I believe all markets behave in a similar way, and I do not think it matters if you are trading a digital currency, a stock or an option. I started out my career trading futures contracts on currency before all global currency rolled into the Euro. We would trade futures contracts on the Swiss Franc, the Japanese Yen or the German Mark which were side by side on the floor of the Chicago Mercantile Exchange (NYSE: CME), making it easy to trade them against one another. Eventually, they rolled all of these into the Euro we know today, but in the 1980’s these futures contracts were the stepping stones to derivative markets.
Soon to follow these currency contracts were Stock Index Futures, which changed the game in terms of leverage and hedging. The S&P 500 futures contract became the benchmark for any portfolio manager who wanted another instrument to enhance his/her performance. The introduction of the Stock Index contracts at the CME in the 80’s had perfect timing as the stock market was making a turn higher and this added instrument allowed a new entrant in equities markets, and brought commodity speculators into the mix who were used to leverage. I think adding these contracts contributed greatly to the rally in global markets and gave managers other tools to manage risks.
One of the most important lessons in trading and investing has to do with patience. Markets spend 85% of the time preparing to move, and 15% of the time moving, so the tendency is to over trade versus picking your spots and executing your investing plan. The lesson I learned (the hard way) was to never short quiet markets which are trending higher. They seem to tempt you to sell them because they appear heavy, and before you know it you are in a melt up chasing them higher covering your short position competing with other buyers trying to fit through a small door. It is a painful experience, and one you never forget. It is like touching a hot stovetop, and the burn stays with you every time you touch something.
All Traders Love Keeping Score
I was motivated to write this as I watch digital currency settle down after this week’s volatility, and I know the drill about random selling or shorting. The volatility in digital currency like Bitcoin, Ethereum or Ripple is 100x the stock market volatility. The common stock market volatility indicator is the VIX contract, which has languished for so long it has become irrelevant. Volatility in digital currencies is nearly unmeasurable in its current form with 30% moves in price in a week, so there is really no comparison to stocks. You can have a single stock risk, but for the most part, investing in macro volatility contracts is a fools journey.
I think the trading world is excited by volatility and this is contributing to the attention digital currency is getting today. The world loves keeping score, and most investors love the action. The just need to be wary of touching the hot stove and shorting quiet markets. It is a lesson everyone learns in their trading career and they wear it forever like a market tattoo.
Photos attributed to the CME, Shutterstock