Robb Reinhold: Well, hello everybody, welcome to Maverick Trading’s class on crypto currencies. Let me give you a quick little introduction about myself and then I’ll turn the time over to Mr Frohlich and he can give you an introduction and you know what, it’d be fun if we gave each other introductions. That actually might get a little messy, let’s just stick with our own introductions.
Jon Frohlich: I’ll go ahead and decline. It just depends on what kind of mood we’re in at the time.
Robb Reinhold: That’s true, that’s true. My name is Robb Reinhold, I’ve been a trader since 1997. I’ve been trading with Maverick Trading since ’97. I’m one of the oldest traders at Maverick and I started off day trading stocks and then I moved into options, then I moved into futures, then I moved into currencies and then I moved into cryptocurrencies. One of the things you’re going to get from me tonight is that this cryptocurrency, the new cryptocurrencies, they’re new, they’re exciting, but you’re going to hear me probably say a couple times, trading is trading. In the end, anything you trade whether it’s a stock, a bond, a future, a commodity, even if you trade bread at the store, I know that sounds a little ridiculous, but in the end, everything is simply a price.
Robb Reinhold: It’s a market price, and if the market price goes up in value and your long, you make money, if it goes down, you lose. If you’re short and it goes down in value you win, if it goes up, you lose. In the end, trading is trading and it truly doesn’t matter what we trade, it just matters how you traded it. So cryptocurrencies, they’re fun, they’re new, we’re going to have a good time talking about them, but you’re going to hear me keep saying, look, it’s just trading, just simply trading. So welcome, again I’ve been around for a while, so if you have any questions, please feel free to ask.
Jon Frohlich: Hello world, this is Jon Frohlich, sitting in here with Robb. We’re pretty excited about this topic, we debate this topic quite a bit here in the office. This is something that, because it’s so new, you know, we started off as day trading stocks back in the day, and then we moved into options, then we moved into currencies and then we moved into futures and now we’re talking about this and this is the new thing so we’re really excited to talk about this. One thing Robb just barely said is it doesn’t matter how you trade it though I would disagree with that, it’s much better if you win so just keep that in mind. We’re going to talk about some things tonight about how to win and Robb is correct.
Jon Frohlich: It doesn’t matter what vehicle you use to do it, trading is trading, there are buyers and sellers of things and if you’re on the right side of it, you’re going to be happy and if you’re on the wrong side, you’re not going to be happy. We’ll get into that and let’s push through this. So welcome everybody and like Robb said, for any of you who have just joined us, there is a question section on your tab if you want to make sure you open that. If you have any questions as we’re going through it, this is a live class, so we’ll be answering those questions as we go. All right, thanks everyone.
Robb Reinhold: All right, so let’s go ahead and get started. Let’s just go over a little bit of cryptocurrency, I already have a couple of questions that I’ve answered about this. Cryptocurrencies are relatively new and the history and I’ve really urge you all to go out and read about the history of bitcoin because it is like, it’s a fantasy novel, it is the craziest thing. Back in 2009, and again this is not even a person, but it’s simply their computer name. When you log into like a computer forum you have to choose a name and someone chose the name Satoshi Nakamoto and this person was the one who created this whole thing. He created bitcoin and he basically created it because he didn’t want a currency with the government that was devaluing currency. If you remember back in 2009, we’d just got done with the crash from the housing bubble and central banks were printing extra money.
Robb Reinhold: They’re doing quantitative easing and flooding the market with money and this person decided, hey, I’m going to make a currency that doesn’t have a central bank, that doesn’t have a central government, where they can’t mess with it, where it has true value. So He created this bitcoin and the way he created it was he basically made this ledger, and it’s very, very confusing. It’s pretty interesting, but basically once you broke down and completed a certain block and that’s known as mining, you were actually given a bitcoin, it was like a little prize. It was like a little prize and once you had that bitcoin, you could exchange it for other things and pretty soon people started taking bitcoin as payment.
Robb Reinhold: Now in the beginning, bitcoin was mostly taken as payment for illegal activities on the dark web, which is really kind of how it started. When you’re going to do illegal activities, you can’t use your bank account so it really caught on this bitcoin as a way to make clandestine transactions. Again, this process called mining, is that people set up these really fast, intense computers attached to a big server banks and they have to crunch an enormous amount of numbers and just to get one bitcoin, you have to solve this problem. You have to solve this basically ledger, and then once you do solve it, and again it can take weeks and months of mining to get one, then you’re awarded this bitcoin. Now there is a fixed amount of bitcoin and again, the founder Satoshi Nakamoto, set it up to where at some point you couldn’t mine any board bitcoin.
Robb Reinhold: The reason was he wanted there to be a fixed amount because if you just keep printing out money like all the governments were doing at the time, it devalues the currency. Here’s the great thing is nobody knows who this person is. No one knows if it’s a man or a woman, no one knows their nationality, but what people know is that whoever this is, they own 5% of all the bitcoin and at the very top they were worth 20 billion, $20 billion. To this day, nobody knows who actually started this, it’s crazy and everyone has all these conspiracy theories. Like I said, I don’t have time to go into all of it today, but it is absolutely fascinating to read the history of bitcoin and what’s called blockchain, blockchain is basically the ledger that verifies it all.
Robb Reinhold: As I said, there was a fixed amount of possible bitcoin, the reward is halved every 210,000, so each time it gets mined, it goes down in value, not down in value, but it’s less rewarding for people to mine them in the end. I just wanted to cover a little bit about it because they started off with bitcoin. It started off with bitcoin and as I said, here is the blockchain technology and this is what the rest of the world is super excited about. The rest of the world is really excited about this blockchain technology because the way it works is that again, to create a new bitcoin, look at the amount of numbers that you have to attempt and it’s like unlocking this puzzle and once you unlock this puzzle, it creates a ledger. Now the great thing about bitcoin and this blockchain is that this ledger resides on everyone’s computer and the programs are constantly checking all the other ledgers to make sure they’re always the same. So there’s no way that somebody can go into a central place and change anything about bitcoin because bitcoin is everywhere, blockchain is everywhere.
