Thursday, March 22, 2018

Sell When Everyone's Buying, Not When Everyone's Selling

Any time I come across a story about Coinbase pissing people off, I'm never shocked. My own experience with them has been basically ok. The commissions charged on purchases and sales there are too high compared to rivals, and they're ridiculously slow to confirm purchases (which isn't entirely their fault, it's mostly the legacy of the antiquated money transfer systems that banks still use).

Their customer service though... wow. That was the last nail in the coffin for me, when I never received a referral credit from them. They claimed that there was no demonstrable relationship between my account and the one he opened. When I sent my friend the referral email, he was standing in my living room of my house, and we had the emails we sent back and forth to show as proof. The idiots at Coinbase customer service still denied everything and refused to pay me what they owed me. They lost all of my business over $10.

As such, I wasn't surprised at all by this story:

"When bitcoin users want cash, they don’t want to wait very long for it.

Thousands of cryptocurrency holders have submitted complaints to the Consumer Financial Protection Bureau (CFPB) in the last nine months, an analysis by personal finance site ValuePenguin found — and the number of complaints skyrocketed when bitcoin prices fell.

The biggest reason people made complaints, the number of which increased 669% between June 2017 and March 2018, was being unable to withdraw money from exchanges, said David Ascienzo, data scientist at ValuePenguin and author of the report...

...Exchanges struggled to keep up with customer support requests as people attempted to sell when prices fell. Higher numbers of complaints, especially about major exchange Coinbase, started coming in as prices started to plummet and reached a climax during the week when the decline in bitcoin’s price was steepest." -- K. Paul
So the short version, Coinbase sucks, specifically because they never seem to be able to wrap their heads around their own growth. They are always chasing it, trying to catch up, rather than ever be ahead of it.

But Coinbase isn't actually my main topic here. Rather, it's avoiding what specifically happened that led to all of these problems and complaints, and it's something that could be an issue at any exchange: selling with the herd.

These issues plagued Bitcoin sellers specifically because they were all trying to rush for the exits together. This was likely people whose only reason to own the asset in the first place was pure speculation, combined with a false confidence that they could call the top of the market and exit with maximum profit. How it usually plays out however is that once the market turns bear, these folks all get the news too late and they then  try to get out as fast as they can, chasing the price down. Add in the people who showed up late to the bull run and it gets even worse.

I avoid this by hardly selling at all. A few days ago I briefly mentioned that this is because most of my decision making is on entries, but my sales have more to do with what's going on in my life, not what's going on with the price of an asset I hold. Basically, I like to avoid transaction fees and taxes, so I tend to wait to cash out of something until an opportunity comes along that would lead to major improvements in my quality of life. My Bitcoin holdings are right now up about 1000% over my cost basis, and were obviously far higher back in December at the peak. I could have cashed out, but then I would have lost at least 25% to taxes, and doing so at that point in time would not have achieved a major goal that I have: to wipe out my remaining debts in one shot. Until I can do that, I see no reason to add expense and complication to my portfolio and my tax return, which selling does.

I know there's probably someone out there going, "but you could have had X amount of cash and gotten rid of Y amount of debt," or something to that effect, to which I would say, "be honest, when would you have hit the 'sell' button?" Everyone loves to imagine that they would sell at the very top, but in truth, most will get nervous all the way up and sell as soon as they're up a few percentage points. The fear of loss is often stronger than the willingness to let gains develop over time, and so many cash out early before their positions really get a chance to run.

It's actually those people that this post is for, and ironically, that's exactly what I recommend that they do in order to avoid the problems other sellers ran in to on the way down: if speculation is your only motivation to be in this space, and "more money" is your vague goal, then sell on the way up, don't try to call the top and think you're going to make a perfect exit, because you won't. As your position appreciates in value, exit in stages, say 10% of the initial position at a time. It's far easier to sell into a market of rabid buyers than the opposite, and you likely won't experience any problems with a lack of liquidity on the part of the market maker (if that's even the problem - it's more likely that there's just no one out there accepting your asking price).

Maybe that will lead to fewer self-made problems, fewer complaints, and less likelihood of .gov thinking it needs to "fix" this stuff and screw it up completely.

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