Bitcoin, crypto currency and block chain...

[dmp]

The trouble with limit orders is you do not always get trade execution at the specified price (only somewhere below that limit price) if there is a rapid sell off, and thin trading it can execute well lower. 

During the handful of flash crashes where sudden market dips caused prices to drop suddenly, then recover. People with stop loss orders in place, actually ended up with deep losses locked in at prices well below their limit price, then missed the recovery back to normal price levels because they were stopped out of their long positions during the dip.

In a stable slow moving market stop-loss orders may work, but bitcoin and the like strikes me as pretty volatile. If the price drops 30% suddenly do not expect your stop loss order down only 10% to execute at the limit price, you will most likely get stopped out down 30%, unless extremely lucky. 

I repeat my advice, if you are long Bitcoin or some virtual currency, with significant gains, protect you basis by selling it and converting to a more stable asset. If you can play without risk there will never be regrets. If it goes up another 100x as some predict you can still make plenty of money.

Am important aspect of investing is understanding upside and downside. Stop loss orders are not as protective as they appear. If you don't believe me ask your broker if the stop loss limit price is guaranteed (hint it isn't).

JR

+1
Good explanation.
The ethereum flash crash earlier this year actually had this happen to inexperienced investors with stop orders. Price started falling and it started triggering stop orders at around $300ish. There were no buyers near the stop price. The prices went WAY down until it got to some buy orders bottom feeding investors had set up (around $15!!!) just in case the price ever really crashed.

Don't ever use a stop, only do a stop limit if anything.
i.e. this would be sell if the falling price triggers the stop (say $900) with a low sell limit of $875. If the price is really falling, it might not execute, but at least you won't be the noob who sold at $5 in the flash crash.

When it comes to stocks it is even more complex because markets are not open to retail investors 24/7. A significant percentage of stock trades are happening on dark markets. In a high volatility market the difference between close price and open the next day can blow right past your stop order.  There was a ETF flash crash a few years ago that really crushed some people with stop orders.

Don't gamble more than your are able to lose.
Ripple has had a big runup on expectations it was going to be listed on coinbase, which just got denied. Watch out below

 

[JohnRoberts]

+1
Good explanation.
The ethereum flash crash earlier this year actually had this happen to inexperienced investors with stop orders. Price started falling and it started triggering stop orders at around $300ish. There were no buyers near the stop price. The prices went WAY down until it got to some buy orders bottom feeding investors had set up (around $15!!!) just in case the price ever really crashed.

QED

Don't ever use a stop, only do a stop limit if anything.
i.e. this would be sell if the falling price triggers the stop (say $900) with a low sell limit of $875. If the price is really falling, it might not execute, but at least you won't be the noob who sold at $5 in the flash crash.

When it comes to stocks it is even more complex because markets are not open to retail investors 24/7. A significant percentage of stock trades are happening on dark markets. In a high volatility market the difference between close price and open the next day can blow right past your stop order.  There was a ETF flash crash a few years ago that really crushed some people with stop orders.

I very rarely trade (I know I am not smart enough), I mainly make long term investments so try to ignore noise from thin trading after normal market hours. Much statistical analysis only looks at opening and closing prices completely ignoring after market trades, which is another way for dumb money to get taken advantage of by professional traders. 

Note: opening prices can gap up/down due to aftermarket trades, and/or foreign market activity. Many companies report results after the market is closed so price swings can occur due to unexpected news. Again not wise to trade on headlines, they use bots for that nowadays so high speed traders will beat you to the punch.

Don't gamble more than your are able to lose.

always true....  At my age (69YO) I should only have some 30% in common stocks BUT, I own zero bonds and can't see buying any in the current bond environment. Hopefully bond markets will improve in my lifetime.

Ripple has had a big runup on expectations it was going to be listed on coinbase, which just got denied. Watch out below

ETFs that hold a basket of crypto currencies may reduce some of the volatility in individual names, but I still am not interested in them as an asset class (not sure it is an asset class, but many do think it is).