Robb Reinhold: There’s ledgers on millions and millions of computers where it can always be checked and made sure that it’s valid. Now, once someone creates a Bitcoin, it goes into a digital wallet. We’ll talk about digital wallets here in a second, but each time a cryptocurrency trades hand, it’s added to the ledger, which makes it more complex. So every time there’s a transaction where someone gives someone else a bitcoin for any reason, that gets added to the Ledger and the ledger goes and is added to all the ledgers in the world, so as you can see here, this is a very safe way to keep a ledger. Imagine if you were a business owner and you had to keep a ledger of your sales and expenses. Now, in the old days, you’d write it down in a ledger book, you’d write down, these are my sales, these are my expenses. Well, in the computerized world, you enter it into a spreadsheet.
Robb Reinhold: Imagine that that spreadsheet was on every single person’s computer in the entire world and could never be changed. You would never lose that ledger, that ledger is the best ledger in the world. That’s really how the digital, the blockchain technology works and banks are very excited about this technology, other finance companies are also very excited about this technology.
Jon Frohlich: I was about to say, I lost my wallet this last week and I figure I’m pretty excited about this digital wallet that I get to carry around with me. The technology has gotten so good with our iPhones and stuff. These digital wallets is the next big thing, I’m pretty excited. Going to keep all my $100 bills and my credit cards in it.
Robb Reinhold: Jon, I’m actually really glad you said that because I wasn’t going to talk about this, but since you brought it up, I’ve had a lot of discussion about cryptocurrency especially over the past years, the price of bitcoin and all the other cryptos have gone up. Everyone knows I’m a trader in my life, and so they come ask me what’s the deal with bitcoin and I’ve had a couple people very skeptical about cryptocurrency. They’re like where is it, where is it? And I always use this argument, your money in your bank, if you have $10,000 in your bank account, do you actually think that there is a shoe box somewhere with $10,000 in it that’s your money? Do you think that bank even has enough money to give all the depositors’ their money back? No, it’s all in a ledger. Your money is a ledger on the bank’s books.
Robb Reinhold: That’s all it is, there is no actual money in a shoe box waiting for you. We’ve already gone to digital money. Yes, you can now go into a bank and they’ll give you these pieces of paper that happened to have value for some reason but other than that, we’re already living with digital currency. When you use your credit card, that’s digital currency, there’s no cash that changes hands, it’s all ledgers. For any of you naysayers out there who say, what is the deal, we’re already in digital currency, every one of us uses it. So Jon, I recommend don’t have a wallet, just use your PayPal, your Venmo, your apps for everything.
Jon Frohlich: I actually had the government put a chip in the back of my neck so I don’t need anything. I just walk around and they just beat me so that’s the future, chips in the neck.
Robb Reinhold: You should get them to put one of those in your wallet too, one of those trackers. All right, so let’s talk about these digital wallets and I was just talking about the banks and this is basically what a digital wallet is. It’s a company, it’s a company that are acting as brokerages. Now, I said banks earlier, let’s talk about how a brokerage works. Let’s say you have a stock trading account at TD Ameritrade and you put … let’s say you make a $10,000 deposit and you buy $10,000 worth of Microsoft stock. Again, do you actually think that there is a shoe box somewhere in TD Ameritrade’s warehouse with your shares of Microsoft tucked away? Of course, not. That doesn’t exist, it doesn’t exist. It’s all a ledger, it’s all a ledger.
Robb Reinhold: So, we have banks that taking your money and they give you a number on a ledger, we have brokerages that take in your money and put your number’s on the ledger. Digital Wallet companies, these are companies that have decided, hey, we want to act as banks and brokerages, so you deposit dollars into them or whatever your currency is and then they will allow you to buy and sell crypto currencies and hold them in your wallet. But as I said, you’re not holding anything, you’re simply holding a ledger. Just like when you think you own 100 shares of Microsoft, you technically own it is in your ledger, but it’s not physical, it’s not physical at all. So the digital wallet companies, they work just like a bank and a brokerage. You deposit money in there, they allow you to make transactions and of course they make money off your money as its sitting there, and they charge you fees in exchange for their services.
Robb Reinhold: These are digital wallets, let’s talk about what in exchanges, because not every digital wallet company is an exchange. However, most of them are. Exchanges are where buyers and sellers come together, so let’s talk about the exchange that most of you will know about, the New York Stock Exchange. The quick history of the New York stock exchange back in the 1700s, it became known that if you wanted to buy or sell stock, you should meet under the buttonwood tree in lower Manhattan at 9:30 AM. Now, please don’t ask me what a buttonwood tree is, I have no idea and I really don’t care to spend the time to learn about it, but it was right there where the buttonwood tree is that the trading would happen a couple of hundred years ago. The problem is the animals that they would bring with them, we’re getting in the way so they put a wall up on the street, that’s where we get the name Wall Street.
Robb Reinhold: And it was in that spot they built a building and this is the New York Stock Exchange. This is where if you want to buy and sell shares of a stock that’s listed on the New York Stock Exchange, you have to go to that building. Now, you can’t go into that building, but what you can do is you can tell your broker or the company that you put your money with like TD Ameritrade, “Hey, I want you to go into that building and buy me shares.” Now, of course, that’s what actually happened 70 years ago, someone actually walked in that building and walked around and went to the post. Today it’s all digital, but it all happens inside of that exchange. The big question is, where is bitcoin traded? If you asked the question, what exchanges the Nasdaq traded on?
Robb Reinhold: Sorry, what exchange is Microsoft traded on? It’s traded on the Nasdaq. What exchange are the futures traded on? It’s traded on the Chicago Mercantile Exchange. So when people ask the question, what exchange is bitcoin and other cryptocurrencies trade on, that’s not so easy of a question because there are hundreds of exchanges, there’s hundreds of them. There’s some ones that are bigger than others, but there are hundreds of exchanges where people buy and sell bitcoin and other crypto currencies. So if you think about it, cryptocurrencies sound like the strange thing, but you’re very familiar with it and what I really wanted to do was I really wanted to break it down into something that was familiar. You know how banks work, you know how brokerage accounts work, if you know those, you know how digital wallets work. We talked about the New York Stock Exchange, how this is where people buy and sell stocks listed on that exchange. The Nasdaq, that’s where people buy and sell stocks listed on that exchange.
