Though we all know that investments are never guaranteed, Bitcoin Cash was doing extremely well. This Bitcoin fork was always in the news. It had even reached a high of $2,500 in the beginning of November 2017, (only a few short months after its release). However, on November 11th ,the coin’s cash value plummeted.
Clients trading on the British exchange, Trading 212, were ready to see Bitcoin Cash rates continue to soar. However, recent news shows their earlier speculations might have been a little hasty.
Trading 212 also suffers from another drawback in that it is a centralised trading exchange. Unlike decentralised exchanges, these have central points of failure that can hamper trader’s returns as we have just seen.
10 Minutes Suspended in Time
To add insult to injury there was a trading suspension in place during the frightening cryptocurrency nosedive. Clients watched, unable to do anything, as their coins lost $800 in value in less than one hour.
According to Trading 212’s statement, clients were only unable to trade for 10 minutes. However, that was all the time it took for the cash value of the coins to plummet. Some investors lost a lot. Some lost hundreds of thousands of pounds.
Unwilling to sit back and accept the situation, 54 clients created People v 212, a WhatsApp group of investors who joined forces to get back their lost profits.
As of November 23rd, clients had claimed losses of $13.2 million. However, some clients were willing to work out a compromise with the exchange and had already accepted 10% of their lost profits in compensation. The rest are holding out for the full amount.
Clients aren’t just complaining about the trading suspension either. They also state that Trading 212 refused to execute their stop-loss and take-profit orders. The company countered stating that for the clients in those situations, Trading 212’s terms of service were violated. Firm CoFounder Borislav Nedialkov stated on November 17th that most of their affected clients agreed to accept the settlement agreement.
Justin Galvin, a Trading 212 customer states that the firm, “exercised too much risk by offering Bitcoin Cash to entice new customers, only to have those traders beat the market by a hundred times.”
Contracts for Difference Trading vs Stock Trading
The waters became even more murky when we learned that Trading 212 customers didn’t even buy Bitcoin Cash right out. They entered into what’s called Contracts for Difference or CFDs.
These products essentially allow customers to bet on whether a certain cryptocurrency will rise or fall in value. American investors can’t invest in CFDs. They’re banned in the United States. Even though huge profits are always attractive, trade margins fall in the area of 30x to 150x. Trading with CFDs, (just like any trade for profit), is considered high risk.
It’s actually common for exchanges like Trading 212 to freeze trading for a few minutes to manage a market’s volatility. When this happens, customers can do very little about it.
Clem Chambers, CEO of ADVFN.Com, keeps this policy in mind when he trades and crafts his strategy accordingly. “In crypto, I exit with my Bitcoin profits immediately. Never leave your winning chips on the table for the dealer to see.”
However, not everyone can use this strategy, especially when they’re trading with CFDs. Every CFD company has a different offer available. Trading 212 has experienced exponential growth since it opened its doors in June 2017, due to the addition of eight new cryptocurrency markets. However, many clients with Trading 212 are inexperienced or young traders. Many of their behaviors demonstrate emotional trading, and lack of awareness to the consequences of making a bad trading decision.
Because of this, many customers are shocked by the actions Trading 212 has taken. They’re unfamiliar with the common policies of trading platforms and exchanges.
If the traders wanted to trade a product that had a limited downside and an unlimited upside then they should have rather have considered options. These are asymmetric instruments which means that the payoff is not the same on the up and down.
There are a range of cryptocurrency option brokers that you can select from which operate in a number of different jurisdictions. It is important when choosing a broker that you are choosing one that is regulated.
In the case of an option with one of these brokers, the maximum that you could lose in the event of an adverse market movement is the amount that you have put up for the trade.
However, if the price were to move in a favouarble direction then the trader could theoretically make as much money as the price is willing to go (less the premium). It is for this reason that many traders prefer options.
Market Fluctuation is Part of the Game
Trading 212 isn’t the only company that’s undergoing criticism because of Bitcoin Cash’s volatility. Bithumb, a Korean exchange also had a system shutdown during the huge cash value plummet. The industry website CoinMarketCap refused to take new prices from the exchange during the cash value plummet.
3,000 of Bithumb’s customers are suing the company. The customers are enraged over the 2-hour outage and are claiming significant financial damages. The cryptomarket overall doesn’t experience the same types of trading suspensions that occur in the Bitcoin marketplace. However, some experts believe the market is heading in that direction.
Regulators have stepped into the situation in response to events that cause such widespread distress and frustration. They seek to inform consumers of the risks of investing in CFDs. Though the Financial Conduct Authority, (FCA), does regulate CFD brokers, they published a disclaimer:
“These protections will not compensate you for any losses from trading.”
Trading 212 has also responded by changing their trading requirements in an effort to keep something similar from happening again. They are raising the deposit level for people who want to trade on margin. Movements toward regulating volatility might make traditional investors feel safe enough to start investing in cryptocurrencies in the near future.