In this episode of Truth About FX, Walter digs into cryptocurrencies — is this legit or a big scam? He tackles the issues that surround this why he doesn’t like to trade stocks. He gives some useful insights on how you can minimize risks and gaps should you decide to trade these. And is it true that the bitcoin is a bubble? And what should you do in case it all blows up in the market? Find out more in this episode…
Download (Duration: 07:54 / 9 MB)
In This Episode:
00:55 – owning it
01:40 – it’s atypical
02:53 – flash crash
04:35 – bumpy road
06:16 – scary
Tweetables:
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Announcer: Sometimes, forex trading is a wild and wooly place to be. That’s why Hugh is here, to post your questions to Walter, the naked forex guy. Hugh’s got questions and Walter’s got the answers. Here at the Truth About FX Podcast.
Hugh: Hi, Walter. What do you think about trading cryptocurrencies? Is it something that people should maybe check out or is it all a big scam?
Walter: There’s a couple of issues here. If you are actually physically buying it and not trading it like as a CFT — CFT is a contract for difference where you can trade gold and silver. You actually don’t own the gold and silver just like you don’t own bitcoin or whatever. You can trade those, the market movements, without actually owning it and so it’s a derivative.
It’s not really doing it now. The issue with that are the same issues that you come up with regular, like choosing a broker. Things like gaps can be an issue. I’ve heard, if you’ll look at the bitcoin chart, as we record this in end of 2017, it’s very choppy. There are a lot of gaps.
One of the reasons why I don’t like to trade stocks is because they are very gappy and you can easily imagine yourself getting gaps over your stop. I’m sure it must have happen all the time to people so you think you’ve managed your risk.
To be fair, that can happen when you’re trading forex as well but it’s just that the chart, it’s atypical. Sometimes you get that weekend gap but you don’t get three gaps a week. That is the thing to think about here.
Number one is can you find a broker who’s not totally dodgy. I’ve heard that there are several cryptocurrency brokers who are catering to the cryptocurrency traders who are really dodgy right now because it’s just a hot thing as we’re recording this.
Number two is how do you deal with these gaps? You’ve got to calculate your marginal requirements and all that, assuming that you have access to CFT broker. You have a CFT broker who allows you to trade CFT bitcoin or CFT ethereum or whatever so you’re trading it. What happens if you get gap over?
The other side of it is were you actually physically buying and selling? Do you actually truly own bitcoin in your wallet and all that? That’s another thing. Again, I’ve heard — and I don’t know if this is true because I’m not doing it — but I’ve heard, my understanding is that they’ve had something like the exchanges have gone down like coinbase or whatever, went down. Nobody can get out and had a bit of a flash crash on the bitcoin or something like that.
That right there, that highlights another risky aspect of trading that we often don’t think about which is what happens if I can’t get out of the trade. What happens if my broker freezes up or closes it down. That’s another thing that you have to think about here. There are two things.
Having said that, I believe a couple of things. First of all, I believe that and I think there is no doubt that these sorts of things and who knows which coin is going to be best or whatever, bitcoin cash, or bitcoin this or ethereum or whatever, it’s like the IPO.
Sort of like after netscape, for those of you who can remember foreign effect, on the first “dot com bubble” thing, when Netscape was the first IPO. Like with the first internet stock to go, to be offered on the NASDAQ Stock Exchange, it was like everyone was like, “Wow, this is real.”
And then, everyone starts scrambling for an IPO and it’s kind of like the same thing now with all these ICO where it’s like, “Wow, everyone is looking at bitcoin. Now they have all these ICOs,” and everyone is trying to get on it.
I believe a couple of things. One is I think that currently, at the end of 2017 as we record this, that bitcoin is in a bit of a bubble. I think it will come down hard and so that’s going to shake a lot of people out.
Two, I still think that this sort of thing is going to, like I would not be surprised if we’ll look back 10 years from now and go, “Wow, bitcoin is at 50,000 or 60,000 a coin.” That would not shock me at all but I think it might be a bumpy road between there and here. I mean, from there to here or here to there, how do you say that?
I think it’s clearly like it’s a bubble. Everyone is thinking about it. Whenever I get in a cab now, I just say to the guy, “Hey, how is your bitcoin?” This is kind of like my test. Same with real estate, “So, how’s your real estate portfolio?”
You floated out and you see how hot it is. How everyone is doing it and it’s true, everyone is into it. I think there is going to be a bubble. I mean, I think there is a bubble in bitcoin.
I think it’s going to come down. I think it’s going to shake a lot of people out and then I think it’ll go up. I think long term, it’s going to go up. The problem is some of them are fake.
If you look at some of them, some of them aren’t built the right way and I don’t know a lot about it but I know some of them are built the right way. Some of them are just pure scamsters, setup by like credit card companies trying to get on this and stuff. It’s crazy.
It’s a lot to weigh through there but I think that for the trader, from a trading point of view, there’s a lot of things to be wary of exchanges. Basically, freezing and the big gaps that you see in the charts.
This kind of a market, like bitcoin in particular, it lends itself well to like trend trading or grid trading where you’re just taking a whole bunch of positions in just one direction. That works really well in strong trend but then, of course, once they collapse your hole in the bag and you’ve got a loss there or a big loss.
I think long term, it’s good, but just thinking right now, to me the gaps are scary. The brokers are scary and I think it’s a bit of a bubble. It’s going to have to shake out. The people that bought bitcoin in the last 4 or 5 months, the market has to throw like the dog shakes the fleas off. It has to shake those people off before it can get going. I mean, I don’t know. We’ll see what happens.
Hugh: Yeah, that’s a good point. I’m actually here in Hawaii and it’s illegal to buy bitcoin in Hawaii.
Walter: Really?
Hugh: Yeah. I just went to a meetup. I guess companies can’t sell it to people in Hawaii so I went to meetup and these guys have always like the back door ways of getting bitcoin. It’s pretty interesting how it’s working its way through the different laws and jurisdictions.
Walter: Yeah, that’s interesting. It’s like China. You can only take $50,000 out of China but yet there’s all these ways to get millions out of China. There’s a lot of these illegal drugs that seemed to be really easy to get in just about any city. It’s crazy. People will always find a way, won’t they?
Hugh: Yeah.
Walter: It’s funny. I didn’t know that about in Hawaii. It’s really interesting.
Hugh: Yeah, it is.
Walter: Cool. Thanks, Hugh.
Hugh: Alright. Thanks, Walter
SHOWNOTES
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