Robb Reinhold: If you want to trade crude oil futures, that’s traded at the Chicago Mercantile Exchange, that’s where you send your order to buy and sell. Cryptocurrencies is the same thing except now there’s hundreds of exchanges out there, there’s just hundreds of them out there and that you can go into any one of them and buy and sell as long as your digital wallet company has access to them. All right, now before we jump into the trading of bitcoin, I kind of want to just go over this concept of a Fiat currency. This is where anyone who that doesn’t like and accept change too well, now I’m not talking about you of course, you are fine, I’m talking about those other people. But anyway Fiat currency, in the old days, they used to make the currencies out of commodities.
Robb Reinhold: They made the currency out of gold because gold had value, at least had perceived value and it didn’t matter if it was one ounce of gold that was made in Italy, it was made in Greece, that was made in England, it didn’t matter because it was one ounce of gold, it was universal. It could have someone else’s face stamped on it, but it was still one ounce of gold. So the value in the currency was about the metal it was printed off, not about the face or the government that backed it. Now, of course we got away from commodity currencies somewhere in about the 1600s, actually in Holland it was the first place to issue paper bank notes, and over the next hundred or so years we actually moved to a paper currency. However, they still were backed by physical metal and this is called the gold standard.
Robb Reinhold: In the gold standard, basically in the US, they used to print out these notes so you’ve … you can go see those. If you go to a coin shop, you’re going to see some of these golden silver notes. They’re actually really cool and they have … you see a red stamp for a gold note, a blue stamp for a silver note, and the way this works is that if you took one of these gold or silver notes into a bank or to the Federal Reserve, you could literally trade it in for $5 worth of silver. That’s, what you could do, you could take one of these silver notes in, walk into the bank and they would give you $5 worth of silver. Same thing with the gold note, they’d give you that much gold. As you can see, the paper still had perceived value because you could turn it in for a base metal, a commodity that people have been trading with for years.
Robb Reinhold: In the 1930s, the US was the very first country to leave the gold standard. Everyone thought that it was going to plummet, everyone said, this is a terrible idea. If our money’s not backed by anything, it’s going to go into become worthless. Well, it’s funny because the rest of the world watched the US and we didn’t tumble, nothing happened. So all the other countries said, oh Geez, we don’t have to hold all this gold and silver for no reason, let’s get rid of it and so pretty much all the countries have left the gold standard. The only one I know that is still on the gold standard is Switzerland, but there are 20% on the gold standard, they paired that back quite a bit.
Robb Reinhold: The whole idea of this dollar bill or this hundred dollar bill in whatever money you have in your wallet, take it out and look at it, it’s a piece of paper, it’s literally worth nothing. So why is it worth something when you go to the store why can you turn it in for something that is valuable, why can you go to the store and buy something, why can you pay someone for their work? It’s because it has perceived value. This is to me the coolest thing about bitcoin and other cryptocurrencies and the thing that I just love about them, it’s the purest form of trading and let me explain what I mean by that.
Robb Reinhold: If you go buy a stock or if you watch Cramer on CNBC or any other new things, you’ll hear people say like, oh, it’s a good company. They’ve got good assets, and so people think that stocks have this base value, and they even talk about things like book value. Now book value is how much … what if we just sold off all the equipment of this company how much is this company worth? That’s called their book value. So if you take a look at a stock, there is an actual value to accompany even if it’s out of business, there’s still a value and if you take a look at real estate, there still a value because there’s still at least something there. So values are there in other assets, but when you take a look at currencies and specifically cryptocurrencies, there is no intrinsic value, it’s all perceived value. It is so pure and at Maverick what we do is we talk about being market agnostic, stock agnostic, and what I mean by that is that as a trader you do not care whether something goes up or down.
Robb Reinhold: You just want to be on the right side of the trade and one of my favorite stories to tell, this is an old story of Maverick that we circulate around, back in, it was like 2000, 2001 I was having an argument with another one of our traders, Jo Jensen and I said to him, I said, I know I’m right. And he said, I don’t care if I’m right, I just want to make money. At first, I’m like, what are you talking about? You have to be right to make money. And then I sat there and thought about it and realized, oh my gosh, I’m more concerned about being right than being on the right side of the trade. I wanted to be right intellectually, I wanted my ego to be paid off because I was smart and I realized, oh my gosh, he’s right, I just want to be on the right side of the trade.
Robb Reinhold: So that’s why I love this cryptocurrency stuff because it’s pure. We’ve taken out any possible reason why there is any value, there is no value, it’s completely made up. It’s a Fiat currency, it’s serendipity, it’s whatever you want to call it. It’s a market price of what people think it’s worth today and that is going to move based on supply and demand. There’s no other factors that will move the price around just supply and demand, and that’s the purest form of trading you possibly get.
Jon Frohlich: Let me kind of tie into that just a little bit. I’ve been talking to a lot of you on the questions that have been coming up and I was asked right now bitcoin is trading right around $7,700, so we’re still looking at bitcoin as a value in terms of dollars. It hasn’t been around long enough for it to carry its own … No one’s walking around and saying that’s worth three bitcoins, that’s not how people are buying cars yet at this point. That’s = why we talk about this stuff so much in the office is because it has its own perceived value too to a degree. Now it trades, like Rob said, it trades very purely because there’s nothing to base it on. They’re not talking about the buildings and the other things that they have going for them, the assets under management.
Jon Frohlich: But what is interesting, somebody brought this up and they said, what if you bought bitcoin right now? And then it went up for the next month and it went up 10% and I said, well that’s great, but what if during that month the value of the dollar fell 10%? Would you be ahead or would you be behind? I mean, how are you going to cash out your bitcoin? You’re going to trade it for dollars, right? So you think it went up 10% and it went up to 84.70, but during that same period of time, the dollar went down 10%, you broke even. A lot of people don’t take that into consideration when you start to trade because it still has to come back to a certain value that you’re going to use if you’re going to use it for anything. I just wanted to bring that up because a lot of people are asking questions about shorting Bitcoin, about how to get into it so we’re going to talk more about that. But I just thought that was a kind of an interesting way of looking at it.
