In a Forbes article about why bitcoin is worth anywhere from zero to infinity the author notes the sketchy beginnings and risks of the cryptocurrency.
The first time I wrote about Bitcoin (BTC) – the electronic currency set up to buy and sell illegal drugs and other products through an anonymous public electronic ledger – was in June 2011, a few days after its price dropped from $17.50 to “a few pennies” after its Tokyo-based currency exchanger Mt. Gox was hacked.
People buy or sell BTC in a wave of fear. Specifically, they are afraid of missing out on further appreciation in BTC’s price. For those suffering from such fear, there is plenty of evidence to support their belief.
In succumbing to the fear of missing out Bitcoin investors are ignoring the risk of hacking which happens with a predictable frequency. There is no Federal Deposit Insurance on bitcoins or any other cryptocurrency. The other risk is just how fast can an investor get out of a large bitcoin position when there is a crash? There are no guarantees of fast and reliable exchange of your bitcoins for dollars in the event of a crash. And, unlike the US stock exchanges, there is no circuit breaker that clicks in at a 5% loss. That having been said there is good reason to be wary of long term bitcoin investment. But can you make money just trading bitcoin?
Can You Apply Technical Trading to Bitcoin?
Let’s say that you are avoiding bitcoin investment for all the right reasons but you are a day trader and making money from high volatility in markets is your business. Technical analysis works in most markets and may well be effective in trading bitcoin on a short term basis.
Should You Buy and Sell Bitcoin Futures?
The CBOE is going to offer bitcoin futures although many large banks are uncertain about the risk of clearing these contracts. Bloomberg writes about how this is working out.
With just a few days left until Cboe Global Markets Inc. debuts futures contracts on the cryptocurrency, many banks are still weighing whether to offer them to clients — and if so, how to handle the mechanics. Several of the largest firms, including JPMorgan Chase & Co. and Citigroup Inc., aren’t immediately offering clearing of the futures as they wait to see how it will work, according to people briefed on the plans.
In interviews, some executives and traders said their desks are eager to get in on the action – but most sounded cautionary notes, ticking off concerns and unanswered questions. Bitcoin’s violent price swings this week have made the new market look all the more dangerous.
The basic concern is that traders will default on their Bitcoin Futures contracts if their positions are overwhelmed by the sort of price swings that the cryptocurrency has undergone, especially this year. There have been corrections of 25% and 20% in September and November. An advantage of trading bitcoin futures is that one will be able to get in and out of contracts more reliably, providing that the whole thing does not go south all at once.
It would seem that the best course of action for those who want to make money just trading bitcoin is to start with small positions and to keep them short, mostly day trading until a technical strategy can be shown to be a reliable guide to profitable trading.
