Whales, Bots, and Other Market Forces
Purpose
Just my thoughts about trading patterns I see, the reasons I think are behind them, and how I use this to my advantage when trading. Very shallow emphasis on trading technicals / charts (that may come in a later post).
Crypto is Different
There are a lot of obvious differences between cryptocurrencies and other tradeable assets. Just to name a few:
- No market opening / closing. Crypto never sleeps
- Globally accessible
- Relatively low barrier to entry - no brokers, extensive paperwork needed. Just a few minutes at a computer.
But these are not what I want to talk about today. Instead, I want to focus on how cryptocurrencies come about, and why this leads to some of the quirks we see when trading.
Value of a Crypto Coin
Bitcoin, the progenitor of all cryptocurrencies, had a fairly slow start compared to what we see nowadays. It traded for less than $20 for over two years in its early days. Now that there are many more eyes on cryptocurrency due to Bitcoin's success, relative upstarts like Ethereum have no problem growing orders of magnitudes in just a few short years.
Ok, they grow fast. So what?
It means that $1 in mid 2010, or 20 BTC, is now worth upwards of $50,000. Thus, cryptocurrencies have made more than a few lucky millionaires. These ultra-early miners and investors, people already rich and looking to make more, and organizations with massive buying power are known as whales, and they are a very relevant actor in today's trading.
Cryptocurrencies Sometimes Seem to be Linked?
There are many possible reasons why BTC, ETH, LTC, and the myriad of other coins have periods where they all move together in close percentage gains and losses. Some of these include:
Whales who may be intentionally manipulating the price.
There is some level of security in diversifying your holdings, and big whales likely have large stakes in more than just BTC or ETH alone. When 1 or 5 minute charts show massive market sells by whales, these are intentionally done to shake those with weak hands to panic sell so that the whale may buy up cheaper coins in the influx of lower limit orders. I've seen anywhere from 1% to 10% gains in just 5-minute periods. While risky, these are actually one of the time's where I make a lot of trades.
Ease of arbitrage.
Arbitrage is one version of this in which somebody makes a simultaneous buy and sell on two different exchanges. For instance, if the price of ETH was $300 on GDAX and $320 on Poloniex, you could sell on Polo while buying on GDAX and net $20 per ETH. There is a lot of talk about exchange arbitrage these days now that more Chinese exchanges like Huobi and OKCoin are listing Ethereum. *While it's easy to be set up on multiple exchanges to participate in arbitrage, actually making meaningful profits is very difficult and not something I'd recommend.
Open APIs and bots.
APIs, or application program interfaces, are the ways in which people can interact with a digital system or program. For instance, GDAX has several APIs that allow monitoring of prices, buying, selling, and more. Most, if not all, of these APIs are open-source and free for people to use and build on to create trading bots. Machine learning, complex algorithms, and teams of developers drive some of the best trading bots, but anybody who is decent at programming can make their own fairly easily. Even those who can't program can in theory download a trading bot. *good bots are not easy to come by, good scams are though
How it All Comes Together
Whales and others with large stakes in cryptocurrency can at least afford to have trading bots be developed for them, but it's clear than not all use them. How is this clear? Because we often see single market orders in the 5-15k ETH range (millions of dollars) that completely decimate or rocket the price during times of high volatility. When these massive movements occur, it's common to see them also happening across many different cryptocurrencies concurrently. This is due to the factors I mention above and how they effect the average trader who sees the market turning and making their buys/sells. The whales and bots game the market, traders exaggerate the changes.
So How do I use This to my Advantage?
Simply understanding what's going on in the market is a big step to having a more intuitive sense of where things are going. You need to be up to date on the news, recent announcements, and development of not only Ethereum or whatever coin your trading, but also any coin competing for market share. Unfortunately for us, that's hundreds of different cryptocurrencies! Fortunately, 99% of these are followers, not leaders. Keeping up with the top 5-10 and any direct competitors is more than enough to know when things are growing due to a big announcement or just whale activity.