Robb Reinhold: Well, Jon, you bring up a good point and we’re now deviating off of where we are going to, but you know what, hey, welcome to Maverick Trading. That’s what we do here, we talk about the interesting stuff. What most people don’t understand is all currency trades are pair trades, even bitcoin. Bitcoin is a pairs trading and again, what I mean by pairs trading is that you are long something and short something else. So if you buy the Bitcoin US dollar, you’re long bitcoin and short the US dollar. If the US dollar goes up in value as much as bitcoin goes up in value, you didn’t make anything, you broke even. Our currency traders know this and this is one of the first things we cover, is that in currency trading, it is pairish trade. You’re always long one currency and short the other, that’s just how it works. Very interesting Jon, I’m glad you brought that up.
Robb Reinhold: All right, so let’s get into trading bitcoin. Should you trade it and if you should trade it, how should you trade it? That’s what we’re going to get into. I’m going to point out some of the things that are not optimal in bitcoin and other cryptocurrencies and I expect these things to get better over time. They already have and I’m going to cover that, but here’s the things you need to be a trader and here’s the things you need to have in order to trade something well. You need to have what’s called price discovery, back in 2007, I’m going to go back and if any of you have seen the movie the big short or read the book, one of the big problems that people had as they were selling what are called credit default swaps, a credit default swap was basically an insurance product on a bond or a mortgage backed security and that market got huge.
Robb Reinhold: The problem was there was no exchange. There was no quote on these securities and it was a huge market and if you had a credit default swap and you wanted to sell it, you had to call around to all the brokerage firms and say, “Hey, I’ve got 10 of these, do you guys want to buy them?” And if they said yes, you would have to negotiate the price right there. Now you could probably negotiate a totally different price with another brokerage. In the end, when you know what hit the fan, everyone looked at their credit default swaps and said, “Oh my gosh, what are they worth?” And they couldn’t figure it out because there was no buyers anymore.
Robb Reinhold: Surely there were something, but what are they worth? No one knew. And banks by law, they have to write their assets down to market value and it was very difficult and it caused all sorts of problems. So having a market where you see the quote, you see what it’s worth right now, is huge as a trader and people were trading securities that didn’t have price discovery. That’s the first thing you need as a trader in order to trade something is you need to know what the price is. Number two, you need liquidity. Liquidity, you need volume. Number three, you need a transaction guarantee. What I mean by that is that there must be what’s called a counterparty. If you’re buying something, someone has to be on the other side to sell that, that’s how markets work. If you go to a market and you’re the only one there, unless you are schizophrenic, you are going to have a hard time selling anything, so good luck.
Robb Reinhold: You have to go to a market where there’s lots of market participants, the transaction guarantee is where I think is the scariest thing out there. In the stock market, they have made the stock markets and the options markets, the futures markets, the commodities markets, all the regulated markets, they have things called market makers. These are market participants and they’re called market makers. Now, yes, there are given many advantages, but they also must always provide a market. Their job is that there’s no other buyers of a stock, they have to step in and buy. They implemented this because there were times in the olden days when everyone would go to sell their stock and there’d be no buyers and the price would plummet until they found buyers. What they’ve done is they’ve paid these companies, they haven’t paid them but they’ve put them in a situation where they can make a lot of easy money, but in the end they have to fill the trade.
Robb Reinhold: So again, if Microsoft comes out and says, let’s use someone like Netflix. If Netflix comes out and says that they’re out of business or whatever, if you want to sell Netflix stock, you can still sell it, there has to be a market maker. Now again, the price will be dropping fast, but you get in the queue, you get in the line and you will be able to sell your stock. It also needs to have an interconnectivity with the banking system and this is basically the idea of you’re taking cash, buying an asset, selling that asset, and turning it back to cash. You need to have a way to get that money out to where you can use it, that’s really what you need in order to be able to trade something. Let’s put bitcoin through this test, let’s talk about price discovery. Now, when we look at the Nasdaq, when we look at the market price of Microsoft, we’re going to go to the Nasdaq and the Nasdaq is going to show us this is the bid or the ask.
Robb Reinhold: Now, Microsoft isn’t traded anywhere else. As I say that, I said, oh, there’s always a … of course, again, there’s dark pools, there’s other market participants, but they all get included into the Nasdaq. The Nasdaq is like a big circle around all the market participants, so you know exactly to the penny what Microsoft is trading at right now and it can’t be traded anywhere else, it’s only traded there. We talked about the cryptocurrency exchanges and here’s the problem is that there’s hundreds of them and the market price is whatever it’s trading for at that exchange. I actually pulled these prices about three or four hours ago, I wanted to get the most current prices I could and you can see that there is quite a bit of difference here. I mean, we’re basically $30 difference between the lowest and the top.
Robb Reinhold: This is better and let me tell you why this is a little bit better. This used to sometimes be up to $100 wide to where if you wanted to go buy it on Coinbase, it was $7,800 and on crack and it was trading at $7,700, so what’s the right price? You’re trading on Coinbase, you can only trade your cryptocurrency on Coinbase. Well, what if the price and all the other changes is significantly lower? Guess what, you still have to buy on Coinbase. This idea of price discovery is very tough on cryptocurrencies because of all these different exchanges. Now this has gotten better because of the futures market, I’ll talk about that in a little bit, but it used to be a big issue. I assume that over the years there’s going to be consolidation in bitcoin and other cryptocurrencies and the exchanges are going to come together where there’s just a few major exchanges.
Jon Frohlich: Hey, one thing, let me just add on this as we’re talking about the scenario. I’ve heard a lot of you that have talked about how expensive the fees are to jump in, that everyone has such high charges to be able to trade bitcoin. It is true and that’s true and as Rob was just saying, things will definitely improve. I remember when we first started trading stock, it was 2250 each direction to get in and out of a stock trade. It was $45 to make a single trade in and out and now if you look at it, it’s pennies, it’s pennies on each side of it. So things definitely change as the markets got broader, as it was more widely used and this is a new market so it’s to be expected that things will cost you.
