Blockchain Currency Trading Not for the Faint of Heart
Are you a Bitcoin investor? If not, should you look at becoming one?
You probably see the headlines every day.
How people investing $10,000 made millions in a year.
Many of those stories are true … but you don’t often see the stories of people bragging how much money they LOST.
Because that’s the other side of the Bitcoin.
Investing in cryptocurrencies is a more complicated question than it sounds because, frankly, cryptocurrencies are complex, and getting more complicated all the time.
For one thing, Bitcoin is far from being the only cryptocurrency in the world … so do you invest in Bitcoin, or go for one of the upstart Blockchain currencies like Ethereum?
If you had invested $10,000 in either one over the past 18 months, you’d have made a small fortune. Or in the case of Ethereum, a very large fortune.
EARLY INVESTORS RETIRED WITH A SINGLE TRADE
A year ago in May Bitcoin was trading at $449.23 USD. Now a single Bitcoin trades for $2,463, an increase of 448 per cent.
Ethereum’s currency, known as ‘Ether’, had an even more volatile, explosive run.
On New Year’s Day in 2016 Ether tokens were trading at 95 cents US.
This month, on June 17, Ether hit a high of $391.55. That’s a return on investment of 412 times your investment.
Someone buying 10,000 worth of tokens would have earned over $4 million dollars.
The same thing happened in the early days of Bitcoin.
THE TEENAGED BITCOIN MILLIONAIRE
Erik Finman, a 12-year-old kid in Idaho, was one of the early Bitcoin millionaires.
Finman started with $1,000 he received as a gift from his grandmother, buying his first Bitcoins at $12. IN 2013 Bitcoins went up to $1,200 and Finman sold them for about $100,000.
He used the money to create a small online tutoring service called Botangle, and built it up to 100 active users.
Finman then sold his company for 300 Bitcoins that were worth $200 each at that time, totalling $60,000. He bought a few more along the way, and as of this year owned 403 Bitcoins worth just over $1 million.
Finman obviously did very well, but should you sell all your mutual funds and buy Bitcoins or Ether?
Probably not, because the lows can come just as quickly as the highs.
THE FLASH CRASH OF 2017
Believe it or not, Ether tumbled from $296 last Monday to just 10 cents in a matter of minutes.
You read that right. From almost $300 to one thin dime. A loss of 99.9 per cent.
So, what happened?
First, a single person sold millions of Ether tokens all at once, which pushed prices down.
Second, the sale triggered ‘stop-loss’ orders on the GDAX exchange software, which pushed prices down even further.
That triggered another stop-loss order, which pushed prices down again, and a sudden downward spiral began that the software wasn’t equipped to handle.
Or, to put it even more simply, the GDAX software couldn’t handle the trade, and went haywire.
The GDAX didn’t help matters after telling traders that the problem was just their tough luck, and it wasn’t going to reimburse them for what was, essentially, a software issue.
Fortunately the GDAX exchange has since assured customers they would receive a refund for those 10 cent trades, and the currency bounced back to over $200.
But along the way many traders sold at low prices, and they’re just out of luck. Millions were lost by Ether traders in a single day.
Ether is still falling this week, possibly over an Internet hoax that Ethereum co-founder Vitalik Buterin had suddenly died (Spoiler Alert: He’s still alive), and partly over a very understandable loss of faith in the ability to trade Ether.
And that’s what we mean by volatility.
You can make a fortune or lose a fortune in a month, or a week, or occasionally in just a few minutes.
YOUNG EXCHANGES INCREASE YOUR RISK
It is true that ‘flash crashes’ happen on the traditional stock exchanges as well. In fact, the first flash crash happened on the mighty Dow Jones, when the Industrial Average lost 1,000 points in 10 minutes flat.
That said, many blockchain investors are worried about the ability of these young exchanges to handle the load.
The Dow Jones and Nasdaq have been around a long time. They boast robust systems with state-of-the-art security.
The younger cryptocurrency exchanges just aren’t at par.
In the latest case, the so-called ‘Flash Crash’ last month, the GDAX was overwhelmed by a single massive trade order, but it’s not the only one reporting problems.
Coinbase, which owns GDAX, also suffered a website outage the same week, and reported ‘degraded performance’ on four out of five days amid a surge of web traffic.
Bitfinex, the largest of the US-based Bitcoin exchanges, and BTC-e also had problems when it was reported both were hit by Denial of Service attacks.
As well, Ethereum itself was hit by the ‘DAO’ hack last summer, which drained more than $3.6 million from the Ethereum network. The Ether tokens spiralled downward from $13 to $7 in a week.
And of course, there was the infamous collapse of the Mt. Gox exchange in Japan in 2014.
At the time Mt. Gox was handling 70 per cent of all Bitcoin transactions worldwide.
In February of 2014 Mt. Gox suspended trading, closed the exchange, and filed for bankruptcy protection.
It appears the exchange was hacked and 850,000 Bitcoins were stolen from investors in a literal crime of the century. Total losses were more than $450 million US … although roughly 200,000 Bitcoins were later located.
CRYPTOCURRENCIES ARE NOT FOR THE ‘RISK AVERSE’
So, the question remains: To invest, or not to invest?
The answer depends on who you are and what you want out of an investment.
If you’re a high risk player betting money you can afford to lose, and Bitcoin can be excellent choices for high risk, high return.
If you’re a cautious investor playing with your life savings … not so much.
It’s not just because the currencies are volatile.
It’s also because the technology on the young cryptocurrency exchanges are still in their infancy.
In some cases a simple tech glitch or a hacked server could cause thousands of people to lose their investment.
Put bluntly, cryptocurrencies have great potential, but they remain incredibly risky investments.
If you’re willing to accept that risk, and you have the patience to wait for the right time, cryptocurrencies can in fact be fantastic investments … but only for a small portion of your portfolio.
You don’t want to bet the farm on Bitcoin, Ether or any other cryptocurrency … but you might want to bet the price of a small car.
If you’re betting money you are willing to lose, cryptocurrencies are in fact a great way to go, especially if you can find an early stage Blockchain currency that takes off, or buy one of the existing cryptocurrencies during one of their frequent downturns.