JR

PS: I heard a very interesting discussion about cryptocurrencies evolving into a secure parallel internet network (I am not sure I understand how but this sounds possibly very disruptive and valuable). That individual also predicted a $10T capitalization for cryptocurrencies and associated technology.  Looks like I will miss that one for now.  :

 

[dmp]

ETFs that hold a basket of crypto currencies may reduce some of the volatility in individual names, but I still am not interested in them as an asset class (not sure it is an asset class, but many do think it is).

I don't think these exist yet. The Winklevoss twins (of facebook fame) having been trying to get one to market for years. The SEC has yet to approve a fund that holds actual cryptocurrencies. There are only ETFs for futures I think. And there are only futures for bitcoin I believe.
Since security/theft is one of the biggest risks for cryptos, a large ETF would be a big target for hackers/ thefts. I think it could be interesting.

 

[JohnRoberts]

I don't think these exist yet. The Winklevoss twins (of facebook fame) having been trying to get one to market for years. The SEC has yet to approve a fund that holds actual cryptocurrencies. There are only ETFs for futures I think. And there are only futures for bitcoin I believe.
Since security/theft is one of the biggest risks for cryptos, a large ETF would be a big target for hackers/ thefts. I think it could be interesting.

They don't yet but the link I shared of Brian Kelly announced that he is developing some

REX Shares, LLC (REX), a provider of alternatives strategy funds and ETFs, today announced a partnership with Brian Kelly, founder and CEO of BKCM (BKCM) and an investor in REX, to develop a line of ETFs and other funds designed to give investors exposure to the blockchain technology, cryptocurrency, and digital assets sectors. Brian Kelly will serve as a portfolio manager for the suite of funds.

I suspect others are working on this too. Prior to this BK informally invested in a basket of cryptocurrency coins and infrastructure.

For the record BK is a regular on a stock market show named "fast money" so he is a trader.

JR

 

[Mbira]

+1
Good explanation.
The ethereum flash crash earlier this year actually had this happen to inexperienced investors with stop orders. Price started falling and it started triggering stop orders at around $300ish. There were no buyers near the stop price. The prices went WAY down until it got to some buy orders bottom feeding investors had set up (around $15!!!) just in case the price ever really crashed.

Don't ever use a stop, only do a stop limit if anything.
i.e. this would be sell if the falling price triggers the stop (say $900) with a low sell limit of $875. If the price is really falling, it might not execute, but at least you won't be the noob who sold at $5 in the flash crash.

When it comes to stocks it is even more complex because markets are not open to retail investors 24/7. A significant percentage of stock trades are happening on dark markets. In a high volatility market the difference between close price and open the next day can blow right past your stop order.  There was a ETF flash crash a few years ago that really crushed some people with stop orders.

Don't gamble more than your are able to lose.
Ripple has had a big runup on expectations it was going to be listed on coinbase, which just got denied. Watch out below

This is why you do a stop-loss limit order-not just a stop loss.  The limit will not allow a sale below a certain threshold to protect you from a flash.  For example you set your stop to initiate a sell order at $1.00 and then you set the limit to not accept anything less than $0.90.  Obviously you are assuming that if there is a flash crash that the price is just going to bounce right back up-and that has been my experience because so many people now also have limit buy orders in place in the event of any sort of crash that things just bounce right back up. 

The main downside (and this may be a dealbreaker-especially if you are going long on certain coins and you aren't concerned about day to day price fluctuations) is that you then have to have those coins on the exchange you are using so you are trusting in their security. 

 

[JohnRoberts]

This is why you do a stop-loss limit order-not just a stop loss.  The limit will not allow a sale below a certain threshold to protect you from a flash.  For example you set your stop to initiate a sell order at $1.00 and then you set the limit to not accept anything less than $0.90.  Obviously you are assuming that if there is a flash crash that the price is just going to bounce right back up-and that has been my experience because so many people now also have limit buy orders in place in the event of any sort of crash that things just bounce right back up. 