Jon Frohlich: So when you, when you’re thinking about that type of thing, if that’s a problem for you, if you don’t like the fact that you’re going to be spending a significant amount of capital to get in and out of a trade, it might be a little tough and especially if you don’t have a bigger account. It gets really tough when you’re having such big fees taken out of your trade so just keep that in mind. There was about seven questions that there were all basically about that so I just thought I’d say it out loud for everyone to hear.
Robb Reinhold: Thank you so much. Price discovery to me, this is a big one, but really the biggest one that I’ve got an issue with is this liquidity. As I said, you’ve seen … if you’ve watched cryptocurrencies, cryptocurrencies will go sideways and sideways and sideways for days and then all of a sudden bitcoin drops $700 in it in like two minutes in a second and it’s really all about liquidity. And if anyone comes to market with a large amount to sell in a period where there’s not a lot of people buying, the prices go crazy. The prices plummet, the prices spike, and it’s because of liquidity, there’s low liquidity. And again, there’s no counterparty to take the other side like there is in the regulated markets, the market makers must take the other side, which again, it helps cut down volatility, it helps cut down on slippage.
Robb Reinhold: So this liquidity issue, and again, remember you’re trading at one of those exchanges so you are bound by the liquidity of that exchange. If you want to sell 10 bitcoins and there’s only three other people on the other side, well guess what? The price has to fall quite a bit in order to entice new participants to come into the market and buy your Bitcoin, you’re going to see a big fall, you’re going to see big fall. And here’s the thing, is that it could, the price could fall on one exchange for that reason and not on any of the others. Then it would probably bounces back up and goes back up to the price of all the others. So there’s all these problems, there’s been exchanges that have crashed to where people couldn’t get out of their cryptocurrency for a day. Hey, sorry, we’re down for the day, you can’t do anything.
Robb Reinhold: There is also … once it had been hacked and bitcoin had just been stolen from people. So to me, there’s a lot of problems with this, a lot of problems so let’s talk about how to solve it. Safest way to trade cryptos and sadly right now is just bitcoin so bitcoin, they’ve made futures on the CBOE and the CME and what these exchanges have done, again, these are regulated exchanges with long histories, with government entities and rules that bind them, they’ve gone out and they’ve created futures contracts based on a collection of the prices at the exchanges. They have a very sophisticated algorithm that goes out, looks at pretty much all the major exchanges of bitcoin, and then it makes a market price of the future. Again, the futures contract is … I’m not going to go into that, but again it’s going to follow the exact price. Sorry, not exact price, but it’s almost the exact price of what bitcoin does.
Robb Reinhold: Now, here is a great thing about futures contracts, they’re regulated. Number two, there’s tons of liquidity. Number three, there’s a guaranteed counterparty. There’s a guaranteed counterparty, meaning if no one else wants to buy that bitcoin future from you, guess what? One of the market makers has to step up and buy it. All of a sudden this solves a lot of the problems that we’ve had with bitcoin and other cryptocurrencies is that all of a sudden now we can basically trade the same instrument, but it’s in a very safe exchange. Now, let me also tell you what is fantastic, the only people that can trade on the futures exchanges are regulated broker dealers. That’s a huge thing and the reason I say that is because to trade on a registered broker dealer, all of those accounts are going to be insured by the government.
Robb Reinhold: They’re going to be SIPC insured, which means if that company or that … Again, we talked about banks, brokerages, digital wallet companies, they all serve the same function, if one of those companies goes out of business and loses all their money, the government will make you whole. Just like when the banks went out of business in 2008, the government came in and made people whole up to, I think it was 100,000, but they moved it to 250,000. All of a sudden it’s so much better this way, you’re trading the same instrument, you’re trading bitcoin, and here’s another great thing, you can go short a future. Now, here’s a real quick crash course on shorting if you’re not familiar with it. Shorting is just the opposite of what you know, you by first you sell second. Shorting is you sell first and by second. You can sell something for $100 and then if the price drops down to 90, you can buy it at 90, you made $10.
Robb Reinhold: How that all happens, I don’t have the time to get into that, but you can short future. Probably to me the biggest reason why I don’t love trading cryptos is that you cannot go short the actual cryptocurrencies, you can only be long. Now, remember as a trader, we’re agnostic, we’re market agnostic. We don’t care if something goes up or down, we just want to be on the right side of the trade and as I said earlier, we don’t care about being right we care about being on the right side of the trade. In cryptocurrency, you can only play one direction. You can only play up and what happens if the market goes down and down and down and down, you better just hope you’re in the sideline. That’s all you can do is just sit on the sideline and hopefully you don’t try to buy it like an idiot, but people are idiots and they’re going to go ahead and buy it when, oh, it’s down 20%, I’m going to buy it. Well, bitcoin lost 60% of its value.
Robb Reinhold: So here’s a great thing is on the futures, you can trade it, and that’s why back in December of 2017, we actually issued a press release and told all of our traders, you are absolutely free to trade bitcoin futures in your trading accounts with us. So again, to me, this is the way you trade it, this is the way you trade it. There’s two contracts, there’s the XBT, and that is equal to one bitcoin, there’s the BTC and that’s equal to five bitcoins. So again, it’s going to trade the same but you have to buy, you’re going to be five times levered on the BTC, you’re going to be five times levered so again, if it goes up, you’re gonna make more money on the BTC, if it goes down, I think you guys get the point.
Robb Reinhold: This is what we’ve authorized our traders to do and I got to say we’ve seen our traders dabble around a little bit in, but as I said earlier, trading is trading. Trading is trading and everything you trade is simply a price, it’s a price and that price is going to go up or down. I always give an analogy that all of different products you can trade, stocks, bonds, futures, Forex, blog, cryptocurrencies, anything, it’s just like a car. Look, a car is a car, a car has a motor, it has four wheels, it drives on the road and the way you drive any car is the same. But we all know that there’s some cars that are slow, there’s some cars that are faster and then there’s race cars but in the end, a car is a car but the speed of the car is different. So when we talk about trading and talk about products we can trade, we’re really just talking about the same thing.
