It is very easy if you are a crypto platform to get short. It might be on purpose or more likely by accident or by necessity.
Exchanges, for example, are by default potential fractional banking structures. As such, if they get robbed they might stay quiet and hope to earn back their losses or merely carry on without enough crypto to cover what their balances say they owe their users. They might need to sell some of their deposits to fund their cost base. They might go short because they think crypto will fall in value and they are trying to trade against their customers. They might be criminals working towards an exit scam. They might have lost track of their balances or lost a private key. The ways to end up short of crypto are many.
This is fine when crypto is falling because you make money out of a short. When crypto booms you are doomed.
This is a business death trap but it can be escaped from and it does of course involve robbery. The best kind of robbery is an invisible one, as any government with their taxation and inflationary policies will attest, and for crypto platforms the one that is most dangerous to its customers is the “stop loss drive.”
It is a trick as old as the hills.
The platform knows where the stops are. It can calculate the cost of spiking the price down, await the optimal moment and know the profit from falsely closing out accounts’ positions. In effect they transfer money from the users account to theirs by loading the bid or simply by closing positions as the stop loss trigger is hit. The platform doesn’t even have to pass the position closing through the order book.
This is going on right now and when you see a wild spike in bitcoin, long or short, this is almost certainly a stop drive. It does of course spread onto other exchanges as it happens, but that is an opportunity to make more profit if the people doing it are sophisticated enough. This is not a crypto invention; it has been going on forever. It is also illegal.
When you hear the explanation as being a “whale” trading, a fat finger or the consequence of news, you are being misinformed. It is a purposeful action to drive stops to fill orders or to close positions at an artificial price. It might be a trader estimating the stops, but it is much more likely to be a platform holder trading against its customers over which they have complete visibility of their stop orders.
What is a trader or investor to do? The best advice is to never invest or trade if you need the comfort of a stop.
“But, but,” you say, “all the advice is to use stops.” Ask yourself: who is offering you this wonderful feature and who is underlining how useful stops are to you? Well, well, it’s the other poker player at the table. If the advisor makes money when you spend or lose money, then you should guess his advice is not going to be in your interest.
A platform that is short crypto with its customers cannot operate in your interest as the more you make, the deeper into the hole they go. It is not as if financial services companies need an existential reason to skin you. If you think about stops mathematically you will note that they can’t help you and the only way to prosper is to “right size” your trading positions. It’s a hard discipline to not over-commit in your position size, but risk management is the only way to survive. Leave that path and disaster is merely a function of time.
Be aware that these stop drives are only going to get worse. If you get killed by one, there is no easy way back to the game. Keep your leverage to a minimum and keep your stops to yourself.
If you over-lever you might make a killing today or next week, but one day you will be wiped out. That’s how leverage works and why so many “genius” traders end up bombed out and broke. Protecting your over-leverage changes nothing but meanwhile leaves you open to being manipulated out of your capital.
Crypto is going to the moon, but it is not the first and will not be the last market to go vertical. If you let yourself be ‘rekt’ on this vertical by bad technique you won’t be able to come to the table for the next and the next and the next.
There are old traders and bold traders but no old bold traders.
Chambers won Journalist of the Year in the Business Market Commentary category in the State Street UK. Institutional Press Awards in 2018.