The #BitcoinBreakdown: Before You Buy, More Caveats
First Appearing on HedgeAccordingly.com
Let us regard the wonders of technology & innovation: Suddenly, we now have multiple easy ways to lose money betting on bitcoin. Giddyup!
With incredible speed, from your laptop or even your smartphone and without even thinking about it, you can open up a new account, inject real U.S. dollars into it, use that to buy a teensy piece of your favorite cryptocurrency, and begin surfing the bitcoin wave. Or begin getting crushed by that wave, depending on your timing, smarts and luck.
This occurs to me on a recent Thursday night, as I visit an old friend in Brooklyn and bring along Big Guy, a college pal who stands 6-feet-4 (“and a half,” he feels it necessary to point out). The Big Guy and I had been hanging out at the famed Waverly Inn in the West Village in Manhattan, where I had the vodka martini, marked down on special: just $28, down from $30 list.
This next point has nothing to do with bitcoin, okay? I gotta say: Anybody who regularly spends 30 bucks on a martini is a P.T. Barnum-scale sucker. What a waste of money. Waste it, instead, on something really irresponsible. . . . like bitcoin.
Anyway, we’re standing around a table in my friend’s apartment in Brooklyn, and Big Guy is taking swigs from a bottle of Blue Point Winter Ale and staring into the screen of his smartphone, as if mesmerized by some new videogame. Instead, he is tracking his own cryptocurrency trades.
“Uh oh, Ethereum is flash-crashing,” he says. He had gotten got into Ethereum (ETH), a newer “altcoin” alternative to bitcoin, a few days earlier at $620, watching it rise to $740 in a day or two and holding on, only to see it crash instantly down to $650 just this moment. Should he sell?
Guy resists the urge and doubles up on his bet, adding to his ETH holdings (as well as Litecoin, LTC) “to lower my cost basis and scalp the bounce-back from the flash crash,” as he describes it later. By 3 a.m. that same night, Ethereum had re-inflated to rise back up even higher, to $850. Whew.
Big Guy had put $10,000 into a new account he opened at Coinbase, a digital exchange akin to the New York Stock Exchange (except it is unregulated and carries no particular guarantees, far as I can see). He had bet his stake all on bitcoin, pulling out after a 53% gain in a week, after commissions.
Guy opened up a second account, this one on GDAX, a 24/7, online platform in the rather unregulated, Wild West of crypto (it is owned by Coinbase). GDAX offers FDIC guarantees up to $250,000 (what happens to your money as a result of your trades is on you). On GDAX, he bet his bitcoin profits on the two lesser lights, ETH and LTC. He says he can take profits out of Litecoin in only minutes, while transferring money out of bitcoin would take several hours. (LTC is lighter-traded than the binge-fueled bitcoin.)
GDAX charges him 25 basis points (0.25% of the total value of the trade) for “taking markets,” that is, buying coin shares on offer, and no fee at all for “making markets,” or selling on the platform. Coinbase’s buying fee, at 1.5%, is fives times as much that of GDAX. A few days after he sat out the mini-flash-crash, Guy transfers some LTC from his GDAX account to another coin platform, Binance, where he wants to sell LTC and spread the proceeds among various coins trading below $5 apiece.
And a day or two after that, Big Guy is beaten down: He was up 75% and lost most of it all when he panicked and fled ETH and LTC at the bottom of a later plunge. Too fidgety. Easy come, easy go. He’s back in Ripple, though, and it has been “outperforming.”
Yes, the Big Guy admits, he does worry that in a flash crash or especially high trading volume, he may not be able to minimize his losses and take out cash. In cryptocurrency trading, the bigger question than whether to sell may be: Can you sell?
Coinbase limits how much money you can pull out of your account after you sell your crypto and convert the proceeds back to U.S dollars or whichever “real” currency you desire. So, in the event of a crash or some sudden, sharp de-valuation in bitcoins, your ability to act fast and sell your coins might be hampered, and selling your coins could be all but impossible.
Think of it as a football packed with cheering buyers, most of them unaware that there’s only one exit—and it is the size of a doggy door. Buyer beware. Puppies, too.
Next up: The high fees for buying bitcoin.