A friendly reminder to bitcoiners on the back of the ETH event earlier today.
- Don't margin trade on GDAX. They have no circuit breakers, low limits ($10k for a margin position), low withdrawal limits, an illiquid book, and no option to isolate margin. They also legally require you to have a large net-worth, which may limit your legal options if you lie to access their financial products and then are somehow wronged.
- Isolate your margin, no matter where you trade. Do not trade at a place where you can not isolate margin (i.e., GDAX). Portfolio margin (i.e. where the entire portfolio is collateral for a position) is dangerous and is usually reserved by brokerages for sophisticated investors, following the signing of a waver. You are forced to use portfolio margin on GDAX. This means that even if you have a tiny position with the underlying as the collateral, you can be entirely wiped out by a flash crash. This fellow's friend on ethtrader had 400 ETH (~$120k) on GDAX, and had a 2.3 ETH margin position. His entire portfolio was liquidated when the price fell to $2 in order to pay back the $800 he borrowed. $120k sold to pay back $800. Because he couldn't isolate margin and he used the underlying as collateral (and they didn't set a stop, but as we see below in (4), that alone may not have been enough).
- Use fiat or equivalent as the collateral, or at worse, a different coin. Never use the underlying as collateral. As we see in (1) above, because the trader used 400 ETH as collateral for an $800 loan, it was liquidated when ETH was at $2 in order to guarantee repayment of the loan. This guy had $800 on loan, but it was backed by $120k in ether. If it was backed by just $800 in cash, he wouldn't have gotten his entire portfolio liquidated. Why on earth he exposed his entire portfolio to this kind of risk for an $800 increase in exposure is beyond me. Supposedly he understood the risks. I'm not so sure. DO NOT use the underlying as collateral if you margin trade. Use the margin balance for your exposure, but protect yourself from total loss of collateral as best you can.
- Set stop limits, and trade on a platform that offers a circuitbreaker against large market orders and liquidation cascades (i.e., bitfinex is good at this). Stop limits are very important, and will protect you from making portfolio-killing mistakes (so long as liquidations are isolated and not on portfolio margin, as discussed above). A stop is simple: If price falls below $X, initiate a market sell for X amount of coins. Problem is, the price can move a lot between when your order is triggered and when it's executed. A fellow over on ethtrader had their $300+ stop filled at $0.10. You are at the mercy of the order book and the current action when you place a simple stop. The solution is a stop limit. You tell the platform two things: when the order should be triggered, and then where the limit sell should be placed. The limit sell can be above or below the trigger, so it can be used as a slippage-stop or as a trigger for an attempted limit sell. For instance, if the trader above had a $310 stop trigger with a limit at $280 (allowing for $30 in slippage), his order would have gone on the books as a limit sell at $280 once the price fell below that. He would NOT have sold for less (unless liquidated), and a liquidation would not eat the whole portfolio so long as you are not on portfolio (or as bitmex calls it, "cross") margin and used a different currency as collateral.
Be smart. Be safe. Feel free to ask questions. I don't want to see anything the likes of that happen to us. If possible, learn from others mistakes so that you don't have to learn from your own. It's much, much cheaper.
Edit: Thanks for the gold, kind stranger!
