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If you’ve been following cryptocurrency news, you’ve probably seen the headlines over the weekend about a man who claimed he woke up a cryptocurrency billionaire to see his wealth. disappear because he could not leave his post.
Man may or may not exist. He did not return Barrons’ request for comment. But according to a Twitter post, he racked up more than $ 1.1 trillion in Rocket Bunny cryptocurrency after investing $ 20.
But there is a lesson in that whether or not the story is verified. You see, there is no chance that you will become a true billionaire or even a billionaire. There is little reason to believe that his initial investment will earn him much more than a steak dinner. And no, it’s not because of the decisions of the trading platforms.
On the contrary, the episode offers an important lesson for any trader: paper profits are never real profits. This is because the last price of an asset is only part of any trade. Volume is another very important part of any trade, as is the ability to execute your trade at the price you want with the volume you want.
Think of it this way: the price multiplied by the volume equals the total value of any transaction. Trying to convert $ 1,000 billion worth of Rocket Bunny or any cryptocurrency into cash is impossible because people on the other side of commerce don’t have a trillion dollars. No one person or group of people does. Who is he going to sell $ 1,000 billion worth of anything to? The Federal Reserve? To move a large amount of money out of anything, you need a big price discount.
Barrons knows this firsthand because some of us, including me, have been in the same situation. In a previous job at an investment company, I had to liquidate an entire stake in a small-cap renewable energy company. The reasons don’t matter, although I like to think it wasn’t my fault.
The total position we had in the shares of this company was around $ 2 million, which is not a lot of money for a fund in terms of total value. But that was a lot if you measured how much we owned of this stock relative to its average trading volume. The action was barely negotiated. There were days when no action was exchanged hands. We had more than 50 days of volume. To sell around 2 million shares in one day, you had to sell the stock at a very good price: down about 50%.
So while we had a position in the company with a paper value of, say, $ 2 million, at the end of the day we only received $ 1 million. Not great. And after selling that stock, the price immediately rebounded 50% off the low, down 25% from the starting price. No one else was willing to sell where I did.
This is the case even in the most liquid stocks in the world. Apple stock (ticker: AAPL), for example. is trading at $ 131.55 on Monday, up 1.1%, in line with the S&P 500’s gains. About 28 million Apple shares were traded today. This means that 0.2% of the shares have changed hands so far today.
Traders and investors would generally say that Apple shares are trading at $ 131.55 on Monday morning. It’s slightly more accurate to say that 0.2% of Apple changed hands for around $ 131.55 per share.
The difference concerns the questions of volume and volume. Let’s say a large fund owns 1.2 billion Apple shares 71 times the amount traded today and was forced to sell everything immediately. The price would be set by the last person convinced to buy the 1.2 billionth share, and it would be less than $ 131.55.
The lesson: prices are set by marginal demand. The price of anything is set by the price paid by the person who is to have that thing right now. Timber in America is, or was, valued by the person who was supposed to have it 24 for a construction project immediately or where the person who is to sell, as I did, can unload his position.
I learned my lesson then. I joined Barrons a few jobs after this one. We don’t trade stocks here, and that’s probably lucky for me.
Write to Al Root at [email protected]
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