Please invest responsibly an important message from the Coinbase team
Comment of the Day

December 11 2017

Commentary by Eoin Treacy

Please invest responsibly an important message from the Coinbase team

I received this email from the team at Coinbase ahead of the opening of futures trading. Here is a section:

We also wanted to remind customers of some of the risks associated with trading digital currency. Digital currencies are volatile and the prices can go up and down. Due to the rapidly changing price of digital currencies, some customers may not have sell limits that are sufficient relative to the value of total digital currency they are storing on Coinbase. Sell limits are one of the many measures Coinbase takes to protect client accounts and assets.

Eoin Treacy's view

At the time of writing the price of bitcoin was $16,614 while the January future was trading at $18,030. That suggests at least a $1400 time premium over spot which is not overly ambitious considering what bitcoin is capable of. So far, the number of contracts traded has been quite small and the circuit breakers were triggered early as the market priced in the time premium on the market. What I found particularly interesting is that an exchange like Coinbase would advise its clients to introduce stops. |

Obviously, they have seen the number of accounts swell substantially in both numbers and capital committed with the result that execution times have slowed. Generally speaking when a conventional exchange is worried about excess speculation it will raise margin requirements which forces highly leveraged participants to put up more capital if they wish to keep their trades open. However, since the vast majority of cryptocurrency is cash settled, the exchanges can only warn people to trade responsibly in a manner similar to drinks advertisements. A big question for investors is how effective these stops are likely to be when the delays that have plagued the exchange multiply when people wish to sell.

Let’s for example think that at least some people take the advice and introduce stops. That represents a significant source of latent supply that could exaggerate the next pullback. In the meantime, the price remains firm. 


Back to top

You need to be logged in to comment.

New members registration