Almost everyone I know in the crypto community considers themselves a “trader.” Not an investor, a trader. They try to time the market, often using leverage.
A lot of people assume that trading is the path to riches. We’ve all heard stories of traders who made 10,000% in a few weeks, often using leverage.
But at least in the stock market world, most traders lose money compared to buy and hold investors, as I explained a while back in “Trading Too Much Hurts Returns.” I suspect this is even more true in crypto, where assets have far more volatility.
Humans are not wired to deal with volatile assets. We tend to time them wrong. So this ethos of “crypto trading” hurts overall market returns immensely. The gains tend to go to those who buy and hold. Sure, a few leverage traders get rich — but I bet it’s a tiny minority.
As evidence, let’s look at two recent Twitter polls by major crypto influencer CryptoCobain. Respondents overwhelmingly make their money trading spot (no leverage) or buying tokens/farming, which is basically HODLing.
Where do you make the most % gains on your portfolio?
— cobie (@CryptoCobain) October 5, 2021
And of course, most people reported they lost the most money leverage trading. And I suspect this is an underestimate, because a lot of people who blew up their accounts trading with leverage probably aren’t on crypto Twitter anymore.
Where do you make the most % losses on your portfolio?
— cobie (@CryptoCobain) October 5, 2021
Exchanges LOVE Trading Fees
Crypto exchanges make most of their money from trading and leverage fees. Coinbase typically charges 1% or more on each transaction. Exchanges don’t make much (in the short term) if people buy and hold.
And the average Coinbase user only holds their bitcoin for 53 days. For ethereum, it’s 42 days. (That is downright hideous. Buy and hold, people. This is the way.)
Exchanges encourage frequent trading. For example, in 2019 Coinbase published a blog post titled “Trade smarter, only on Coinbase.” It was about a new suite of trading tools to “build a data-driven investing strategy with exclusive, unbiased trading signals.”
And Coinbase recently started offering leverage (margin). It’s “only” offering 3x leverage, but that’s still too much for the vast majority of people. To be clear, I’m not singling out Coinbase here — I’m just using it as an example. A lot of other exchanges offer leverage ranging from 20x-to-100x, which is crazy.
Regardless, a crypto company that was truly long-term-focused would encourage its users to buy and hold for the long term and avoid margin. People would make a LOT more money, and in five to 10 years it would create a ton of value for the exchange when many of those users became far wealthier than they used to be. Exchanges could give loans to customers, help them cash out, etc. There are a lot of ways to make money when your customers do.
If a lot of your users are trading on margin, I’d bet at least 90% will eventually go bust. So offering leverage and encouraging frequent trading is a very short-sighted strategy.
The bottom line: Don’t trade on margin. Ideally, don’t trade at all. It just makes the exchanges more money and crushes your chances at great returns.