The main downside (and this may be a dealbreaker-especially if you are going long on certain coins and you aren't concerned about day to day price fluctuations) is that you then have to have those coins on the exchange you are using so you are trusting in their security.

Glad to hear you have it all sorted out.... 

If you can count on the price bouncing right back up why set  up a stop loss order at all? 

That order either takes you out of the long position during gentle dips down (forfeiting the gains from any following bounce back up), or does nothing at all during large moves down.  The limit order just protects you from the extra pain of selling into a wide gap down price, which is only painful "if" it recovers. In my decades in the stock market I have seen a few severe price gaps down that never recovered (not many thankfully and that is why we diversify into multiple different securities. You don't want all your eggs in any one basket). The flash crash phenomenon is a relatively recent thing precipitated by high speed and algorithmic trading. 

If you predict that virtual currencies will continue going up for a lot longer, with high price volatility, stop orders even with limit down do not appear (IMO) like a way to preserve value.  Maybe just roll the dice and let er ride.

Now for the 3rd time I repeat. If you have enough profit already to pull out your basis, you CAN NEVER LOSE money that way...Trade with the house's money.  Worrying about missed profits is another sign of a bubble, luckily for you guys there are still people just now hearing about this, so like a good ponzi scheme more new participants you can sell to.

JR

PS: If I sound like an old fogey, it's because I am.  8)

 

[Mbira]

Glad to hear you have it all sorted out.... 

If you can count on the price bouncing right back up why set  up a stop loss order at all? 

That order either takes you out of the long position during gentle dips down (forfeiting the gains from any following bounce back up), or does nothing at all during large moves down.  The limit order just protects you from the extra pain of selling into a wide gap down price, which is only painful "if" it recovers. In my decades in the stock market I have seen a few severe price gaps down that never recovered (not many thankfully and that is why we diversify into multiple different securities. You don't want all your eggs in any one basket). The flash crash phenomenon is a relatively recent thing precipitated by high speed and algorithmic trading. 

If you predict that virtual currencies will continue going up for a lot longer, with high price volatility, stop orders even with limit down do not appear (IMO) like a way to preserve value.  Maybe just roll the dice and let er ride.

Now for the 3rd time I repeat. If you have enough profit already to pull out your basis, you CAN NEVER LOSE money that way...Trade with the house's money.  Worrying about missed profits is another sign of a bubble, luckily for you guys there are still people just now hearing about this, so like a good ponzi scheme more new participants you can sell to.

JR

PS: If I sound like an old fogey, it's because I am.  8)

It's a fair question to ask what the point is in setting them up anyway.  For me-it's for two reasons.  One is that then I know that my initial investment is locked in and "safe" without actually pulling that money out.  I'd rather keep that money in instead of pulling it out so it can make more profits.  So really, it's more for piece of mind if I'm traveling or not on top of the markets.  An example would be that I have some LTC that I thought I had bought a little too high so I set it and it sold while I was on a plane.  I was able to rebuy a little lower. 

I'm not saying that the price will always go up no matter what-I'm saying that in my opinion in the event of a flash crash, the price will correct to near what it was almost immediately.  Once that happens, the price may very well go way down depending on the situation in which case a stop-loss would be really helpful. 

That limit is only really going to protect me from those super fast flash crashes.  The sale would probably still have time to trigger in the event of a dramatic drop that is spread out over a few hours which is much more likely (like what happened a couple weeks ago).  So for me maybe I bought some BTC but I'm feeling like I might have bought high and a correction is coming.  I'd set a stop-loss limit to sell and then rebuy a little lower.  I tend to buy small amounts and set a limit sell a bit below for that small amount to until I know that the price has stabilized higher and then I'll adjust. 

