Crypto market oddities— whales, pumps, and ICOs

Those who have been trading in the crypto markets have probably noticed that there is something strange about them. Why do some coins randomly explode in value, then plummet back down in seconds? Why do some coins get stuck at a certain price for weeks? Why is the bid-ask spread 50% of the coin’s price?

All of these questions can be answered by the lack of regulation in these markets, and are a result of what people are allowed to do because of it. I want to cover three main topics: whales, pump & dumps, and ICOs. Note that I do not condone any immoral or illegal behavior here; I just want to make people aware of what is already going on.

Whales

As the name implies, whales are people who hold large amounts of a certain coin. These people are usually those who bought in early and obtained large amounts at a cheap price. Being in possession of a large amount of a token gives you a lot of power in manipulating the price of said token. This is usually exercised in the form of buy and sell walls. Walls appear in the order book of an exchange, and are large orders at a certain price that bound the market price of the token below or above a certain level. In normal markets, this would be considered manipulation, and most people do not have the quantity required to manipulate anything of consequence. However, smaller coins in crypto markets have low enough volume that whales can actually control the price. For example, imagine a coin that trades 100 ETH worth per day, on average. A whale who accumulated 1,000 ETH worth of that coin could easily enact a sell wall at a certain price, forcing new sellers to either wait an indefinite amount of time to sell at the wall (or higher) price, or sell lower below the sell wall. This allows the whale to force the price beneath the sell wall price, similar to layering. Most coins have whales manipulating them, to varying degrees. Typically the higher the market cap of a coin, the lower the whale influence is. Note that sell walls are not necessarily indicative of manipulation, as these do occur naturally as well. An easy way to determine if a wall is artificial is to observe its behavior over time; a whale’s wall will most likely jump around as the price moves as the whale readjusts, whereas a naturally-occurring wall will either stay in one place or move slowly in bits as the price changes.

The depth chart for a coin with a sell wall

Pump & Dumps

A pump & dump scheme is another activity that would not be allowed in a regulated market, in which people coordinate to buy a certain coin together, rocket the price up, and then quickly sell off their coins at the higher price. These are typically ran in private discord or telegram groups. These are not especially dangerous, unless you happen to be buying exactly as a pump occurs. Ironically, the reason the coin stays liquid during pumps is that usually the slower members in the group end up buying the high-priced coins from the faster or earlier members. Oftentimes, after a coin is pumped, it will actually settle at a price higher than the original price, so if you own something that is being pumped & dumped, you are probably better off just holding onto it.

A typical graph for a coin that has been pumped & dumped

ICOs

Initial coin offerings (ICOs) are a fairly unique part of the crypto market, as they allow people to buy in to newly-formed coins. After a coin ICOs, it usually ends up somewhere like Etherdelta, rather than a larger exchange like Binance. Experienced investors like to invest in these, rather than larger coins, because these coins are usually very cheap initially and have the potential to 1000x in value, whereas a larger coin may be limited to a 10x gain due to relative market cap. However, most coins in a place like Etherdelta are relatively ignored, and have extremely low volume. Many of these coins will be worth very low amounts, and have order books so thin that a large buy order will completely clear through the sell orders. Generally, these coins are very illiquid, and may result in strange price behavior, such as when they oscillate between two very different prices (such as from 1 sat to 2 sat) depending on order book behavior. This makes them prime targets for manipulation, so be careful when buying such coins. Coins that have recently ICOd are relatively similar to penny stocks.

The Etherdelta interface

Conclusion

For these reasons, crypto markets allow for extreme volatility and rapid changes in coin market caps. However, experienced traders who understand these phenomena know how to respond appropriately and can avoid being hurt by them. Many of these things do occur in normal stock exchanges, except they are not illegal in crypto markets. The lack of regulation in these markets is something that is unlikely to change for a while, so if you intend to seriously trade in the crypto markets, it is essential that you become familiar with the behavior that drives them. Or, just buy and hold.

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