Sixth part in a series. Part 1, Part 2, Part 3, Part 4, Part 5
Published on December 27, 2017
By Evan McDaniel, @sellputs
Seems like everybody wants to buy in on bitcoin, and if you do, brace for a gut-tossing rollercoaster ride and another drawback, as well: Trading costs in crypto are astonishingly high.
Value Partners Asia ex-Japan Equity Fund has delivered a 60.7% return since its inception three years ago. In comparison, the MSCI All Counties Asia (ex-Japan) index has returned just 34% over the same period. The fund, which targets what it calls the best-in-class companies in "growth-like" areas of the market, such as information technology and Read More
Comparison: on TD Ameritrade, you can do a $10 million transaction in stocks on the New York Stock Exchange and it will cost you as little as $6.99; sell $10 million in bitcoin, and the transaction fee could come to $100,000 or more. And stocks are safer!
Opening an account with Coinbase (see Part 3 of this series), is more of a beginner’s way, admittedly, to go to the market to “buy” crypto-coins. It also is the better option for buy-and-hold fans of bitcoin, though holding anything too long in cryptos may be risky on its face.
Coinbase imposes a fee on every transaction you undertake, charging 1.5% of the total value of the purchase or sale. And if you want to use your credit card to set up an account, Coinbase will charge you a 4% fee for the pleasure. That’s $400 to hand ’em $10,000.
The GDAX trading platform is the more advanced way to play, ideal for day trading and high-frequency trading if you have the nerve. It assesses no transaction fees at all as you trade, and it allows more sophisticated techniques that Coinbase doesn’t enable, such as limit orders letting you set stop-losses (sell when the price falls to a particular level) and buy limits letting you trigger a “buy” only when a coin hits the price you specified.
The platform exacts an ample vig, however, once you take cash out of your GDAX account, whether it’s an exponential windfall or the remaining shreds of cash from a bitcoin beating. GDX charges a fee of 25 to 100 basis points, or 0.25% to 1.0% of the total sum you withdraw. In some cases the fees run even higher than that.
Plus, on Coinbase and GDAX the only way to bet on bitcoin et al is to bet their prices will rise—so far, you cannot hedge that gamble by actively betting that bitcoin will actually go down in price, by selling short. At least, you can’t do that on Coinbase and GDX and their rivals. Now, though, you can short elsewhere, via futures contracts on both CBOE and the CME
One futures contract on the CBOE involves one full bitcoin, while at the CME, one contract covers five bitcoins. Thus, the CME contract has higher leverage than the CBOE contract. The CME contract is based on the average price taken from five exchanges, while the CBOE’s contract is priced off of a single exchange, run by Gemini Trust Co.
Those differences create gaps and fleeting, short-lived anomalies, and professional traders and their Ph.D. mathematicians will be brainstorming this one, figuring out new algorithms aimed at exploiting those spreads between the two markets. It is unclear how much bitcoin prices could gyrate around as a result of such computerized trading.
As you read this—most of you didn’t get down this far, and for those of you who did—I’d bet you some holders of real bitcoins are slowly converting a portion of them into dollars and investing the cash in new bitcoin futures on CBOE and the CME. In some ways that may be the ultimate sign of how bitcoin gradually will get co-opted by Wall Street and superseded by trading in derivatives-of-derivatives based on bitcoin prices.
Hold on to your hats for this ride.
Next: A new way to predict bitcoin’s pricing patterns.
Evan McDaniel, aka @sellputs, is a derivatives trader, algorithm wizard and advisor to hedge funds. You can reach him at [email protected]
Some content provided by Dennis Kneale Media.