With all this said, I do think that trying to automate your trading with these tools is a really bad idea if you are using them as the foundation of your trades.  It's too easy to just lose, lose, lose.  I am all for the strategy of buying long on solid tech, pulling your coins into a hardware wallet and forgetting about it for years.  But as always-I have no idea what I'm talking about and no one should follow my advice!

 

[JohnRoberts]

Kodak the obsolete camera film company has rebranded itself as a bitcoin company  : :

[edit- apparently Kodak is applying blockchain technology to tracking the source of photographic images. Not sure how or if that would work.  [/edit]

announcing "Kodakcoin" at CES  and enjoyed a quick double from their single digit stock price.

This is not normal or sustainable stock price movement.

Another old stock market saying to heed, "markets can remain irrational longer than a smart trader can remain solvent" when betting against the nonsense.  I expect the bitcoin music to keep playing for at least a while.  Current trend seems to be consumers betting long bitcoin, and hedge funds trading it short, when they can... Hedge funds do not have the greatest track record recently as they can't even beat index funds. Interesting show to watch from a safe distance, maybe make a small investment in virtual currency but I don't even have 5% gold, let alone any bitcoin. 

Money coming out of bonds as that bond bubble subsides will want to go somewhere with higher return, but bitcoin seems like the polar opposite of bonds.

JR

 

[Anthon]

As someone who has a bachelors degree in applied Economics, IMHO: the bitcoin is useless as a currency, and will almost certainly fail as soon as the hype blows over. And it will.

Also, the technical analysis of predicting the prices just doesn't work. You can test all your techniques, and I assure you it will not be better then doing random trades - you can't outsmart chance. And the fluctuations on the short term are just that - random noise.
I wrote a paper about, as a university student.
Only the brokers can make stable income from trading, by taking a commission from each trade - and that's why they keep promoting it, without actually doing it.
Do some people get rich by trading? With millions of people in the trading business, it is a statistical certainty that some of them will get stinky rich, by chance alone.
Also, inside traders (people who know something most people can not know) can get ridiculous amounts of return on their tradings. Even though it is illegal, nobody can prevent it.

Crypto currency and block chain in general are interesting concepts, however.

 

[dmp]

As someone who has a bachelors degree in applied Economics, IMHO: the bitcoin is useless as a currency, and will almost certainly fail as soon as the hype blows over. And it will.

Is bitcoin cash useless? How about other cryptocurrencies, like raiblocks? Some of the new innovations in response to bitcoin's high fee, slow transaction method sound promising, but I'm not sure how they will work as use increases.  Bitcoin was doing fine until transactions hit the ceiling.

Only the brokers can make stable income from trading

Buy and hold has worked pretty well. Just look up prices a month/year ago to see for yourself.  It seems you're talking about day trading?

Also, inside traders (people who know something most people can not know) can get ridiculous amounts of return on their tradings. Even though it is illegal, nobody can prevent it.

It's funny how people are pulling out all these criticisms that have always applied to stock investing as well. Notice the Intel CEO selling just before the bad news got out? How about the Experian execs? Look up the stock returns from members of Congress (insider trading laws don't apply to them).  If there were a high frequency analogy for crypto you can bet you'd be hearing about it.

The explanation for all this vitriol directed at crypto that I find most plausible is that the wrong people are getting rich this time. It isn't the insiders on wall street but the tech geeks. 

 

[Anthon]

Is bitcoin cash useless? How about other cryptocurrencies, like raiblocks? Some of the new innovations in response to bitcoin's high fee, slow transaction method sound promising, but I'm not sure how they will work as use increases.  Bitcoin was doing fine until transactions hit the ceiling.
Buy and hold has worked pretty well. Just look up prices a month/year ago to see for yourself.  It seems you're talking about day trading?

It's funny how people are pulling out all these criticisms that have always applied to stock investing as well. Notice the Intel CEO selling just before the bad news got out? How about the Experian execs? Look up the stock returns from members of Congress (insider trading laws don't apply to them).  If there were a high frequency analogy for crypto you can bet you'd be hearing about it.

