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If you’ve been following the cryptocurrency news, you likely saw headlines over the weekend about a man who claimed he had woken up a cryptocurrency trillionaire only to see his “wealth” disappear because he couldn’t exit his position.
The man may or may not exist. He has not returned Barron’s request for comment. But according to a post
on Twitter,
he accumulated more than $1.1 trillion in cryptocurrency Rocket Bunny after investing $20.
But there’s a lesson in this, regardless of whether the story is verified or not. You see, there is no chance you could become an actual trillionaire—or even a billionaire. There’s little reason to think his original investment will get him much more than a steak dinner. And no, it’s not because of any trading platform’s decisions.
Rather, the episode offers an important lesson for any trader: Paper profits are never actual profits. That’s because the last price of an asset is only one part of any trade. Volume is another—very important—piece of any transaction, as is the ability to execute your trade at the price you want with the volume you want.
Think of it this way: Price multiplied by volume equals the total value of any trade. Trying to convert $1 trillion of Rocket Bunny—or any cryptocurrency—into cash is impossible because the people on the other side of the trade don’t have one trillion dollars. No one person or group of people does. Who is he going to sell $1 trillion of anything to? The Federal Reserve? To move a large dollar amount of anything requires a big price discount.
Barron’s knows this firsthand because some of us—including me—have been in the same situation. At a previous job with an investment firm, I had to liquidate an entire stake in a small-capitalization renewable energy company. The reasons aren’t important, although I like to think it wasn’t my fault.
The total position we owned in that company’s stock was roughly a couple of million dollars, which isn’t a lot of money for a fund in terms of the total value. But it was a lot if you measured how much we owned of that stock compared with its average trading volume. The stock was very thinly traded. There were days when no shares traded hands at all. We owned more than 50 days of volume. To sell roughly 2 million shares in one day required selling the stock at a huge discount: down about 50%.
So while we had a position in the company with a paper value of, say, $2 million, by the end of the day we’d only received $1 million. Not great. And after I sold that stock, the price immediately rebounded 50% off the low, down 25% from the starting price. No one else was willing to sell where I did.
That’s the case even in the world’s most liquid stocks.
Apple
(ticker: AAPL) stock, for instance. is trading at $131.55 on Monday, up 1.1%, in line with the gains of the
S&P 500.
About 28 million Apple shares have traded today. That means 0.2% of the stock has changed hands so far today.
Traders, and investors, would typically say Apple shares are trading for $131.55 Monday morning. It’s slightly more accurate to say 0.2% of Apple has changed hands for about $131.55 a share.
The difference involves volume and volume matters. Let’s say a large fund holds 1.2 billion Apple shares—71 times the amount that has traded today—and was forced to sell it all immediately. The price would be set by the last person convinced to buy the 1.2 billionth share, and it would be lower than $131.55.
The lesson: Prices are set by marginal demand. The price for anything is set by the price paid by the person who has to have that thing right now. The lumber in America is, or was, priced by the person who had to have that 2×4 for a construction project immediately–or by where the person who has to sell, as I did, can unload their position.
I learned my lesson then. I joined Barron’s a few jobs after that one. We don’t trade stocks here, and that’s probably lucky for me.
Write to Al Root at [email protected]