/Acquisitions | Medium | High

Discipline

A profitable strategy is useless without discipline. Many day traders lose money because they don't meet their own criteria. “Plan the trade and trade the plan,” they say. Success requires discipline.

Day traders profit from market volatility. For a day trader, a stock's daily movement is appealing. This could be due to an earnings report, investor sentiment, or even general economic or company news.

Day traders also prefer highly liquid stocks because they can change positions without affecting the stock's price. Traders may buy a stock if the price rises. If the price falls, a trader may decide to sell short to profit.

A day trader wants to trade a stock that moves (a lot).

Day Trading for a Living

Professional day traders can be self-employed or employed by a larger institution.

Most day traders work for large firms like hedge funds and banks' proprietary trading desks. These traders benefit from direct counterparty lines, a trading desk, large capital and leverage, and expensive analytical software (among other advantages). By taking advantage of arbitrage and news events, these traders can profit from less risky day trades before individual traders react.

Individual traders often manage other people’s money or simply trade with their own. They rarely have access to a trading desk, but they frequently have strong ties to a brokerage (due to high commissions) and other resources. However, their limited scope prevents them from directly competing with institutional day traders. Not to mention more risks. Individuals typically day trade highly liquid stocks using technical analysis and swing trades, with some leverage. 

Day trading necessitates access to some of the most complex financial products and services. Day traders usually need:

Access to a trading desk

Traders who work for large institutions or manage large sums of money usually use this. The trading or dealing desk provides these traders with immediate order execution, which is critical during volatile market conditions. For example, when an acquisition is announced, day traders interested in merger arbitrage can place orders before the rest of the market.

News sources

The majority of day trading opportunities come from news, so being the first to know when something significant happens is critical. It has access to multiple leading newswires, constant news coverage, and software that continuously analyzes news sources for important stories.

Analytical tools

Most day traders rely on expensive trading software. Technical traders and swing traders rely on software more than news. This software's features include:

• Automatic pattern recognition: It can identify technical indicators like flags and channels, or more complex indicators like Elliott Wave patterns.

• Genetic and neural applications: These programs use neural networks and genetic algorithms to improve trading systems and make more accurate price predictions.

• Broker integration: Some of these apps even connect directly to the brokerage, allowing for instant and even automatic trade execution. This reduces trading emotion and improves execution times.

• Backtesting: This allows traders to look at past performance of a strategy to predict future performance. Remember that past results do not always predict future results.

Together, these tools give traders a competitive advantage. It's easy to see why inexperienced traders lose money without them. A day trader's earnings potential is also affected by the market in which they trade, their capital, and their time commitment.

Day Trading Risks

Day trading can be intimidating for the average investor due to the numerous risks involved. The SEC highlights the following risks of day trading:

Because day traders typically lose money in their first months of trading and many never make profits, they should only risk money they can afford to lose.
Trading is a full-time job that is stressful and costly: Observing dozens of ticker quotes and price fluctuations to spot market trends requires intense concentration. Day traders also spend a lot on commissions, training, and computers.
Day traders heavily rely on borrowing: Day-trading strategies rely on borrowed funds to make profits, which is why many day traders lose everything and end up in debt.
Avoid easy profit promises: Avoid “hot tips” and “expert advice” from day trading newsletters and websites, and be wary of day trading educational seminars and classes. 

Should You Day Trade?
As stated previously, day trading as a career can be difficult and demanding.

• First, you must be familiar with the trading world and know your risk tolerance, capital, and goals.
• Day trading also takes a lot of time. You'll need to put in a lot of time if you want to perfect your strategies and make money. Part-time or whenever isn't going to cut it. You must be fully committed.
• If you decide trading is for you, remember to start small. Concentrate on a few stocks rather than jumping into the market blindly. Enlarging your trading strategy can result in big losses.
• Finally, keep your cool and avoid trading emotionally. The more you can do that, the better. Keeping a level head allows you to stay focused and on track.
  If you follow these simple rules, you may be on your way to a successful day trading career.

Is Day Trading Illegal?

Day trading is not illegal or unethical, but it is risky. Because most day-trading strategies use margin accounts, day traders risk losing more than they invest and becoming heavily in debt.

How Can Arbitrage Be Used in Day Trading?

Arbitrage is the simultaneous purchase and sale of a security in multiple markets to profit from small price differences. Because arbitrage ensures that any deviation in an asset's price from its fair value is quickly corrected, arbitrage opportunities are rare.

Why Don’t Day Traders Hold Positions Overnight?

Day traders rarely hold overnight positions for several reasons: Overnight trades require more capital because most brokers require higher margin; stocks can gap up or down on overnight news, causing big trading losses; and holding a losing position overnight in the hope of recovering some or all of the losses may be against the trader's core day-trading philosophy.

What Are Day Trader Margin Requirements?

Regulation D requires that a pattern day trader client of a broker-dealer maintain at all times $25,000 in equity in their account.

How Much Buying Power Does Day Trading Have?

Buying power is the total amount of funds an investor has available to trade securities. FINRA rules allow a pattern day trader to trade up to four times their maintenance margin excess as of the previous day's close.

The Verdict

Although controversial, day trading can be a profitable strategy. Day traders, both institutional and retail, keep the markets efficient and liquid. Though day trading is still popular among novice traders, it should be left to those with the necessary skills and resources.

If history is any guide, this bear market might be long and severe.

This is the S&P 500 Index's fourth such incident in 20 years. The last bear market of 2020 was a "shock trade" caused by the Covid-19 pandemic, although earlier ones in 2000 and 2008 took longer to bottom out and recover.

Peter Garnry, head of equities strategy at Saxo Bank A/S, compares the current selloff to the dotcom bust of 2000 and the 1973-1974 bear market marked by soaring oil prices connected to an OPEC oil embargo. He blamed high tech valuations and the commodity crises.

Here are six bear market charts.

Time/depth

The S&P 500 Index plummeted 51% between 2000 and 2002 and 58% during the global financial crisis; it took more than 1,000 trading days to recover. The former took 638 days to reach a bottom, while the latter took 352 days, suggesting the present selloff is young.

Valuations

Before the tech bubble burst in 2000, valuations were high. The S&P 500's forward P/E was 25 times then. Before the market fell this year, ahead values were near 24. Before the global financial crisis, stocks were relatively inexpensive, but valuations dropped more than 40%, compared to less than 30% now.

Earnings

Every stock crash, especially earlier bear markets, returned stocks to fundamentals. The S&P 500 decouples from earnings trends but eventually recouples.

Support

Central banks won't support equity investors just now. The end of massive monetary easing will terminate a two-year bull run that was among the strongest ever, and equities may struggle without cheap money. After years of "don't fight the Fed," investors must embrace a new strategy.

Bear Haunting Bear

If the past is any indication, rising government bond yields are bad news. After the financial crisis, skyrocketing rates and a falling euro pushed European stock markets back into bear territory in 2011.

Inflation/rates

The current monetary policy climate differs from past bear markets. This is the first time in a while that markets face significant inflation and rising rates.

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