Tuesday, April 24, 2012

Velocity of Money

A commenter asked me why I keep insisting that the velocity of money is important, so I want to talk about that a little bit.  Examples and numbers will be involved!

According to the vast knowledge of Wikipedia:

"The velocity of money (also called velocity of circulation) is the average frequency with which a unit of money is spent on new goods and services produced domestically in a specific period of time."

The main concept behind the velocity of money is that an order that takes 6 hours to complete at a relatively low margin can be far better, in terms of net profit, than an order that takes 24 hours to complete at a high margin.  This is because you can repeat the 6 hour order 4 times in 24 hours and end up with a higher net income than the high margin item.

Below is a table that illustrates how velocity of isk can work in a completely theoretical manner.  The setup is: 
  • Widget A can be bought for $100,000, sells for $150,000, and each item sells in 1 hour.
  • Widget B can be bought for $1,000,000, sells for $2,000,000, and each item sells in 6 hours.
  • The example player starts with $1,000,000 isk.
  • Sales tax and broker's fees are ignored.
Here is what happens in one day (24 hours):


Widget A is an insane money maker!  At the end of one day of trading it made 16 B isk!  Obviously this is not a real case.  There is no item in the game that moves 100,000+ units an hour and has a price near $100,000.  There are also very few items that will consistently flip every single hour of each day.  But the theory is sound.  Push the Widget numbers out to every 3 hours, and drop a cycle near the beginning to diversify the profits, and you will get a few staggered version of that curve, limited by the daily trading volumes. Widget A will still net far more than just betting on that 1 million isk high margin order!

In summary: diversify across a lot of small orders that are all moving quickly in order to keep your volume clipping along.  Add in big orders as your capital allows you to take longer-term investments.  If all of your isk gets tied up in order that take forever to move, you may be missing out on more boring, but useful trades.

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