The explanation for all this vitriol directed at crypto that I find most plausible is that the wrong people are getting rich this time. It isn't the insiders on wall street but the tech geeks.

Bitcoin can never work as a currency, because the price is so volatile. If the price went through the roof, it actually makes it bad.
I thought bitcoin was about creating a currency for actual usage, not speculating.
Most currencies are backed by a Central Bank, adjusting the money supply to regulate the price, keep it at about 2-3% inflation, which is healthy for the economy. With bitcoin there is no way to regulate the price - it will depend 100% on the demand, which makes it unpredictable, thus totally unacceptable as a currency.

You can only earn from it, if you sell it. And once people decide to dump their bitcoins to cash in, the price will crash pretty fast. 
In the end, there is no value created - just redistributed from some people who bought it high, and sold it cheap to the people who bought in cheap and sold at a high price.

It is a perfect example of an economic bubble.

I can't speak for other crypto currencies . I just find it strange that a lot of financial institutes are so open to the idea - if it really worked, it should be their biggest nightmare.

The criticisms where just for trading in general, not only for bitcoin trading. Bitcoin is just a new hype.

 

[dmp]

Most currencies are backed by a Central Bank, adjusting the money supply to regulate the price, keep it at about 2-3% inflation, which is healthy for the economy. With bitcoin there is no way to regulate the price - it will depend 100% on the demand, which makes it unpredictable, thus totally unacceptable as a currency.

When you look at how much value a unit of money loses at 2-3% inflation per year over a person's lifetime, it is pretty significant. Why is this "healthy for the economy"? It's actually healthy for government debt, since the value of the debt, if held in the government's currency, is reduced in value. Economists also believe that 2-3% inflation leads people to spend more, and they think that is healthy for the economy. I wonder if less reckless spending and consumption might actually be better for the economy. 

There are many examples of currencies that have been ruined by inflation and hyperinflation, due to government's printing money.  Can you name a single currency that has been ruined by deflation (i.e. the currency gaining in value)? I don't know of a single one.

 

[Anthon]

When you look at how much value a unit of money loses at 2-3% inflation per year over a person's lifetime, it is pretty significant. Why is this "healthy for the economy"? It's actually healthy for government debt, since the value of the debt, if held in the government's currency, is reduced in value. Economists also believe that 2-3% inflation leads people to spend more, and they think that is healthy for the economy. I wonder if less reckless spending and consumption might actually be better for the economy. 

There are many examples of currencies that have been ruined by inflation and hyperinflation, due to government's printing money.  Can you name a single currency that has been ruined by deflation (i.e. the currency gaining in value)? I don't know of a single one.

That's the point - money loses value over time, so people with money have an incentive to invest, or spend it.
Money is supposed to circulate.

Not a single currency was ruined by regular 2-3% inflation
Hyperinflation is another story - this happens when government tries to fill the holes in the budget by printing money on massive scale, Zimbabwe style. This is actually why most governments can not print money (the central bank does).
But this just shows that you can't create wealth out of thin air, kind of what bitcoin does at this moment.

There is a negative relation between inflation and unemployment (called Phillips-curve). Like you said - inflation means more spending = more work = more jobs. Overspending is bad, but 2-3% leads to a normal amount of spending, from the economic point of view.

Money loses value over time, but it's not that bad - because the prices and wages grow along with it (indexation). Wages haven't grown proportionately in the last decades, but there are other reasons for that.
Government also pays interest to its debt, so in this sense it gains nothing from the inflation.


Deflation is actually very bad. An example: Japanese lost decade.
When money gains value faster than most investment assets, there is no point in investing your money and you are less likely to spend it, and the economy stagnates. It can lead to deflationary spiral - basically central bank can not inject more money into the circulation to decrease deflation, because nobody wants to buy government bonds at this point, because the return rate is lower then just cash.  People start hoarding money, increasing the value of money even further. But nobody wants to spend or invest it.
This is called 'liquidity trap'.

