If you have ever bought or sold cryptocurrencies through a mobile wallet app or an cryptocurrency exchange website, you can consider yourself a part of the rapidly growing cryptocurrency retail market.
Different from traditional foreign exchange, retail market in cryptocurrencies formed way before there were any institutional platforms, brokerages or funds. It is a true grassroots movement created from the bottom up.
Fast forward to 2018, the big players are taking take control of the markets and things are starting to become complicated for the #hodl crowd. Here’s the 6 things that are broken in cryptocurrency trading today.
Fake News
Let’s start with the most obvious one — fake news. Cryptocurrency market today is dominated by fake news stories which find their way to the unsuspecting mainstream media. Their editors cherry pick these stories directly from websites like Reddit and without any fact checking plop them onto their front pages for the whole world to see.
What’s even more disturbing is that once the stories turn out to be untrue, no retractions are made and no action is taken to make sure a fake story will not be published again without proper fact checking.
Mainstream audience has no ability to fact check cryptocurrency news, there are no known, established and reliable sources of information, so they trust their mainstream media to do the fact checking for them.
As a result people will not know when they are being duped and the media can simply get away with it without sacrificing face. It might also be due to the fact that in post-truth world we don’t need to apologize for anything anymore (thanks Donald!).
Furthermore, mainstream media’s inability to grasp the complexities of blockchain technology, and peculiarities and use cases of each cryptocurrency sometimes leads to massive and reckless misreporting.
Solution — fact check the news before sharing them!
Pump and Dump
The promise of quick money works like a giant magnet sucking in thousands of first time cryptocurrency investors into Pump and Dump chat rooms on Telegram app.
Pump and Dump campaigns are designed to increase the price of a low volume cryptocurrencies and tokens in a matter of seconds and to create “buy” positions at certain price points which then the organizer of the Pump and Dump will use to exit their position, leaving everyone else with a few worthless coins.
Typical pump & dump
There are literally thousands of people being duped by Pump and Dump groups every day.
On some exchanges (looking at you HitBTC) one can see Pump and Dump participants flooding hundreds of messages into the public chat rooms on command expecting to influence fellow traders to buy or sell a certain asset.
Cryptocurrency exchanges are able to counter the Pump and Dump campaigns by enabling circuit breakers similar to the ones already existing on stock exchanges around the world. A circuit breaker puts a temporary hold on trading in case an asset’s price moves up or down significantly in a short period of time hence reducing the effectiveness of price manipulation actions.
Price Manipulation
Another form of price manipulation is “buy walls” and “sell walls” done by a handful of individuals with massive holdings, simply known as “whales”. If you heard that cryptocurrency markets are volatile — this is the number one reason why.
A “buy wall” on Poloniex exchange
Don’t get me wrong, I have nothing against whales in general. They are beautiful and majestic animals living in the depths of the ocean. However I would like to Moby Dick the hell out of these “crypto whales” for the damage they are doing to the cryptocurrency ecosystem and unsuspecting investors.
When an inexperienced investor sees a “buy wall”, they interpret it as a positive price signal.
The flawed logic goes something like this: if someone opened a “buy” position worth a few million dollars the price will go up — I must get in now. Since the same price position is taken by a whale the investor will enter at a higher rate.
A large market position effectively creates pressure for smaller investors to enter the market at certain price range. If enough of these traders do the same it will actually result in a price movement and allow to effectively manipulate the market price without spending a single cent.
As soon as the price moves in the right direction the whale will re-locate their position in order to narrow down the range once again. If the market changes direction these walls will suddenly disappear often leaving the asset price in free fall.
Exchanges could do much more to prevent price manipulation actions by these wealthy few, by introducing fees or limits on moving large market positions.
Forex and Binary
As a former Forex and Binary Options industry insider, I am appalled to see that companies like eToro, SimpleFX, IQoption and FXPro (and many others, please don’t feel special) are now offering “Cryptocurrency Trading” option.
Thousands of unsuspecting investors are sucked into these platforms by fancy YouTube advertisements promoting “get rich quick” lifestyle, where they place 40x leveraged positions on a volatile derivative on top of Bitcoin, and loose all their money in minutes only to find out post factum that by investing there they actually did not buy any assets and their trade never reached the market.
“Aaaaand it’s gone… Next!”.
To my surprise, during numerous discussions and interviews with “professional” forex traders, almost none understood that Forex brokerages do not make actual trades on the open market but rather take on your trades as a counterparty (you vs them). The game is rigged just a tiny bit through a combination of leverage, bonuses and spreads for majority of traders to consistently loose money or being locked out from withdrawing their profits, yet brokerages are not required to disclose this to their customers.
“But it’s regulated! They have a license! That makes it legit!” — Oh does it now?
All the regulator requires is to copy-paste the same “you may loose all your money” disclaimer in a few places around your website, and collect your customer’s identity documents to comply with Know Your Customer (KYC) and Anti Money Laundering (AML) rules. After that you are free to leverage the s**t out of them.
During our short and colorful chapter of modern history many things were considered legal but were in fact completely unfair to the receiving end — slavery, segregation, woman’s rights. I consider the current Retail Forex industry to be one of those things that we will eventually look back on with disgust.
Don’t use platforms where you cannot actually acquire and withdraw your cryptocurrency — otherwise you are trading “promises”, and promises are worthless.
Scam & Ponzi Schemes
There is one simple rule to find out if anything is a scam: it will offer a guarantee of profit.
Currently there are hundreds of tokens, investment platforms, mining operations and coins offering guaranteed % returns. These will generally end up being outright scam (you wake up one day, the website is gone and so is your money) or a ponzi scheme, in which case you will initially receive part of your investment back (see it’s working!!!) in order to lure you in to invest more and then … poof, gone.
Guaranteed profit is right there next to unicorns. It’s bait. No one can predict where cryptocurrency markets will go next, so be careful of anything that says otherwise.
HODL
I’m a big fan of the idea that all you need to do is to buy and hold your cryptocurrency (aka HODL) and you will eventually make money due to the fact that price increases overtime anyway with adoption.
However if everyone just takes their money out of exchanges and into offline wallets, it leaves the whales, scammers and price manipulators in total control of the market.
I recently saw a top 30 cryptocurrency with a few billion dollar market cap being manipulated on Poloniex with a mere 70 thousand dollar “sell wall” while their community on reddit was scrambling to find explanation for the tanking price and sharing links to rumor based stories “I think that must be the reason why it’s going down”.
No — the reason is that by HODLing you have absolutely no control of the price. You must participate.
I believe that cryptocurrencies need to take some direct control of the price action on the exchanges, and to responsibly counter the negative effects of price manipulation until the proper checks are in place.
Thanks for reading!