What is the Mindset of the Whales?

Throughout investing we like to believe in the “invisible hand” and that markets operate fairly. In the cryptocurrency market, this concept is a myth.

Whales and insiders manipulate various exotic coins for the purpose of their own gains. The patterns that can be seen usually occur in the form of pump and dump cycles. For instance, Dogecoin was infamously pumped and dumped four times by an anonymous trader known as Wolong. He recorded his whale-like strategy in a pdf file entitled ‘god’. Throughout the article, he describes, “Whales, they are ruthless, swift, cunning, very very patient and most importantly, they do not obey the rules of the game.”

In cryptocurrency markets, retail investors want a reason to believe in a coin and typically whales will select a time to jack up the price as a result of positive news. Human psychology needs to believe the “invisible hand” is what motivates the market through beneficial competition. But too often in the cryptocurrency market we see such obvious cases of price manipulation. Not only in Dogecoin but in many others as well.

Although many predictions regarding the future of bitcoin have been incorrect, there has been one which has presented impeccable veracity. On December 9th, 2017 an article was published titled, ‘Will the Futures Market do to Bitcoin what it did to Gold?’ Now that 6-7 months have passed, it is clear that this article successfully predicted the first five months of the 2018 bitcoin bear market.

The article begins by comparing the effects of gold prices after gold futures were launched on December 31st, 1974. During the early 1970s, gold prices reached at an all-time high due to the anticipation of gold futures being launched. The futures launch allowed pessimistic investors to hedge their bets against their existing long positions. This collective pessimism created a gold bear market that would not reach its all-time high for another 2-3 years. ‘This same argument was proposed by the Federal Reserve Bank in San Francisco in a paper titled, “How Futures Trading Changed Bitcoin Prices.”

“The rapid run-up and subsequent fall in the price after the introduction of futures does not appear to be a coincidence, rather, it is consistent with trading behavior that typically accompanies the introduction of futures markets for an asset.”

It is interesting to note that bitcoin was at an all-time high the day before launching bitcoin futures. The article also goes on to compare the graph of the 1974 gold futures launch as well as the bitcoin CME futures launch on December 17th. After the initial launch of gold futures, the price declined with nearly a 50% drop over the next 2 years. As we know, bitcoin’s 2018 price has followed this decline almost exactly. Its radical decline of late has been substantial.

Considering the cryptocurrency market moves much faster than traditional markets, the graph is slowed down by 4.3x speed and shrunk by a factor of 60. This is what the graph came to look like:

The effects of futures on gold and bitcoin have a remarkable resemblance.

The gold market took about 2 years to recover before it eventually rebounded 10x over the course of the next two market cycles. This 2 year period is equal to about 4.5 months in the crypto market. It is interesting to note that many of the so-called experts have recently predicted the crypto bear market to end around the summer of 2018. So far we have not seen an end to the bear market, however promising developments such as Coinbase Custody did manage to break bitcoin into the $6600 region.

But as a market, human psychology loves a reasonable explanation for price rises to occur. Nevertheless, one must wonder if the whale analysts are all looking at the same charts. Especially now when we are hearing the 50-60k predictions which are awfully similar to the trends which happened in gold.

Typically a market requires positive news to bring belief and optimistic sentiment to a market and as of now, aside from Coinbase Custody, there needs to be a significant breakthrough to resurrect bitcoin out of the bear market. This breakthrough could occur as a result of the implementation of the lightning network, atomic swaps, and other upcoming developments. Unfortunately, these developments are still most likely 14-18 months away.

Sources for additional related content:

https://www.newsbtc.com/2018/07/03/economist-bitcoin-futures-killed-the-2017-bull-run/

https://medium.com/swlh/will-the-futures-market-do-to-bitcoin-what-it-did-to-gold-b7d35704641

https://cryptofrenzy.files.wordpress.com/2014/02/god.pdf

Disclaimer: This is not financial advice. Please do your own research and make objective decisions. This article is intended to educate readers about bitcoin futures’ relation to the crypto bear market. The author of the article owns cryptocurrency.