Why I Don’t Trade Ethereum
On Wednesday 21st June I felt vindicated in my decision to ignore the recent inbox-pounding influx of entreaties to ‘trade Ethereum’. As you likely know, the price of Ethereum on the leading GDAX exchange run by Coinbase plummeted from over $300 to $0.10 in a matter of moments. Many of those who trade Ethereum were wiped out. Although it seems that they may be made whole again soon, these recent events will have left many traders with greater financial difficulty than seems reasonable for one trade.
My belief is that Ethereum, or other cryptocurrencies, may (or may not) represent a fantastic Wild West gold-rush, unlike anything else available in the modern markets. But unless you have the means to buy and hold these currencies for the long term - and I mean years - then you shouldn’t touch them with a barge pole.
Rich Poor Quick
Ethereum may well be a good long term investment,. But if you are thinking about approaching it like you do your normal Forex trading, then recent events have shown that you risk becoming just another retail trader patsie. You'll be making other people rich while losing your shirt on the latest get-rich-quick scheme.
Smug self satisfaction and hindsight are found in abundance on the internet, particularly in the world of trading. As such, I would rather write about why I won’t be trading Ethereum (or other cryptocurrencies) in the future, rather than crowing about the past. But first, for those who missed it, a potted history of recent events:
The theory goes that a large sell order was placed - too large for this embryonic market - and it wiped a third or more off the price of Ethereum vs the Dollar almost instantly. This, in turn, caused a domino effect of stop losses and margin calls. This huge amount of automatic sell orders entering the the Ethereum exchange caused the price to tumble to practically zero.
Coinbase themselves initially said that they would not be refunding affected traders (a position they have now reversed) as all of their systems ‘operated as intended’ during the crash. This meant that they also were honouring traders who bought at the bottom (presumably some as low as $0.10) and watched the price of ETHUSD rally all the way back to $300 and above.
This naturally leads me to ask the question - who profited from this?
Any sophisticated trader will have know that placing such a large order all at once will have caused the price to slip. There was simply never going to be enough liquidity at the price they entered at for the amount they wanted to trade. If they were a big enough player, then they must surely have known that?
Futurism.com says that the order itself caused the price to plummet from $317.81 to $224.48, which in turn triggered about 800 stop losses and margin calls. This then drove the price to $0.10 before GDAX suspended trading.
So, our mysterious trader potentially exited the last of their position at $93 worse that the first part of his position. By taking it slowly it is highly likely that they would have been able to save themselves the loss. They could have exited smaller amounts over a period of time to ensure the market remained stable.
If we assume that this was a sophisticated player (I suppose it could just have been an unsophisticated but rich trader…) then we have to assume that they did this on purpose.
So, am I in the realm of daft conspiracy theory to believe that someone deliberately crashed the market to then re-enter at $0.10 and ride that pony all the way home?
It Could Happen Again
Now, this is all conjecture. Perhaps it was an innocent trader cashing in on the tremendous bull run of the last few weeks, oblivious to the price crash their trade would cause. But, if it was deliberate, then it would hardly be the first instance of big players in the markets shaking prices for their own benefit.
GDAX claim on their website to be a fully US regulated Exchange and you have to provide ID documentation to get an account. This can’t even be excused by the traditional anonymity of the cryptocurrency world. There are apparently only about 80 million ‘Ether’ in circulation - a ‘big’ dump on one Exchange (only a portion of that market) wouldn’t have to be that big at all it seems.
If it was me, and I had just made a killing doing this, with no repercussion, I know I’d be tempted to have another go...
Why I Won’t Trade Ethereum
So, that’s the potted history and the conspiracy theory. You are very welcome.
Now to the main reason that I won’t trade Ethereum, Bitcoin or anything else. And why I certainly won’t trade them on margin. (It is worth noting that if you simply owned Ethereum in a Coinbase wallet you would not have been stopped out or margin-called. Trading on margin is always more risky.)
My trading strategy, like many others, is built around discovering a single repeatable edge and trading that for consistent small gains. These are compounded and over time my gains will magnify. Perhaps I find a new edge and add that to my trading, perhaps not.
Trading Ethereum flies in the face of that methodology. It is a ‘stick it all on black’ style of trading. Who honestly knows if Ethereum, or Bitcoin or any of the other dozens of new cryptocurrencies are going up? Or if some are and others will fail? What happens if (when) they get hacked? Or superseded by a new cryptocurrency of which you have yet to hear?
Speculation, not Trading
By all means buy into them if you believe that cryptocurrencies have a place in our future. But don’t kid yourself that this is trading; this is speculation. You have no edge. You don’t have a system to trade Ethereum if you just buy the stuff because there’s a load of hype, or because your broker keeps including it in their weekly email.
Sure, you may make money, potentially lots of it, but you are just as likely to lose your money thanks to wild volatility.
If you have a buy-and-hold, long-term play in mind, then I can sympathise. But the stuff I’ve been reading on forums of people trying to apply normal Forex trading systems to these cryptocurrencies is staggering!
Still Not Stable
My point is illustrated by what has happened since the flash crash. Right now, on Tuesday 26th June, ETHUSD is trading at around $260. That is a massive drop from the high on the 22nd of $327. On my broker feed it equates to 8000 pips. 8000! Who needs flash crashes when normal volatility will lose you 8000 pips in four days? Admittedly other brokers knock one decimal off this, so it is only 800 pips...
I know that if you have a sensible position sizing strategy then the pip amount doesn't matter. But do you think that most people who trade Ethereum are doing so as part of a wider currency trading portfolio, risking only 1% per trade? It doesn't seem that way from the forums. It seems people are chucking everyone on one massive play, because everyone is telling them that the only way is up up up!
Clearly the flash crash has undermined the confidence of those who trade Ethereum, but even if time heals these wounds and traders come back to the world’s second favourite cryptocurrency, I will still be staying away.
Buy The Thing For Real
Having said all of the above, I would consider buying some of this stuff for real. Actual Ethereum, in a wallet, not on margin. Then I am immune to flash crashes, and as in all trading, staying away from margin keeps you safe(er).
But that for me would be an investment. Akin to buying a house in what I thought was an ‘up and coming’ part of town. Or buying some gold and burying it in my garden. Maybe it comes good and I double my money, or more. If I had done so with Bitcoin five years ago I’d be a rich man.
So, OK, I don’t disagree with you that the cryptocurrency bull market may have a long way to go. And I don’t disagree that investing in Ethereum may be a good idea. But I totally disagree with anyone that tells me that buying an ETHUSD derivative, on margin, in an attempt to partake in this rally is a good idea.
Ethereum and other cryptocurrencies may well be an investment opportunity, for those that have the capital at hand. But it sure as hell does not form part of a good Forex trading strategy.
Blowing months of hard-earned Forex gains on a speculative play just doesn’t seem worth it. And judging by some of the chat on the Ethereum forums, most people aren’t exactly risking 1% of their portfolio on this particular trade… If Get Rich or Die Trying is your thing then feel free to ‘Go Big or Go Home’.
I wish you luck, but I’ll be watching from the side.