Welcome to the real wild-west of cryptos

We’ve all seen the ‘regular’ volatility of cryptocurrencies. It’s not uncommon to hear about a coin trading at +30% up from the day before, only to be down 50% tomorrow. The volatility doesn’t really bother me too much – it’s more the flash crashes and lack of regulation that concerns me. I don’t want to rehash what I wrote earlier this month about cryptos because my position still stands, but none of what I researched prepared me for what I found late last week.

Firstly, I do want to add something that I think I left off my original article(it’s important, please bear with me) and then I’ll share what had me laughing for hours on Friday. You won’t believe what I stumbled across.

The important thing first

Previously, I wrote that the smart money was taking notice of cryptos, in spite of what the naysayers were naysaying. In proof of this point, I am now able to trade an ETN called “Bitcoin Tracker One | COINXBT” on the Nasdaq Nordic (Stockholm) exchange, regulated by the Swedish FSA. This is no fly-by-night product on some 3-week old website run by some scammers out of their garage. This is a serious investment vehicle, available now to serious investors who want to invest in a serious asset class.

So what, you might be asking?

Well, cryptos have something amazing going for them (something I failed to mention last time).

They are uncorrelated.

If you’re managing a billion dollar portfolio, one of your biggest challenges in managing your clients’ funds is to find and buy assets that don’t move in a similar fashion.

For example, the Swissy (USDCHF) is heavily correlated to gold (XAUUSD). When the gold price goes up, the USDCHF goes down (the CHF part appreciates). This is because the value of the Swiss Franc is based partially on Switzerland’s vast gold reserves and thus the value of the Swissy appreciates as the gold price does the same.

There are many other correlations in markets, here are just two:

  • Specific indices move in an inverse relationship to the related countries’ currency vs. other pairs. For example, the Brexit vote caused a sell-off in the GBP. To compensate, equities based in the UK rose in price (thus keeping their overall value more or less constant). This one is tough to understand, but I’ll happily break it down in another article if there is interest.
  • When everyone is feeling nervous about world events (North Korea firing missiles, of late), investors rush to sell stocks and buy the Yen, and Gold. I’m not going to go into reasons for this, but again, maybe we can look at it at a later time.
    The point is that events that influence prices have a wide effect across all markets, influencing almost all asset classes to some point. This makes investing large sums of money really tough because if everything is connected, you haven’t really invested in a whole bunch of different things, have you?

Cryptos are different.
The price of Bitcoin, so far, has almost nothing to do with anything else that is going on in the world.

Isn’t that incredible?

So when major players in the market start holding cryptos are part of their portfolios, don’t be surprised.

Wild, wild-west

A good friend and fellow trader showed me something last week that blew my mind.

Have you ever heard of “front-running”? Front-running is an illegal practice whereby a professional trader puts his own little order in, just before he puts his client’s huge order into the market. The result is that he personally gets in at a great price (better than his client) and the sheer volume of his client’s order pushes his little position nicely into profit. His client’s position suffers as a result of his own greed.

Well, the Crypto Cowboys have taken this to a whole new level. And remember, there are no regulations here stopping them.

Let me explain.

Some rather smart, rather devious individuals have setup free-to-access groups that pump and dump crypto markets. The method is simple:

  1. Create an open to all online chat group. I’m not going to show you where to find them, sorry.
  2. Get as many members on it as possible. The groups I have found have between 3000-5000 members.
  3. At a pre-arranged time (there are even countdown clocks) the group admin releases the name of a crypto currency. At that time, everyone in the group starts buying. Because of all the demand, price rises rapidly.
  4. Other suckers who are not part of the pump and dump (and who don’t realise how the game is played until it’s too late) see prices rising fast. They quickly start buying, thinking that price is going to put in a huge day. These are the Fear Of Missing Out Suckers who are hoping for a huge win.
  5. While the FOMO suckers are buying, the pump and dumpers are moving over the dump part of their show. They are selling back their positions to the FOMO buyers. The result is that the FOMO buyers aren’t buying into strength – they are buying into a top, and most often, price crashes quickly as a result.

Let me show you how this looks on a chart (this is from a real pump and dump folks)

That’s a 5-minute chart showing the pump of altcoin, FoldingCoin (FLDC).

Incredible.

I’ve watched 10 or 15 pumps to date and they never seem to disappoint, rocketing prices up often between 30%-150%.

Here is the dump part of the chart above:

Do you see how price comes tumbling down, as the weak-handed FOMO buyers realise they’ve been duped?

You probably think I am writing this piece to stop you from becoming another unlucky FOMO buyer.

I’m not doing that.
I’m here to warn you that everyone playing this game is a sucker, even those doing the pumping. Especially those doing the pumping.

Let me explain.

Actually, here are the rules directly from one of the pump and dump groups. This might give it away:

Do you really think that the group admins are waiting to place their buy orders at the same time as everyone else? Get serious. The group admins need you to get buying aggressively and blast price up in the pump because they’ve already bought much lower down. As you can see from the copy above, they even advise you to buy 20% higher than the current price. Why do you think this is? I know there is a reason posted, but let me tell you the real reason: It’s so that the group admins can sell their altcoin to you, the pump and dump sucker at 20% higher prices.

So the question is, do the pump and dump suckers ever make any money? Sometimes, yes. Quite often, by the time the coin is announced and the admins start selling (telling everyone else to buy), its very obvious from the price chart that the pump and dumpers are left holding losing positions, or close back to where they started.

So, the crypto pump and dump scheme has just two participants. They are the group admins and suckers. Some of the suckers think they are on the inside. That would be an incorrect assumption. Don’t become a sucker, inside or out.

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