We interrupt our normal programming this week. The Blockchain related headlines in the past week have been screaming market doom/gloom. Our focus at Daily Fintech is digging below the headlines to get actionable insights. So this week we chose one theme that is illustrated by three stories.
The theme this week is market manipulation as institutions enter the market. The actionable insight is how to trade cryptocurrencies when the big dogs (Institutional Traders) move in. Our simple advice is in that headline – focus on what Institutions do, not what they say.
Last week’s cryptocurrency market action has rammed through one big message. The cryptocurrency markets are purpose-built for manipulation for four reasons:
- 1. They are unregulated. The sight of anarcho-capitalist crypto traders shouting “we wuz robbed, where are the cops?” is delicious for irony aficionados. These markets may become more regulated in future, but for now they are like the Wolf Of Wall Street on LSD.
- 2. These are small thinly traded markets. The Hunt Brothers cornered the Silver market in the 1970s (watch this for a history lesson in market manipulation). Try finding a market today that is big enough to deploy some real capital and small enough to manipulate. How about BTC/USD or ETH/USD?
- 3. Media is easier than ever to manipulate. The crash in ad revenue means that many of “the people formerly known as journalists” are overworked and underpaid. It is even easier than normal to feed them a story that drives the market.
- 4. Technical Analyst media gurus are also easy to manipulate. This will annoy the TA crowd. They like to claim science, not like those dumb media guys. In practice the science is based almost entirely on market belief that the science is real; it is faith based, not science based. If enough traders believe that a specific price point signals buy or sell according to some TA formula then it will be true; so although it is faith based not science based it can be a profitable trading strategy. However the best traders use their understanding of faith based trading to clean up using a technique known as “reflexivity”. “Reflexivity is the theory that a two-way feedback loop exists in which investors’ perceptions affect that environment, which in turn changes investor perceptions.“ This is what legendary trader George Soros used to break the Bank Of England on 1992. Now that many TA guys have become media gurus with YouTube and Twitter followers, they become easier to manipulate. From the Market Manipulator’s Handbook – “drop the hammer when the price hits a point that lots of TA gurus say is significant”.
Goldman Sachs was at the centre of this big theme this week with one story in the headlines and one more below the radar.
The first story, scooped by Business Insider and picked up by most media venues was that Goldman Sachs was dropping its plans for bitcoin trading. Many see this as the catalyst for the market crash. The crash was based on a belief in how smart the Goldman Sachs traders are. If Goldman Sachs no longer like Bitcoin, it must be time to sell. I share that belief in the smarts of the Goldman Sachs trading desk . Which means that I believe that they issue PR for a reason, not just because they like feeding journalists.
In a twist to the story that falls into the truth is stranger than fiction category, Goldman Sachs then issued a statement that the story about them dropping bitcoin trading was fake news.
So, I don’t buy the implied thought that Goldman Sachs no longer like Bitcoin. The second story, which broke a few weeks ago (so it is boring to the news cycle) is based on focussing on what Institutions do, not what they say.
The second story, a bit more below the radar from a few weeks ago, was about Goldman Sachs getting into Bitcoin Custody. This was like many more stories about Institutions quietly investing in the Blockchain cryptocurrency business, by hiring key people or launching services such as exchanges and custody.
Pay more attention to the second type of story. Focus on what Institutions do, more than what they say. When you see both clearly you have some actionable insight.
The third story gave data to back up the savvy trader’s intuition that these are manipulated markets. This was some seriously good reporting by CCN. Quoting from that article: “news spread that Goldman Sachs was sidelining plans of opening its cryptocurrency trading desk, a report coinciding with a market that took a sharp downward turn. The other day, market analysts saw someone take a 10,000 BTC short position while overall market sentiment has been positive.
Top analysts have been questioning why someone would take a $74,000,000 short position so quickly. It didn’t make sense unless he knew something that they didn’t. Only a few days after he started shorting there is some bearish news that comes out.
Others speculate that it could have been someone at Goldman Sachs themselves who took a $74m short position, waited 2 days, then announced they’re pulling out of Crypto.
These speculations have been just that, speculation. But with new AI technology keeping a watchful eye on the cryptocurrency market, there is evidence that points to a deliberate market manipulation, though by whom is still up for debate. And CCN just got the scoop, directly from the data source.”
This was great reporting by CCN, based on some work by “data scientists and market analysts from the RoninAI team, an AI-based crypto signals platform”. I doubt that regulators are smart enough to track all the shenanigans in a market; show me a market where that is true. I am confident that the availability of data such as this will make traders a lot smarter and markets have a great self correcting capability. If you spot something like this and have a good way to monetise your signals, you will make money trading, and market manipulation will over time become less profitable. For example, short traders doing forensic accounting, have a bigger impact than the regulators on fraudulent accounting.
There are four possible game plans for traders who are not employed by Institutions:
- 1. HODL like Buffet. I know, Buffet thinks Bitcoin is bunk. But he (or his successor at Berkshire) is making moves that were unthinkable before – like investing in a private VC backed startup in India (Paytm), so who knows? If Mr. Buffet did change his mind on Bitcoin he would buy and hold (or hodl in crypto speak), not trade. Sure, BTC/USD crashed to c $6,500, but in Jan 2017 it was below $1,000 – dang only a 6.5x return over 18 months!
- 2. Find a crypto that is thinly traded enough for the capital that you have, where you can be the market manipulator. Go down the CoinMarketCap list till you find one that is small enough to manipulate with the capital you have to deploy. Do this until the regulators change the game.
- 3. Front run the smartest guys in the room. Good luck with that. Finding a cure for cancer or running a 3 minute mile might be easier.
- 4. HODL plus big wave riding. if you bought BTC/USD for sub $1,000 in Jan 2017, holding it in Sept 2017 for $6,500 is OK, but getting out at $13,000 during the crazy run up in late 2017 (not even near the top) and getting back in at $6,500 is better. It is not buy & hold. Nor is it day trading. It is a hybrid of these two extreme opposites.
Bernard Lunn is the CEO of Daily Fintech and author of The Blockchain Economy. He provides advisory services to companies involved with Fintech (reach out to julia at daily fintech dot com to discuss his services).