Even with an automated strategy, market share could happen at the wrong time.
In the last few months, there has been a very strong shock throughout the crypto world. The reference is to the FTX case, until recently, among the best-known cryptocurrency exchanges in the world, second only to Binance, which has currently filed for bankruptcy before the competent authorities.
Investor confidence in the world of cryptocurrencies is weakening. This is due not only to the FTX case, which adds to the LUNA case that shocked the industry last spring but also to how these events occurred in a very short time.
History of the FTX Crash and Market Dynamics
The founder of FTX is Sam Bankman-Fried (SBF). Their exchange was widely used by cryptocurrency traders around the world. It was also regulated in many countries; unfortunately, traders who had invested in said exchange from trouble could not be spared from the harsh consequences of the FTX’s collapse.
FTX, through subsidiaries such as Alameda, invested the money deposited by clients by committing a large sum of FTT tokens (issued by FTX itself). A type of maneuver that would appear to constitute fraudulent activity that puts customer deposits at serious risk.
As if that were not enough, with two days to go, one of FTX’s main competitors, Binance, announced plans to sell $2.1 billion worth of FTT on the market. Such news generated panic, creating a kind of virtual ‘bank run’. Therefore, the FTX exchange was faced with large withdrawals; as a result, it ran out of liquidity within two days, and it blocked withdrawals.
Many other exchanges sought cover by activating an audit mechanism called ‘Proof of Reserves’, circulating various reports on Twitter confirming its strength, as well as disclosing the assets held. This was an attempt to stop the ongoing withdrawals that were triggered in November, which continued, although to a lesser extent, in December.
Automated Trading Strategy: Some Conclusions
Unfortunate cases occur regardless of the strategy used. That is, even with an automatic strategy, investors may find themselves participating in the market at the wrong time. Certainly, the use of a stop loss or, in any case, a condition to exit the trade after too long bearish movements, in itself limits significantly the risk, because in any case, the profit could be reduced immediately.
In contrast, “buy and hold” strategies generally work without stop loss or other exit conditions. In any case, investors should monitor their positions, keep their eyes open, and stay as far away from fraudulent brokers as possible. The goal is to avoid being put in the position of trading in an illiquid and extremely volatile market.
By Audy Castaneda
