Age-old wisdom rang true for investors watching powerlessly as bitcoin cash values plummeted on November 11. Clients of Trading 212 were also content to see bitcoin cash reach a high of $2,500 earlier in the month. After celebrating substantial profits, recent news shows that the company may have counted their chickens before they had hatched.
The unfortunate investors of the British cryptocurrency brokerage watched their profits fade away, unable to act due to a trading suspension as the cryptocurrency nosedived $800 in less than an hour.
According to Trading 212, trading was only suspended for ten minutes. That appeared to be all it took, however, for many investors to lose a lot of their gains. For some, the loss spanned over hundreds of thousands of pounds.
Refusing to accept the situation, 54 affected people set up a WhatsApp group called “People v 212,” with the intention of joining forces to recuperate their lost profits.
The collective group of people affected by the suspension claim to have lost approximately $13.2 million, although some clients have accepted the compromise proposed by Trading 212. These clients received a ten percent portion of their lost funds back from the brokerage. Others held firm in their insistence that Trading 212 should pay out the full amount.
Affected investors claimed that the temporary trading suspension was not the only problem that occurred during that time. They mentioned that Trading 212 did not execute their take-profit or stop-loss orders. The company responded by saying that in those cases and for those clients, the brokerage’s terms of service had been violated.
Co-founder Borislav Nedialkov said November 17 that most of the affected clients had accepted a settlement agreement.
One of the customers involved in the situation felt that Trading 212 bit off more than what they could chew in their service offering. According to Justin Galvin, Trading 212 “exercised too much risk by offering bitcoin cash to entice new customers, only to have those traders beat the market by a hundred times.”
Purchasing Stocks Vs. Contracts For Difference (CFD) Trading
The grey area comes in when the type of trade is examined. The customers of the British firm had never physically bought bitcoin cash, but instead entered into contracts for difference, or CFDs.
CFDs allow customers to take positions on the movements of the cryptocurrency, essentially betting on whether it will appreciate or depreciate. CFDs are banned in the US, especially since trading margins fall between 30x and 150x. Although the prospect of amplified gains is attractive to many clients, all trades come with a high risk.
It is not uncommon for companies such as Trading 212 to freeze positions briefly to manage volatility. In these instances, customers have little recourse.
Clem Chambers, CEO of ADVFN.com speaks of his crypto-trading strategy. “In crypto, I exit with my bitcoin profits immediately. Never leave your winning chips on the table for the dealer to see.”
Unfortunately, this isn’t always possible with CFD companies due to the different trading offers that they have available. Trading 212 has multiplied since its launch in June. Its expansion was greatly aided by its addition of eight cryptocurrency markets.
Despite its other successes, it appears that many investors and traders are young or inexperienced. Their actions speak of emotional trading or a possibly willful unawareness of the consequences of a bad trade. Many customers were surprised at the actions taken by Trading 212, most likely due to an unfamiliarity with the nature of trading schemes.
Market Fluctuation is Nothing New
Other companies involved in the cryptomarket were also under fire as a result of bitcoin cash’s steep spikes and drops. Korean exchange Bithumb suffered outages at the same time that Trading 212 also experienced difficulty. Another company to react was CoinMarketCap, an industry website which merely prevented new prices from the exchange to be taken.
Bithumb is facing a lawsuit by three thousand of its customers. Investors on the exchange claim that an alleged two-hour outage caused them substantial losses.
The cryptomarket does not presently have the same trading suspensions that are triggered in the bitcoin market by similar events. The cryptocurrency market does appear to be moving in this direction, though.
Regulators have also responded to the event and others like it, having recently stated the risks of cryptocurrency CFDs. Although the Financial Conduct Authority (FCA) regulates CFD brokers, they also published the following disclaimer:
“These protections will not compensate you for any losses from trading.”
Trading 212 is in the process of revising their trading requirements to prevent similar situations from happening in the future. The company has announced that it will be raising the deposit level required to trade on margin. The move towards regulating volatility may claim more traditional investors to this newfound investment market.