1.6 How to Trade Amples

As previously discussed, unlike current-generation cryptocurrencies, gains and losses in the Ampleforth network can be attributed to supply in addition to price. Thus it benefits traders to take both information signals into consideration, evaluating trades based on both the supply of units, S, and the price per unit, P, where market cap M = P × S.

And unlike current-generation synthetics, the Ampleforth supply policy has three states:

  • Expansion
  • Contraction
  • Equilibrium

Below, we’ll identify the unique trading opportunities presented by the Ampleforth protocol across each of the three states, and then combine our findings into a predicted movement pattern.

Expansion

As discussed in the previous section, during expansion there is a window in time where fast traders have a profit opportunity to sell after the supply increases but before any price correction occurs. As long as there are enough traders who exploit this opportunity, price would correct downward creating general price and supply patterns like below:

As shown above, the price series (left) appears to end roughly as it begins; however the corresponding supply series (right) paints a different picture, ending higher than where it began. To best evaluate the unique profit opportunity created, we can look at the price × supply or market cap series below:

Above we can see that while the system is expanding between t1< t < t2, there is an opportunity for fast traders to sell more Amples at a higher price than at the next equilibrium point M2. This occurs because the system expands proportionally to holders when the nominal exchange rate of Amples is > the price target threshold, and continues to expand daily until the price target returns.

A trader looking only at price cannot differentiate between selling at t < O and t > O because by all appearances the price series chart is symmetric. Conversely, a trader looking at price × supply sees an asymmetric opportunity and can capitalize on it.

Contraction

The activity on contraction is very much like expansion. As long as enough traders value the opportunity to buy more of the network for a cheaper price, price would correct upward, creating general price and supply patterns like:

Again in this case the price series (left) appears to end roughly as it begins; whereas the corresponding supply series (right) paints a different picture, ending lower than where it began. To evaluate the unique profit opportunity created, we can similarly look at the price × supply or market cap series below:

Above we can see that while the system is contracting between t1 and t2, fast traders can buy more Amples at a lower price than at the next equilibrium point M1. This occurs because the system contracts proportionally from holders when the nominal exchange rate of Amples is < the price target threshold, and continues to contract daily until the price target returns.

Similar to the expansion case, a trader looking only at price cannot differentiate between buying at t < O and t > O because the price series chart is symmetric. Conversely, a trader looking at price × supply sees an asymmetric opportunity and can again capitalize on it.

Equilibrium

Within the threshold band of the price target, the supply policy does not intervene and supply remains constant. This would generate a price and supply pattern like below:



Predicted Output

Combining all these together suggests a potential price and supply movement pattern like below:

Where the price curve (above left) trades around the exchange rate target, with deviation during dynamic (dotted) periods. And a market cap movement pattern like below:

Where the price × supply, or market cap curve, is step-function-like, alternating between dynamic (dotted) states and equilibrium states. In practice, when transitioning into and out of dynamic states, we expect that effective traders will attempt to predict where the next equilibrium market cap will land, deriving their optimal buy and sell targets from these predictions and updating them as the market discovers the actual equilibrium point.

Next: The Evolution of Risk & Reward