Robb Reinhold: If you buy a stock like Philip Morris, that’s a slow car, that’s a slow car. You buy a stock like Walmart, that’s a slow car. Well guess what, you can buy a faster car like Netflix or Amazon or you know what you can do? Go into the options market, get an even faster car or futures. Cryptocurrencies to me is the race car, it’s the race car and it’s really scary that people that don’t know how to drive a dodge stratus, which best car ever best car ever again. He had big, big brag here. I own a dodge stratus, for those of you that watch SNL, you’ll get that joke. But people that can’t even drive a dodge stratus correctly, they don’t understand the pedals, it’s really scary that they’re getting into a race car because that’s never going to happen, it’s never gonna end up with a good result.
Robb Reinhold: So real quick, let’s cover the margin requirements and this is another reason why I just don’t totally get white people trade cryptocurrencies is that encrypted currencies, there’s no margin. You put up 100%, you put up 100% of the money. Now again, you can buy half a bitcoin, you can buy a fourth of a bitcoin, you can buy 0.001 of a bitcoin, but you still have to put up all the money. For the futures, you only have to put up 30% of the money on the CBOE. So if you wanted to control $10,000 worth of bitcoin, you would have to come up with $3,000, that’s your margin would be on. It’s going to be … it’s way better that way. You have less money tied up to take the same position, it gives you a lot of extra capital to do other things with. Again, there’s so many advantages, so many advantages of trading it a little bit differently.
Robb Reinhold: All right, so let’s go ahead and kind of wrap this up and then I’m going to go into some Q&A here for a little bit and again … I know Jon’s furiously answering questions over there so if you have any questions, keep typing them in. The conclusion is the actual cryptocurrency, there are still some problems with it. The inability to go short? Nope, there’s no margin. Yes, it’s volatile but again I’m going to walk through just some things in regular currencies. So yes, we can see cryptocurrencies go up 8%, 8% in a day. Now, normal currencies, they can go up about … a decent move is 1% a day, so to buy $100,000 worth of cryptocurrency, you need to have 100,000 dollars and if it goes up you make 8%.
Robb Reinhold: Hey, good job. You just made eight grand, good job. In any other currency, and we’re talking about foreign exchange here, for me to buy $100,000 worth of a currency, my margin I need, is about 3,000 to 4,000, somewhere in there. It depends on what brokerage you’re with and then it goes up. You just made a thousand dollars but you made it on 3,000, you made 33% return over here. So as you can see here, when you take a look at cryptocurrencies where there’s no margin, yes you get bigger percentage moves, but back that there’s no margin, you’re actually going to be making way less on percentage returns.
Robb Reinhold: So my opinion, I’ve had many people ask me, “Hey, should I trade cryptocurrencies?” I always say yes, but just take the crypto word out of what you just said. Should I trade currencies? And the answer is, yeah. That is the safer game, it’s a huge market. The currency market, the foreign exchange currency market is the largest market in the world. $5 billion, or is it trillion, I can’t even remember, the numbers are ridiculous of the volume that goes through. Is it trillion Jon? Yeah, it’s trillion. $5 trillion a day goes through the exchanges and again, there is a centralized exchange to that, the numbers just keep getting better.
Robb Reinhold: All of a sudden we’ve got a market that’s bigger, price discovery is great on currencies, the leverage you get, you can make more returns than cryptocurrencies and it’s the same game. Does everyone understand it’s the same game? It’s a market price, the market price is gonna go up or down based on supply and demand. It’s the same as bitcoin, it’s the same as Ethereum, it’s the same as Litecoin, it’s the same thing, but you’re able to do it in a much safer way. You have safer accounts, you have price discovery, you have costs, and it’s … again, to me it’s a no brainer. If you want to trade cryptocurrencies trade currencies. I know you might think it’s not the same thing but it is literally the same thing.
Jon Frohlich: Robb, getting lots and lots of questions about exactly that. Talking about Coinbase for instance, at this point is at this point in cryptos are young enough that you’re basically trading the crypto currency against whatever currency you use because if you are in Coinbase, when you want to withdraw your money, you’re not withdrawing those bitcoins, you’re not downloading them just to hang onto, you’re going to be taking them out and turning them back into cash. If you made $20,000 in bitcoin, you’re going to take them out and put them into dollars. So again, that’s exactly what currency trading is and I got asked, do I think that at any point these cryptocurrencies will be trading as pairs against each other where you can go long say bitcoin and short Ethereum at the same time. Absolutely, that will happen as soon as the market’s big enough. As soon as this is traded widely enough, then that will definitely happen.
Jon Frohlich: The markets will just naturally become like that. When people see ways to make money, it will develop but the timeframe on that, I have no idea. I have no idea when the markets or the cryptocurrency markets are going to be the same as the stock market or the options market or the bond market or the current currency market. There’s no way to know exactly what the timeframe is, but obviously things are always evolving. When it comes to currency, it’s always just a promise. A currency is just simply a promise to pay for something. That’s really all that anything is so it will come in time. The cryptocurrency market will improve, but in my opinion, for it to be where it would be something I would be comfortable trading regularly, it would be years down the road, very likely.
Jon Frohlich: Then again, as fast as things are moving it might be shorter than that but they’re definitely making progress. As Robb mentioned, they are a changing, but right now it makes way more sense to trade the dollar against the euro than it does to jump in and try to scalp bitcoin so just keep that in mind. One thing about here at Maverick is we are always focused on risk management and on capital preservation, and so for me personally, it’s much easier to maintain consistency and to follow my plan of trading than to jump in and put too much into say bitcoin or Ethereum or any of the other cryptos. I have no problem with people that do, but I always explain to them the how they need to be able to manage their risk. When they get in, have an entry point, have an exit point and then I ask them how are they even going to find out if they’re getting it at a good point or not and there’s really not a lot of people that can answer that question.
