Stop loss

[Muis]

I have a large amount of coins, that I'd like to automaticly sell as soon as the market price dives below a certain point, in other words: as soon as bitcoin crashes. But to do this I'd have to move all the coins out of cold storage, store them online at an exchange, and place a stop-loss order. And this has a certain risk (even bigger than a market crash), namely loosing everything to a hacker or a malicious operator.

So I'd prefer to keep everything in cold storage, write some script that detects a market crash, immediately transfer all the coins to an exchange, and sell them. While this is possible, there will be a pretty large delay because of the fact the exchange will require 6 confirmations before the incoming funds are accepted.

I was wondering, are there ways to speed this up? I know MtGox allows uploads of private keys, but it will still not give you immediate access to the funds, since it first sweeps out the coins to send them to their own address (requiring those 6 confirmations again).

So is there a way to have some kind of stop-loss functionality while using cold storage, or how do you guys protect yourselves against a potential market crash?

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[John (John K.)]

I have a large amount of coins, that I'd like to automaticly sell as soon as the market price dives below a certain point, in other words: as soon as bitcoin crashes. But to do this I'd have to move all the coins out of cold storage, store them online at an exchange, and place a stop-loss order. And this has a certain risk (even bigger than a market crash), namely loosing everything to a hacker or a malicious operator.

So I'd prefer to keep everything in cold storage, write some script that detects a market crash, immediately transfer all the coins to an exchange, and sell them. While this is possible, there will be a pretty large delay because of the fact the exchange will require 6 confirmations before the incoming funds are accepted.

I was wondering, are there ways to speed this up? I know MtGox allows uploads of private keys, but it will still not give you immediate access to the funds, since it first sweeps out the coins to send them to their own address (requiring those 6 confirmations again).

So is there a way to have some kind of stop-loss functionality while using cold storage, or how do you guys protect yourselves against a potential market crash?

I simply ride out a potential market crash. Any crashes are bound to be short term (note: I consider crashes as < $5) as any occurrence should be due to some bugs (MT.Gox goxxing again etc etc).

[casascius]

I plan to ride out market crashes as well.  To me, playing to benefit from market crashes is day trading - which comes with two separate risks - the risk of making bad trades, as well as getting stiffed without recourse.  At some point, playing roulette or blackjack becomes a better risk.  The best place for your haul of bitcoins is secure cold storage, like spread across multiple safety deposit boxes.

[casascius]

I simply ride out a potential market crash. Any crashes are bound to be short term (note: I consider crashes as < $5) as any occurrence should be due to some bugs (MT.Gox goxxing again etc etc).

A few days ago I watched prices fall down from $9 to $7 in under a minute, because someone dumped 40k BTC. If such an event triggers a panic sell-off I'd rather be safe.

I don't believe there will be a panic selloff that pushes the price below $5 for very long, given it's been tested - it sat there for months and people said ho-hum.  There are still only so many bitcoins and there is a genuine market demand for holding them, so have a little faith and sit on them.  $9 may be a high price TODAY based on the current market demand (referring people who WANT to own bitcoins for the sake of doing so, not just dump them at the first profitable opportunity), but I don't believe $9 will be a high price 3-6-12 months from now, and I am satisfied holding mine through the storms "come what may".

[DeathAndTaxes]

I simply ride out a potential market crash. Any crashes are bound to be short term (note: I consider crashes as < $5) as any occurrence should be due to some bugs (MT.Gox goxxing again etc etc).

A few days ago I watched prices fall down from $9 to $7 in under a minute, because someone dumped 40k BTC. If such an event triggers a panic sell-off I'd rather be safe.

So your stop loss kicks in at <$8 and when the market rebounds a few seconds later to $8.50+ you lost 10% or more?  Sweet!
Stop loss + high volatility = good way to lose a lot of funds.

Trying to guess the bottom of normal volatility and putting your stop loss below that is a fools errand.  If the markets did allow stop losses the next major manipulation would be intended to force those stop losses to execute and rob you of your coins.  There simply isn't enough market depth, so someone with $500K to $1M to could force a 10% move which is enough to kick you your stoploss.  Now if it was just your stoploss it wouldn't really matter but imagine there are 1000 other unsophisticated traders with a combined stop loss of 20K more coins.  The price falls way down to $7 (remember stop loss executes at market).  The manipulator buys after the panic sells and in span of a few seconds hundred thousand dollar or more is transfer from you (and others) to him.   Rinse and repeat over and over and over until you rob every single stop losser dry. 

The only thing worse than a flash crash is a flash crash where your "safety stop loss" caused you to sell at the bottom.  The only thing worse than that is watching BTC price rebound in a matter of seconds and knowing your coins are gone.

[casascius]

I was amused when I read through the posted internal Bitcoinica e-mails, where it was mentioned (paraphrasing) that "we made a ton of money on those forced liquidations"...

A stop loss is not your friend... it's the friend of the person willing to exploit their existence, and who sells enough just to make the dominos start to fall, and then buys right back at a cheaper price.

Same goes for a lot of short positions - same deal, opposite direction, same profitability.

Any time you can take an action in the market knowing that there's a good chance that the market will continue in the same direction you started due to automatic orders being triggered, it's a ripe opportunity for BIG PROFIT for the person willing to make the first move.  The profit is paid for by the people with the automatic positions!

[Dargo]

Muis,

It sounds to me like you are what is known as a "weak hand." You are so scared of losing money that you probably won't make any either. If your plan is to sell if BTC goes below 7.5 again, well, there's a good chance this will happen. But it very likely won't mean that price is crashing to 5, so there's a pretty good chance you will just get stopped out and price will turn around and head higher (and you will miss the ride).

I recommend that you reduce the size of your position to the point that you feel comfortable either 1) keeping your BTC at an exchange so you can trade more actively and use tighter stops, or 2) keeping your BTC in cold storage and allowing yourself a much wider stop.

For example, what if you transfer half your position to an exchange and manage to sell it at 9. Then you have +1.5 BTC profit on half your position. And you now have a +1.5 BTC cushion on the remaining position (i.e. price can go all the way down to 6 before you are looking at a loss overall on the trade). This is just one scenario of course, but I recommend doing something like this so you can hold a stronger hand. 

[casascius]

The way I think of holding Bitcoins is, it's like buying Google or Apple in its infancy.

If you are lucky enough to have bought either of those stocks at $5 or $7.5 or $9, it barely matters today.

If I were you, I'd take your coins bought at $7.5 and NOT WORRY what happens to the price.  If it goes down, the only thing you should conclude is "oh well, a better buying opportunity came along, but too bad I wasn't lucky enough to have taken it".

Bitcoins went down to $2 but I didn't jump.  Too bad I couldn't have known at the time that was the bottom, otherwise I'd have bought as many of them as I could get.

By the same token, you could walk up to a roulette table and see it hit red eight times in a row, and think "gee, if only I had been here just ten minutes earlier, my usual strategy of betting on red really would have paid off".  The point is, THERE IS NO WAY YOU COULD HAVE KNOWN it would happen in time for you to have bet on it - and there is NO WAY you can know what will happen to Bitcoin in the short term.

But if you believe like me and know that Bitcoin will go up in the long term, then you'll buy now (at any price that's reasonable - 7.5 sure sounds reasonable to me), and then spend or sell your coins much later - at a hopefully much higher price than anything you might see today.