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BITCOIN & BANANAS
How to Guide: Cryptocurrency
Understanding price jumps in cryptocurrency
BITCOIN & BANANAS
How to make sense of price jumps & the impact of Futures
How to Guide: Trading & Investing in Cryptocurrency
Feel like you missed out on Bitcoin … again? Think its "back to the moon"… again?
Friday’s $1,000 jump in price of the “new” cryptocurrency of Bitcoin is due to a “old” market pattern – a “short squeeze” so still plenty of opportunity to take whatever side of the market you favor once you understand.
During trading on April 13, the price of Bitcoin jumped $1,000 from $7,000 to a high of $8,055 – a 13% gain from the previous day’s close of $6,939.
The jump was due to a covering of SHORT positions – some to take profit, others to cover losses.
What is a SHORT?
It’s when someone who doesn’t yet own something had made a promise to sell it at a certain price sometime in the future.
A Short Squeeze happens when lots of people who don’t yet own what they have agreed to sell at a certain price have to go to the market and buy to fulfill their obligation.
BITCOIN SHORT
In bitcoin terms, sometime in the past people who believed bitcoin was going to drop in price below $7,000 sold bitcoin “short” – they sold bitcoin they did not own for delivery on a future date – April 13, 2018, and now had to buy it to cover their obligation.
WHY? BITCOIN & BANANAS.
There are two sides to a transaction. One side expects an increase in price, the other expects a decrease.
Let’s put it in terms of bananas (versus bitcoin).
Imagine its January 1, 2018 and you will need to buy a banana in the future - on April 13, 2018.
The price of a banana is currently 10.
1. You believe the price of a banana will go up by April 13, 2018.
This means you would have to pay more in April then you would today for the banana but you don’t need the banana today so you don’t really want to buy it now. Your goal is not to pay more for the banana in April then you would have to pay today.
2. I believe the price of a banana will go down by April.
If I am right, I will be able to buy the banana in April for a cheaper price than you are willing to pay for it and make a profit. I don’t own the banana today, and I don’t want to buy the banana today since I can’t sell it to you until April so I am “short” and will need at some time before I have to deliver you the banana buy it in the market.
So, on January 1, 2018, you and I enter into an agreement where I promise to sell you bananas on April 13, 2018 at a price of 10.
Now it is April 13, 2018, and I must fulfill my obligation to deliver bananas to you, but of course I don’t have these bananas so I must first buy them – at whatever the price is today (spot price).
If the price is less than 10, I’m happy since I’m selling to you at 10.
If the price is more than 10, for example 11, I lose since I already agreed to sell to you at 10.
BITCOIN SHORT COVER - FRIDAY, APRIL 13, 2018
On Friday, Short-sellers of Bitcoin at $7,000 covered their short positions and as a result the price jumped or in bitcoin speak “to the moon”.
On Twitter a post showed large bitcoin player “a whale” covering short positions. Some buying was to take-profit, some to stop a loss.
Bottomline
If you believe Bitcoin and other cryptocurrencies in the long term will rise in price (to the moon) there’s still plenty of opportunity to buy. If you’ve been telling friends it will go to zero here’s your explanation for the current pop.
Regardless of your view on Bitcoin or another other investment opportunity remember to:
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Carefully weigh the risk and reward,
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Consider your time horizon,
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Know your take-profit and stop-loss,
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Don’t invest funds you may need in the short-term,
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Speculate only with funds you can afford to lose.
Hoping you only see the upside, Stacy
News
April 8, 2018
Soros & Rockefeller Funds ready to play in Cryptocurrency & ICOs.
Rockefeller venture fund, Venroc, has partnered with Coinfund, best known for Coinlist – facilitates ICOs, and chat maker, Kik, to “mentor, advise and support teams of cryptocurrency startups.”
Did you ever wonder why Britain withdrew its currency, the pound, from the European Exchange Rate Mechanism in 1992? Meet George Soros, considered to be the world's premier currency speculator. Read story here
Soros' ability to "break the GBP" and move fiat currency markets should not be forgotten - especially given the 40% fall of Bitcoin from highs in December 2017.
With Bitcoin down significantly since Soros dismissed cryptocurrencies, Soros Fund Management, with $26 billion in assets, may be ready to start trading. Read story here
With mainstream entities entering the market and cryptofunds being introduced into IRA accounts it is important to improve your knowlege base and receive accurate objective news of relevant developments.