Jon Frohlich: I think everyone’s kind of trying to figure that out, but for me personally it’s a little bit of a better idea just to stay … for the time being, sit a little bit on the sidelines of Crypto and keep your eye on it and while you’re doing that, trade with real currencies that are established and have been trading very widely all across the globe. So keep that in mind, just to sort of piggyback on what Robb said. Plan your risk, manage your risk, buy low, sell high all the time, that’s all we do. So, perfect.
Robb Reinhold: All right, I’ve been just taking a couple of questions here. Someone has asked me who we trade through. We trade through interactive brokers and interactive brokers is just the best company as far as execution costs, spreads, everything is the best. And recently, for those of you that don’t know some things that have happened recently was the SEC made a law back in September of 2017 so almost about a year ago. And they basically came out with a law that any registered broker dealer, which is someone like TD Ameritrade, E-Trade, Charles Schwab, they could no longer offered levered FX trading to any of their clients. The reason they did this was that about two and a half years ago, the biggest US company that did Forex was called FXCM and years before that the Swiss national bank had pegged their currency to the euro and they had kept its value down.
Robb Reinhold: Then in the middle of the night, unexpectedly, they removed that peg that had been there for two and a half years and the market freaked out and the Swiss franc jumped 30% against the euro. What happened was the losses were so big in FXCM, now remember what I said about banks, they just pull all the money together in your ledger, well, that happens in FXCM and all brokerages. The losses were so big that virtually the money was gone, they had lost all the money that depositors had put in. FXCM was gone, they were a business and all the people that had accounts with them, they were out of luck. Now, luckily, luckily a private equity came in there and bailed them out and made people whole. They basically took over 94% of the business and they’ve been able to actually get their investment back but if you go back to 2010, there was a company called MF Global, they did the same thing.
Robb Reinhold: If you remember Jon, Corzine, MF global, same thing. They were a futures and Forex trading company and they went out of business. Six billion was theirs and anyone that had an account with them pretty much lost all their money. The reason why we think it’s such a great deal we trade with IB is that we are large enough in size and we’re institutional, we meet certain exemptions so we can trade, we can trade a levered Forex at interactive brokers. And as well as I know, we’re one of the only proprietary trading firms that can do that because we have that kind of size. So again, it’s really cool. Again, trading currencies is fantastic at IB, IB always has the best rates, they publish how many, what percentage of their Forex traders were profitable during the month, and it’s funny because some other brokerages do too, IB is always like at about 50% and then everyone else is like, at like 12%, 8%, 7%. It’s just where the pros are, it’s just where the pros are.
Robb Reinhold: All right. Hey, let’s wrap this up. We’re getting a bunch of questions so I’m glad we have this up. Some people say, “Hey, I only see the options application on your website. Where is the FX website?” Well, we have two separate divisions at Maverick Trading. We have an options and futures division, and we have a fore division. So again, you’re going to gravitate towards one of those. If you’re new, I would say look at checkout both, see which fits your personality better. Let me just say this and I’m going to make general statements here so of course there’s always circumstances, but options that are more slow and steady wins the race. So your personality, if that’s more your personality, slow, steady wins the race, that’s probably where you should go. If you’re a little bit more of a risk taker, you love to get in and out of stuff, then Forex is definitely the place to go. So if you can see down below maverickfx.com is the Forex division and mavericktrading.com is our options and futures division.
Jon Frohlich: Robb, one thing that you brought, I didn’t hear if you brought it up or not, we’d talked about it earlier today, the one thing about Forex, if you’re not familiar with Forex trading, one of its big selling points is all the leverage and that’s why a lot of people like to trade with cryptocurrencies too because of the big moves. Leverage is basically the same as volatility where you’re giving yourself a lot more power and a lot more ability to make money as things move. In the cryptocurrencies, especially in bitcoin, you can see that thing move 10% a day and you might not see things move that big in the Forex market, but you get to leverage yourself at 40 or 50 to one, and with that much leverage behind you, you don’t need something in the market to move 10%.
Jon Frohlich: You need it to move 1% and then you’ve got the exact same thing or even hardly 1%. It needs to move far, far less so keep that in mind. If you’re interested in some of these big moves, I think a lot people with cryptocurrencies, they get caught up in the hype of like, Oh man, if you would’ve bought this, if you would have had a $100 worth of bitcoin back in the last three years ago, you would be worth thousands of dollars. Well, that’s all well and good, but you can do that exact same thing with trading Forex or with trading options because these are leveraged instruments, but we’re talking about the ability to use that leverage, but you can do it in a much safer manner and we teach all of our traders how to, how to use that.
Jon Frohlich: You want to use that volatility and that leverage for your benefit, but at the same time, you need to have the ability to protect yourself because running out there and just going for it without any safety net is the quickest way to be out of the game so keep that in mind. If crypto currencies has always been a super interesting thing to you, you should really check out Forex or options. Like Robb said, options has a little less leverage and it’s something maybe for bigger players, but the Forex market is much, much safer than the crypto market at this point so just keep that in mind. Robb do you want to talk about what’s going on with the FX ?
Robb Reinhold: Yeah, for sure. So again, I can see that we’ve got a collection of some of our traders, our current traders and we have a lot of new people in here. We love what we do and hopefully you can tell that tonight. I know me personally know Jon does too, I love to talk trading, I love to get into all the weird areas of trading and really talk about some cool stuff. Come check us out, if this is something you want to do, you want to trade professionally, you want to trade for a firm who backs our traders with capital, come check us out. We’re offering anyone that came here tonight or sees us on the video, come join us and see what we do. We meet every single Friday, we meet every single Wednesday as a group, as a firm, and we talk about the markets, we talk about trade setups, we talk about trades we’re in, we talk about trades that we’re thinking about getting in.
Robb Reinhold: We do that on Sundays and we do that on Wednesdays. We also have other classes during the week where we’re always talking with our traders, but this is what we do every single Sunday and Monday. We’d love to see you join us at one of our Sunday sessions, so again if you are interested in that, then reach out to one of our recruiters. One of our recruiters will be sending you an email basically saying, hey, do you have any questions for me, is there anything you want? Just let them know, hey, I’d really like to go to that FX room and check out what you guys do.
