Understand Steem (the crypto-currency) and don’t get burned
For those who are completely new to crypto-currencies or just trading in general.
Today we saw the price of Steem jump 40%, which is great when it’s going up… but people panic when it’s going down.
If you have never traded it may be hard to understand why.
Steem is the crypto-currency that is designed to transfer value between Steam Dollars, Steem Power and regular currencies. So let’s face it, at one time or another you will have some Steem therefore it is worthwhile trying to understand it.
If you think you like a bit of RISK:
Understand the risks you are opening yourself up to.
The 40% rise we saw today was probably caused by one buyer. The amount of Steem that was purchased was only about 7 000 USD. Which is virtually nothing when it comes to markets, so how could 7 000 USD change the price by 40%?
The answer is very simple:
There isn’t much Steem available on the markets. Much of it is locked up in its long term form, Steem Power. Because there is so little available it is possible for relatively small purchases to raise the price significantly. The same is true for small sells, they can also drop the price rapidly in similar ways.
When this occurs with a currency or stock it is considered not very liquid.
WARNING:
This will make the Steem crypto-currency highly susceptible to market manipulations similar to what happens to penny stocks and other low liquidity crypto-currencies.
Two of the most popular scams are described below:
The Pump and Dump scheme:
- Miners amass, or traders buy large amounts of a thinly traded crypto-currency at low prices.
- Then the hype starts or they buy up rapidly causing the share prices to jump 10% to as much as 50%, maybe more.
- Naive investors see all the positive hyped up marketing news about the currency, and they see the recent trade activity and increasing price and volume. This makes many investors feel excited about the stock and many start to suffer from FOMO (fear of missing out).
- Such naïve traders then buy the currency hoping to rake in the profits.
- The huge buying activity of the thinly traded stock by traders causes the currency to skyrocket in price well above the already inflated prices. The share prices skyrocket because not enough sellers are available to meet present buy orders at current prices.
- Such huge new buying activity creates liquidity for the schemers to now sell shares at the inflated prices. The liquidity is created by the high trading volume (trade activity), increased buying activity and increased market cap.
- The law of supply and demand is alive and well in that many buyers are available to buy up shares that schemers are now dumping/selling to hopefully make a huge profit.
- The ascent in stock prices inevitably begins to slow and waver.
- At some point the schemers may dump the remaining currency they owned which temporarily or permanently causes the prices to plummet as low, or near as low, as the levels it was before the pump began.
- Those who bought in at inflated prices panic sell at huge losses or are left holding the bag.
The Dump and Pump:
The Dump and Pump is a similar scam to the Pump and Dump.
In this type scam, the schemer demotes, rather than promotes, a currency by spreading FUD (fear, uncertainty and doubt).
- They may also initiate selling to induce panic selling. The objective of this scheme is to drop the price substantially to enable the repurchase of positions at much lower prices and selling shortly thereafter when the price rebounds.
- Once again the novice trader not understanding what is going on is induced to panic and may suffer heavy losses
(Somewhat adapted for crypto-currencies from http://www.extraordinaryinvestor.com/penny-stock-scam.html)
If you decide to trade in Steem be aware of the volatility potential and these and other manipulations that are likely to occur. Don’t be suckered.
If you don’t like risk:
Then you need to convert your Steem to something else quickly:
Cash out by selling your Steem on an exchange (potentially losing out like selling you Apple or Microsoft shares early)
Power it up to Steem Power (this will lock it up as a long term investment into Steemit.com that will increase your voting power and earns more Steem Power over time)
Convert to Steem Dollars (these are pegged to the US Dollar as a protection against the above described volatility)
Pump/ dump OR Moon/ Doom such hype cycles are expected, and are common occurrences in every commodity/currency/equity that is traded... important thing is to hold on to your nerve and follow your gut feelings.
Don't get trapped, study the business model where you put your money in, then invest and forget...
Follow law of averages while investing:
Everything that goes up, must come down - Everything that goes down must come up..
To the Moon, Alice, to the moon!
Is there actually a way to do that?
I thought, by the lack of a mechanism to do it (that I can find), they could only be earned here on Steemit with post.
You will be able to trade Steem for Steem Dollars using the internal exchange, but only after July 4.
thanks
Ahh ty
Thank you for that info! <3
That's blocktrades, isn't it?
No the internal exchange is what you get when you open the menu on the upper right (three lines) and then choose "Currency Market". It is build directly into the blockchain and isn't run by any company.
Blocktrades also can exchange between STEEM and SBD (and many other coins) but it is a company, not built into the blockchain.
Interesting. I'm pretty excited about the possibility of the Bittrex support of using USD to get altcoins. could get some more steem that way. Would love to be able to delegate, but my problem is not having enough of it to do so; I'm up here for the community, not really for the money, but the issue ... Money is needed to supported the community, so it's a catch-22 either way.
Risk: Likelihood of total loss. ;-)
Glad that the work as been done prior to come up with 2 great contributions from Bitshares. Market Pegged Assets and STEEM POWER. Steemit is an idea who's time has come.
The Steem Dollar is a bit different from an MPA as its highly defined by seignorage and the price feed .. Lessons were taken from Seignorage Shares .. Something cooked up by Vitalik
I want to resteem this but can't seem to be do so..
I really like Steem. For someone fairly new to crypto it is great to see a coin with a real product behind it. who knows if there is some super computer attached to Golem? If Ripple is so widely used, why am I still paying huge SWIFT fees at work? WFT is STORJ and how does it make cloud storage free?
Just saying that we are all using STEEM everyday. I think it is only going up.
Also,
I'm not pumping it.
simply and easy to understand. Thx a lot
Nice analysis of how pump and dumps work.
I can't be the only one who read this and thought of something very nasty...
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Excellent post @gavvet ! Here are some posts to help you get more traction and exposure to your Steemit posts, startup, business or self:
[HOW TO] Public Relations Training For Startups, Steemers & Steemit: PART 1
[HOW TO] Public Relations Training For Startups, Steemers & Steemit: PART 2
[HOW TO] Public Relations Training For Startups, Steemers & Steemit: PART 3
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thanks for the links!
helpful, thxx
Do we really see FUD (Fear Uncertainty and Doubt) spreading in the dump and pump scenario? I've always felt these two scenarios where we just pump, dump, pump, dump are certainly interconnected with each other where panic selling drops the currency price more so than FUD.
Also, You mention that "Much of [STEEM] is locked up in its long term form, Steem Power". This does not mean much unless you can give quantifiable information. I am sure it is available, and numbers truly do speak for themselves. Where are the numbers?
This. Knowing how much is in steem power would be very helpful.