When you're seeing massive, instantaneous changes in price on the 1 and 5 minute charts, there's likely a while swimming about on your exchange. A big tell is when the price shoots down by several percent after a period of slow, organic growth. How is this done? After a large sell, the limit orders for buys will be wiped out, and the difference between the lowest sell and highest buy will have a large difference. Bots will rapidly fill this gap with small amounts of coin in order to drive the price one way or another, but human traders are not so fast. Rather, when a large market sell indicates a change in direction of the market, many will also sell to get their profits. This drives the price lower, bots still filling in the gap with small-amount trades. The price eventually realizes that it's just a whale sell, not a market turn, and it finds support and starts to go up again. Now that the sell orders have a large buffer of small-volume amounts, people want to rapidly buy back in since they incorrectly sold off to a whale. Many will settle for a market order. This eats through the low volume buffer and hits the whales strategically placed sell wall at high price. Alternatively, the whale places several large sell orders to stamp out any upward momentum the price gets back. This induces panic selling and the whale simply waits and buys up the cheaper coins.
That's a lot of words, how about some visual aid?
Since I'm not doing technical analysis, I'll be using some screenshots from GDAX I took today while trading.
Here is a 1 hour candle chart from the last couple days. As you can see, there's a pretty nice pattern going on here that I used on the last hump from $230 to $216. Without using any statistical analysis tools at all, you can see that there is a period of growth where the candles generally have pretty short wicks. That means the price is moving in only one smooth direction without a lot of volatility. As the pattern repeats, the size of the large initial sells become larger and more pronounced, but the period remains about the same. This is partially due to the different markets that are trading during the part of the day. News of the Chinese exchanges adding ETH helped fuel the last hump, but predicting that there would be a 5-10% correction and when it would happen wasn't too much of a stretch.
This time, it worked out nicely. I had high confidence that the opening of the Chinese exchanges would not effect the price instantaneously like some people seemed to think. Without there being any other major factor, and seeing that ETH was growing without following a trend of BTC, LTC, or other big coins, I anticipated that whales would be taking profits here. It helped that the last ATH was passed as well, and I figured many who bought then and were upset would try to get out ASAP with only minor profits.
Lastly, I want to look at this 1 minute graph for a moment.
Here we can see a few things. At the time, I was looking for a sell at $234.89 since that looked like it would be around the peak judging by the 1 hour chart above (just missed it). I also saw that big sell wall and didn't want to get stuck behind it for very long since the price was starting to run up quickly and go into a big sell off. If that wall was broken, I would know that the bull rush was outpacing the whales and I would have changed my strategy and likely bought in quickly after.
You can see how the first large sell was bought up within 5 or 6 minutes and recovered nicely, so buyers were definitely in the market. Then you see the first big ramp and sell off. At the time, this looked like pretty unnatural growth (single large sells) so I was very confident that there was some whale manipulation going on. The final pump was approaching my 1 hour prediction, and even though I missed it, I quickly readjusted and sold big at $229.89.
The humps I'd been seeing on the 1 hour chart tend to bottom out near the peak of the previous, so I buckled up and waited for $218. I set some limits both above and below this amount, and sure enough about 2 hours later the pattern continued.
These trades helped increase my ETH stack by a little over 5%, which was the amount I was looking for given my predicted sell price and buy back. If, at any point, things deviated and my gains went past -2.5%, or 50% of my potential expected profit, I would've bought back in and eaten the loss (if the 1, 5, and 15 minute charts agreed).
Hopefully this post has been somewhat insightful to read through. Perhaps you took some info away about how cryptocurrencies are different due to their origins, whales, bots, or other market forces. If you liked this post and want to see more of my personal thoughts about trading and the approach I take, leave a like and let me know! If you think I'm a horrible trader and nobody should think twice about anything I've written, let 'em know in the comments! I'd be happy to learn from YOU too.
Fantastic post!!!
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