Jon Frohlich: Real quick, one of the things that’s so great about this, I’ve had people talk about this a lot, is that the way that the FX room is set up is that it sets up traders for the week. There’s a big market out there as we were talking about … the Forex market is the biggest market out there, so how can you possibly sit at your screens and look at this entire market? Well, it’s very easy. You get together with a big group of people where you have lots and lots of eyes looking at it and then you discuss it. So we get together and we talk about what just happened, what announcements are coming up, what’s going to move the market, what’s going to change the values of the different currencies, and it’s been a huge, huge help.
Jon Frohlich: This is something that we started back in the very, very beginning when we first started Maverick as a proprietary firm. This was kind of the cornerstone of what we did it and it’s what gives everybody the ability to agree or disagree, but we can kind of come to a consensus of which direction we are going and we have some of our, our top traders that give their ideas out and say, hey, I like this currency, I like this position and here’s why, and it really allows you to grow as a trader. If you’re brand new to trading, this is going to be invaluable to you so definitely as Robb said, come check it out. We’d love to just show you what we do, you can decide for yourself if it’s something for you or it’s not for you.
Robb Reinhold: Awesome, and as Jon said, check out our members area. One of the things I always … I love challenges and I don’t know why it’s just how I was built, but we have a bunch of tests so our traders to become eligible to trade from capital, they have to pass tests. Again, our tests aren’t meant to discourage anyone, you can have unlimited retakes, but we want to make sure that everyone knows all the proper principles of trading, risk management, all that stuff. So again, if you want to come check it out, we’ll give you full access to our members area inside. You could poke around, you can check out any of our classes, any of our software, any of our products and what we’re doing, any of the recent trades we’ve been making, and then of course I would say jump in and take the test. If you think you know trading, let’s see what you know about trading and I think you’ll see that, hey, there’s a lot of things that you can tidy up on in your trading.
Robb Reinhold: So if you’re interested in any of that, again, you’ll get an email from a recruiter in the next 24 to 48 hours in the email that you put in a to attend this webinar. Just reply to them and say, hey, you know what, I definitely want to check this out, can I please get a username and password and they’ll get you set up right away. That’s about all I have. Jon, do you want to cover anything else?
Jon Frohlich: No, I appreciate, I’ve had a lot of questions, my fingers are cramped up from answering so many questions. I apologize to anybody who didn’t get their questions answered. If you do need additional questions answered, please feel free to stick around we’ll be here for a few more minutes. Some of the questions that I can see that didn’t get answered actually did get answered because you just asked before we brought it up, so you should be good with that but I’m going to take a few minutes and look through any of the questions that didn’t get answered and make sure that you’re all taken care of. You can always find us here at Maverick Trading, I’m Jon JON at Maverick Trading. If you have any questions, feel free to send them and we can get everything taken care of.
Robb Reinhold: What happened to the H in your name?
Jon Frohlich: Luckily my parents realized how useless it was.
Robb Reinhold: They said this kid’s never going to be able to spell four letters, let’s make it easy for him.
Jon Frohlich: You don’t want to put any silent letters in there. Sadly enough, if I really look at my entire name, I have several H’s. I’m Jonathan, I’ve got two H’s in my last name but yeah, Jon, J-O-N @Mavericktrading.com. Feel free to send me any emails with questions and we’ll get everyone taken care of.
Robb Reinhold: One thing before we officially sign off, I had a question. The very first question that came in from Peter and he’s like, “Hey, I don’t want to derail the presentation, but what do you think about the report that Trump is considered raising tariffs on China from 10% to 25%?” All right, now this is what we talk about every single Sunday, every single Wednesday, this is what we talk about with all of our traders. Here’s what we do at Maverick is that there are what are called fundamentals in trading and fundamentals are things like PE ratio, growth rates, how good is the company selling its product, how cool of a CEO do they have, all these things that are … they are indicators of what a stock should do, but they don’t necessarily … Stock doesn’t necessarily follow the fundamentals.
Robb Reinhold: We are technical traders, we do only technicals and it really bothers me that … when I first started in the business, when I told people I was a trader back in 1997, people laughed at me, people said, “Oh, you can’t make money trading. No one can make money trading, that’s a fool’s game.” They put it, oh you have to make money buying and holding stocks and all of a sudden now today it is a different world where we literally have shows like fast money talking about trading, but the thing that bothers me is that they’re still doing kind the old school Wall Street of, Hey, this is a good company. We like where it’s going, we like to management and we think the chart is nicely trading above a 20 period, moving average.
Robb Reinhold: Those are completely different, we are 100% technical, 100% technical. So Peter, when you asked me the question, okay, what do you think about Trump raising tariffs? We’ve known about this for the last two months. The week that Trump officially announced the tariffs on China was three weeks ago, guess what happened that week? The market went up, the market went up, it didn’t care. So what do I think about this report that they could raise tariffs more? I think the market’s going to do what it’s going to do. No, yes, it might knock it down, but we are in a bull market and the smart money was to be on the long side up until two days ago and then on Friday it came tumbling down, but we are over extended at that point.
Robb Reinhold: I’m a big believer in market action. I don’t want to know what the news is, I want to know what their reaction to the news is as a trader. The reaction to the news of tariffs has been the industrials have been hit a little bit, the multinational companies have been hit again, but yet they’ve rebounded the most over the last two weeks, but tech just kept going. Tech kept going, consumer kept going, all the sectors kept going. Right now healthcare is super hot so in the end, the market action is the most important thing and the fact that the market has gone up during this whole talk of terrorists, tells me we’re likely going higher. That’s just my opinion on that, take that for what it is. I’ve been wrong many times as a trader, so I won’t even feel bad if I’m wrong about that. All right. Hey, thank you very much for joining us. Like Jon said, will stick around and answer any questions we can but if not, everyone have a great day and take care.
Jon Frohlich: We’ve gone over a few minutes from where we want it to be, so let’s let everyone go that’s gotten what they need otherwise anyone who’s still has questions feel free to stick around for a few minutes and get those answered. Thanks everybody, we appreciate it for taking the time for us this evening and we look forward to speaking with you guys. Take care everyone, cheers.