Crypto Update 2

The crypto portfolio volatility continued this month with almost all the previous months gains being erased during this past week. The portfolio now stands with a total gain of just 2.8%.

As you know this crypto experiment is a long-term bet that isn't designed for trading but the extreme volatility in the price of the crypto currencies owned does make me ask what drives prices.

Like any market, it is the fear and greed of the buyers and sellers that determines price but there are always pundits proposing why something has happened. In the case of bitcoins recent plunge, attribution is being directed towards 'leveraged longs'.

That's the term for those who have borrowed money to purchase Bitcoin on the expectation  that prices would rise. This can be done through the futures market or any number of firms that provide margin trading facilities across a range of markets.

These margin traders put up a small sum that allows them to control a much larger portfolio. Think of it like a deposit on a house. You put 20 per cent down and borrow the rest. However, unlike a home loan, the asset is continually revalued and you need to keep the deposit ratio current.

For example: If you deposit 20K as the minimum to purchase 100K of Bitcoin and the value of Bitcoin declines to 80K, they will only lend 16K against it. That means you need to put in another 4K to stay in the game. If you don't they can sell you out and you'll lose the entire 20K initial deposit.

These are known as margin calls and wise traders know never to make them...or even allow your position to get close to needing them. As a trader, price is the only thing that demonstrates if you are right or wrong and when it goes against you, it means you have got this call wrong!

So if a large number of traders have leveraged longs and the margin call is imminent, then most of them will sell out. In a thinly traded market like Bitcoin, that can move prices quite a lot.

I'm not sure how that explains the moves in the other crypto I have but it is what it is.

The individual holdings have performed as follows (compared with last time):

Crypto 1:  +1.4%  (+14.3)
Crypto 2:  +4.3%  (+26.3
Crypto 3:  +26.3%  (+57.4)
Crypto 4:  +11.6%. (+51.1)
Crypto 5:  - 14.6%. (-11.5)

These figures are automatically calculated and updated in real time at Easy Crypto which is the firm I used to purchase the portfolio.