Bitcoin to the Moon- Are You Really Prepared?
What would you do if the price of Bitcoin suddenly went to $100,000? Obviously, this would be a cause for celebration among cryptocurrency holders and there is no shortage of ideas on how to spend that money. Some people may answer that the first thing they would buy a new car, while others may want to purchase a new house or go on a nice long vacation. As exciting as all of those ideas are, they overlook one important aspect. If the price of Bitcoin (or any other crypto) were to spike to an all-time high, traders would have to find a way to quickly sell their Bitcoin or convert it to a stablecoin before other traders placed sell orders and pushed down the price. I believe that one of the best ways to prepare for a “moon” is to establish multiple trading accounts with leading, reputable exchanges.
We know that cryptocurrency markets are extremely volatile, and if a new all-time high price was reached, there would be a strong incentive for traders to rush and sell their cryptocurrency at the All Time High (ATH). This puts downward pressure on the market because traders want to be the first to cash out. The longer they wait, other traders come in and sell thus pushing down the price. As the price falls, more traders place sell orders "while the getting is still good" and put further downward price pressure. If Bitcoin briefly spiked to an insanely high amount, the traders who were able to sell first would be the biggest winners. As these “Early Movers” sell their Bitcoin, they would put downward pressure on the market which means that subsequent sellers would have to accept lower and lower prices with each passing minute. If BTC were to “moon”, time would be the most important factor in determining which traders can realize the biggest profits and which traders miss out.
Liquidity Squeeze
Having a single account on a single exchange might not provide adequate liquidity for a trader to sell a significant amount of their crypto in a “moon” scenario. This screenshot shows that the majority of recent BTC-USD trades on Coinbase Pro have been for less than .1 BTC. Given today’s BTC price of around $7,300, this means that the average trade is less than $730. Of course, we all want the price of our crypto to increase in value, but think about the liquidity implications of a “mooning” crypto. Could an exchange that typically handles $730 transactions easily handle several $100,000 or $1 Million transactions?
An Example Scenario
Let’s suppose that you purchased 10 BTC on 30 Jan 2017. At that time, the price would have been around $920, and the total purchase cost of less than $10,000 would have been very reasonable for moderately well to do individuals who were looking for a way to invest their Christmas bonus or received an early tax refund. If BTC were to hit $100,000 the value of these 10 BTC would then be worth more than $1Million. Again, a $10,000 investment in BTC in 2017 would have been very reasonable for a large number of investors, and I anticipate that there are quite a few individuals who have more than 10 BTC sitting in their wallets. If crypto “moons”, even average investors will become whales overnight. I bring this up because it is important to understand that an increase in price could put a tremendous squeeze on the liquidity provided by leading exchanges.
If each of these investors tried to sell their hundreds of thousands of dollars worth of BTC on Coinbase Pro, they could easily overload a system whose average value per trade is less than $730. Sell orders could easily overwhelm buy orders and the price of BTC could plummet. If the pure dollar volume of trades did not overload the technical capabilities of the system, then the drastic drop in price from sell pressure could possibly cause the site administrators to temporarily suspend trading. We don’t know for sure how exchanges would respond to massive sell orders, but more exchanges = more options, and the trader who already has established accounts at a variety of exchanges will have more options to quickly sell their crypto if one exchange crashes or if trading is halted. .
It is possible that there would be so much selling pressure that no single exchange would be able to provide enough liquidity for a trader to sell all of their crypto. More than likely, traders would have to place multiple trades on multiple exchanges to liquidate their “mooning” crypto as quickly as possible. Remember, the longer they wait for an order to be fulfilled, the lower the price drops as other traders place their own sell orders and drive down the price. Bigger orders can take longer to fulfill, so there would be a time-based advantage to placing three $100,000 trades on different exchanges instead of one $300,000 trade on one exchange.
It goes without saying that these exchange accounts should be fully verified and active so that the trader can instantly trade their crypto. Different exchanges handle account verification in different ways, but the common theme is that different levels of verification give traders different privileges. Lower levels of verification typically have limits on how much you can deposit or withdraw in a single day, and may limit you to trading crypto-crypto and not actually selling from crypto-fiat. Trying to sell BTC at an ATH will be completely futile if you only have a basic starter account that only allows crypto-crypto trading (ignoring stablecoins). Sometimes, the verification process only takes a few minutes, but I have also had tricky circumstances where verification has taken me more than a day to complete. Obviously, when time is money, the last thing you want to be doing is stuck trying to submit your ID documents to a crypto exchange while everyone else is cashing out and selling at the ATH.
Ease of Withdraw
Let's suppose that a trader has prepared for their crypto to "moon" and used multiple accounts on different exchanges to lock in their price and quickly sell their crypto at the ATH. Their funds are now sitting in fiat on several of the leading exchanges. We know that keeping funds on an exchange is one of the riskiest aspects of the whole crypto trading process, and quickly moving those funds off of the exchange is not just a matter of convenience, but also a matter of security. Unfortunately, this is easier said than done, and most exchanges limit their customers to a maximum withdraw rate.
As a US client, Kraken's intermediate account will only allow me to withdraw $50,000 per month without showing extensive documentation of the history of my funds. Assuming that BTC goes to $100K and I sell 10 BTC, it would take twenty months (over 1.5 years) of consecutively withdrawing the maximum amount to transfer my funds to my "real" bank ($1,000,000 sale / $50,000 per month withdraw). Even with that, I would bump up agains the 130K annual limit well before I withdrew all my cash. We already know that leaving funds on an exchange is especially risky - exchanges frequently shut down, get hacked, and freeze accounts in response to changing regulation. These threats would only become more pronounced as BTC reaches an ATH, and leaving funds on an exchange would become an incredibly risky proposition.
Instead, let's suppose that I prepared ahead and was able to sell my BTC on more than one exchange. Not only does this give me a higher chance of quickly offloading my crypto at the ATH, but it allows me to more quickly withdraw my funds off the exchanges and into a more secure account. I can withdraw $50,000 per month from an intermediate Kraken account; if we add my "level 2" Coinbase account, I can withdraw an additional $25,000 per day. Assuming that there are 30 days in the average month, I can cut down the time needed to withdraw my funds to 1 month and 6 days. If I were to have created additional accounts on Binance or upgraded to a higher verification level on Kraken and Coinbase, the time taken to transfer these funds off the exchanges would have been reduced even further.
Conclusion
As someone who holds a variety of cryptos, I certainly hope that at least one of my coins "moons" and experiences a drastic increase in price. I also realize that a coin that "moons" while sitting in my wallet does absolutely nothing. To realize the gains from a rapidly appreciating crypto, traders must be able to actually sell their coins at the ATH. I predict that a "mooning" crypto would put extreme pressure on exchanges and squeeze liquidity. Some exchanges might be shut down due to the volume of orders overloading server capacity, while others could be administratively halted to prevent volatile price swings. To give themselves the best chance of being able to sell their crypto at ATH, traders should be proactive and establish fully verified accounts on several different, reputable crypto exchanges.
References:
https://pro.coinbase.com/trade/BTC-USD
https://www.marketwatch.com/investing/cryptocurrency/btcusd?mod=home-page
Image Credit: https://stocksnap.io/author/spacex
▶️ DTube
▶️ YouTube