How to Lose $85 Million in Bitcoin in a Day

October 23, 2023 Profitable Investing Tips

We have written frequently about how volatile Bitcoin trading can be. We have highlighted the Bitcoin trading risk caused by wash trading. Something we forgot to mention is that traders need to make sure that the news stories they are following are not fake. This is a short story about how to lose $85 million in Bitcoin in twenty-four hours. Traders were led to believe that the Blackrock spot Bitcoin ETF had gotten the OK from the Securities and Exchange Commission. It was fake news.

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What Is a Spot Bitcoin ETF?

ETF stands for exchange traded fund. There are thousands of ETFs. A common type of ETF is one that allows a person to invest in or trade a market index instead of buying hundreds of stocks. Alternatively, an ETF lets a person trade something that cannot be traded directly via a stock exchange. This would be the case in the USA with a spot Bitcoin ETF. The exchange would buy and sell Bitcoin. It would offer shares of the ETF whose value was based on the current market (spot) price of Bitcoin. Just recently a Euronext Bitcoin ETF opened for business in the EU. Meanwhile, several spot Bitcoin ETF proposals are languishing with the Securities and Exchange Commission. One of them is with BlackRock which operates 424 ETFs. The assumption of many in crypto is that when these ETFs become operational, it will provide a huge boost to Bitcoin trading. The assumption, or hope, is that this would drive the price of Bitcoin back up toward levels not seen since before crypto winter. It would do this partly by bringing in investors interested in making money with Bitcoin but not in having a crypto wallet or working though the blockchain. They would simply buy and sell shares like they do with stocks.

Liar, Liar, Pants on Fire Crypto News

Crypto trading is notorious for market manipulation, pump and dump schemes. This time around a “tweet” on X (formerly Twitter) said that the BlackRock spot Bitcoin ETF had been OKed by the SEC. This caused the price of Bitcoin to go up 10% which hurt traders who had been betting on the price sagging some more. The Bitcoin price fell again when a follow-up tweet said that the first tweet was incorrect. Coin Telegraph sent both tweets and apologized in the second tweet.

Perils of Shorting Any Market

Markets go up. Markets go down. Markets trade sideways. Investors, like folks who buy and hold Microsoft, Apple, or Amazon stocks, simply buy. They generally make money over time when they buy good stocks because the stocks go up. However, even solid companies see their stock prices fall in a bad market. Those who seek to profit when prices fall use a couple of approaches. One used in the stock market is to borrow stocks from a brokerage, sell the stocks, and then buy later when the stock has fallen in value. This is called shorting. Another approach is to buy and sell futures contracts. In the case of Bitcoin these trade on the CBOE (Chicago Board Options Exchange). Someone expecting the price of Bitcoin to fall would sell a futures contract for a lower Bitcoin price. They would be obligated to purchase at the expected (lower) market price. They would lose money if the price went up like it did after the fake news tweet! The problem for a trader who has “shorted” an investment in some way is that it might go up instead of down. These traders are often leveraging their investments because they do not expect big movements in the market. When that happens and the movement is opposite from what they expected, the results can be devastating just like when traders lost $85 million in just twenty-four hours trading Bitcoin.