Just to prove my point - would you use Bitcoins right now, to build a company that actually creates wealth, jobs etc? Probably not, because it has much higher return rate than any durable investment you can think of. People are hoarding bitcoins at this point - and the price reflects that: high price with steady supply means a lot of people want to buy it, and very few want to sell it.
Good currency should have a balance between buyers/sellers, which would lead to a steady currency rate + some inflation to stimulate the economy.

I'm not saying the current monetary system is perfect, but bitcoin would be much worse. The world economy would collapse in a matter of days.

 

[JohnRoberts]

This has been stated before but it is worth repeating. Blockchain is a useful technology for reducing cost of tracking transactions, Bitcoin and other virtual currencies, seem like a classic bubble.

They have started to sell futures contracts that should eventually reduce the high volatility for virtual currency, but I also agree when the tide turns it will be painful for last men standing when music stops. (nothing goes up to the sky).

Interesting how Russia and Venezuela are looking into offering virtual currencies (probably to get around western banking sanctions).

There are some new variants on virtual currency that are not trying to replace money, but improve transaction efficiency. Something like this could gain more traction.


JR

 

[Script]

Deflation is actually very bad. An example: Japanese lost decade.
When money gains value faster than most investment assets, there is no point in investing your money and you are less likely to spend it, and the economy stagnates.

Couple that with a 'hire-and-fire'-style of employment market (it wasn't the case in Japan back then) and you'll see many people suffering for real. Still there were many so-called 'homeless' people in Japan living for years in blue-sheeted cardboard boxes around every single railway station across the country., or worse, committing suicide.

Inflation = bad
Deflation = bad
Stagflation = bad

Still, from a purely economical point of view, inflation is the least unfavourable of the three. It's better for people -- on average, that is. The rest is in the hands of our politicians.

I wonder if less reckless spending and consumption might actually be better for the economy.

1+

 

[tands]

You're not going to have inflation without wage growth or government spending that actually creates jobs, rather than simply handing it to corporations for stock buybacks like the state does now.

Ha ha.

 

[Mbira]

It's always funny to me when people talk about bitcoin as being a "new" hype that is a bubble.  The bubble is the hype itself.  The hype will die down-just like it did in 2012, 2013, 2014, 2015, 2016, and 2017.  The price will go down a bit and level out and then the hype machine (the real bubble) will start again when some reporter does another story on it and it gets a lot of attention. 

Regardless of what the original proposal of what bitcoin would be used for, for many years it has been considered "digital gold"-a store of value.  So it's not really trying to be a highly liquid currency that is used in day to day transactions.  There are many other coins that are better for that if people are interested in that specific purpose. 

The short term monetary fluctuations are not really the driving concern for most of the people involved that are interested in the technology itself.  Most of the hype that I see is around short term speculation that isn't really in the best interest of the technology anyway.  If the market goes way down, it won't really matter to the people that are really doing this work. 

 

[Script]

"digital gold"-a store of value

A misconception right from the start, I'd say.

If the market goes way down, it won't really matter to the people that are really doing this work.

That's good to hear.

For my part, I am less concerned about the people who are 'really doing this work', than the majority of people who have been lured into jumping this train. And what a ride as of late. I wouldn't be surprised to see BTC at 8000 soon, maybe even 5000 after that -- now that central banks seem to be pulling the plugs.

 

[Script]

I've read a lot of money has rotated out of gold into cryptos

And it's rotating back into gold only a month later...

All part of the wild goose chase only.

 

[Mbira]

I wouldn't be surprised to see BTC at 8000 soon, maybe even 5000 after that -- now that central banks seem to be pulling the plugs.

Well we all have our guess about what will happen with Bitcoin!  And at some point we will probably all be right!