As the cryptocurrency bitcoin cash surged to a high of $2,500 last weekend, clients of Trading 212, a brokerage based in the U.K., Germany and Bulgaria, were sitting on fat profits, in some cases hundreds of thousands of pounds.
That is, until Sunday, when the cryptocurrency took a nosedive – and the firm suspended trading.
Unable to close their positions, the affected customers could only watch as the price of bitcoin cash fell more than $800 in under an hour. Trading 212 says the suspension lasted only 10 minutes, but according to the traders, that was all it took to erase in some cases sizeable gains.
Not taking it lying down, 54 customers went so far as to set up a WhatsApp group called "People v 212," where they compared notes about how to reclaim their alleged missing gains.
All told, the Trading 212 clients – many of whom described their frustrations in interviews or emails – say they lost an estimated £10 million ($13.2 million), though some have settled their complaints with the company. For example, a group of traders from Cardiff, Wales, has accepted an offer to pay out a proportion, about 10 percent, of the profits they say they were owed.
Aside from temporarily preventing clients who had accumulated gains from cashing out, some said Trading 212 failed to execute their stop-loss or take-profit orders. The company, in turn, claims the customers whose orders were canceled had violated its contract terms.
"Today we have settled with most of the affected clients," Borislav Nedialkov, a co-founder of Trading 212, said Friday.
Justin Galvin, one of the Trading 212 customers battling to get what they see as their rightful profits, blamed the company for the situation, however. In statements, he argued the firm simply took too risky a strategy in offering the product in a nascent market.
Galvin said:
"In my opinion, they exercised too much risk by offering bitcoin cash to entice new customers only to have those traders beat the market by 100 times.”
CFD emptor
But while bruising losses are nothing new in the crypto space, these traders hadn't actually purchased bitcoin cash. Rather, they had entered into contracts for difference (CFD) with Trading 212. In a CFD, traders don't buy assets directly but take positions on price movements. (CFDs are banned in the U.S.).
The gains and losses are amplified because the brokers allow trading at 30x to 150x margins.
In short, these entities don't hold any of the assets that customers are trading on. In this sense then, CFD brokers operate in a world that is more akin to betting. (Indeed, many of the companies in the sector also offer spread-betting services, although not in Trading 212's case.)
These companies sometimes freeze positions for short periods to manage volatility, as Trading 212 did with bitcoin cash on Sunday. In such situations, there is little clients can do if the broker prevents them from adjusting their positions in the market.
The goings on at Trading 212, then, perhaps represent a collision of worlds, where crypto traders meet old-school middlemen.
"In crypto, I exit with my bitcoin profits immediately. Never leave your winning chips on the table for the dealer to see,” said Clem Chambers, chief executive of company stock analysis site ADVFN.com.
Trading 212, however, is relatively new to the CFD broking game, launching its share-dealing and crypto service in June this year. Nevertheless, it has succeeded in attracting many young investors and traders. Its addition of eight cryptocurrency markets has helped it to expand.
Still, many investors may have been prone to act emotionally, perhaps either not understanding, or being wilfully unaware, of the terms of the investments in which they had entered. It may be that the company concluded the Cardiff-based traders were "trading in concert" given that they knew each other, although the company has so far brought forward no evidence.
Not used to the nature of the trading schemes that have sprouted up around the market, many were surprised, then, at the measures the company has taken.
Rickety markets
But Trading 212 isn't the only area of the crypto market to come under stress as a result of bitcoin cash's weekend ups and downs.
Bitcoin cash's price pullback happened at the same time as Korean exchange Bithumb began to have outages. In response, industry website CoinMarketCap stopped taking prices from the exchange, meaning 50 percent of trading volume worldwide wasn't shown in its charts.
Three thousand Korean customers of Bithumb have launched a class action lawsuit against the exchange claiming they suffered losses as a result of the two-hour outage.
Price swings of the magnitude seen in the bitcoin market on Sunday would possibly have triggered a trading suspension on stock exchanges, but this is crypto, where no such mechanisms exist. Having said that, the market is showing signs of maturing.
The introduction of bitcoin futures by derivatives market giant CME Group will go some way to bearing down on bitcoin volatility – although some incumbents in the futures markets worry that a crypto "virus" could jump the species barrier and initiate a pandemic in the "real economy." The outbreak of influenza at Trading 212 may be an early warning sign.
Regulators, it seems, are taking notice, though their main message is "buyer beware."
Following the incident, the Financial Conduct Authority (FCA) issued a statement on the risks of cryptocurrency CFDs. But Trading 212's customers are unlikely to find any consolation in its words.
While the FCA regulates CFD brokers, it warned:
"These protections will not compensate you for any losses from trading."
Since then, Trading 212 appears to be taking steps to ensure a similar situation doesn't repeat, announcing it was raising the deposit level required to trade on margin.