Investment Analyst @ SenseTime. Founder of Worthyt. MIT Sloan 2020.
Disclaimer: this article is an opinion piece from recent experiences that is intended for education only. It does not serve as investment advice or suggestion for any type of investment. Investing in cryptocurrency is a very high-risk activity; if you intend to do so, it is at your own risk. Among other reasons, this practice is high-risk because it assumes that 1) the price will bounce back and 2) you have bought in at a price lower than the bounce-back price. This is not guaranteed in the cryptocurrency marketplace, and it is wrong to assume it will always happen.
The cryptocurrency market is more sensitive to news than traditional markets. If a good piece of news is broadcast to the market, the price of a coin can skyrocket immediately; on the other hand, bad news can negatively impact a coin’s price. In many cases, though, both scenarios historically have gone through a correction period after the massive price shift, and in this article we study possible strategies that can take advantage of the swings and corrections to make profit. I’ve mentioned in the disclaimer and I’ll reiterate: this is all based on opinion from my recent experience with short-term trades on Waltonchain. This piece is written for educational purposes and should not be taken as investment advice.
Because of the two recent incidents at Waltonchain, I will be using it as a case study for the strategy. That being said, I am not endorsing or dismissing the coin from a product or financial perspective — I have no concrete opinion on the coin at this moment, and don’t really care to share it anyway. I’m only using it as the case study because of the proximity of those incidents as it relates to time. Both incidents are different examples of news and are followed by a period of correction, so they are great examples to clearly identify. You can view the price interactively on CoinLib: https://coinlib.io/coin/WTC/Waltonchain
Figure 1 (above) is the reference illustration that I will be citing from for the remainder of this article. Incident 1 (the red 1) refers to the Gamed Contest, and Incident 2 (the red 2) refers to the Partnership Rumors. Summaries of the incidents and profit strategies I used for both are detailed in the sections below. The green area is what I refer to as the correction zone. Usually, this happens in the event of a heavy pump or dip in prices. In those cases, the price swings heavily on one side or the other, and the wave eventually settles in a sweet spot. While it’s obvious that one can profit from the heavy pump swing, the correction zone is another point that can be leveraged.
This is an example of bad news impacted the market nearly instantly. On February 28, 2018, Waltonchain published a Tweet that ended a contest it was hosting for its community members. Buried within the plethora of responses was a happy winner. That winner was Waltonchain.
Supposedly, someone on the team won the contest, but did not sign out of the official Waltonchain Twitter account before posting the response. The community didn’t believe this excuse, and blamed Waltonchain for intentionally creating a fake winner and then messing up on the announcement. The price dropped from around $22 to $17.
At face value, the price crash could seem detrimental to any current Waltonchain holder, and might’ve been a red flag for anyone who had intentions on purchasing Waltonchain tokens. The reality, though, was that it created a great buy opportunity.
As mentioned before, news and events can cause heavy swings on price for any cryptocurrency, because the speculative market is sensitive to consumer sentiment. But one thing to consider is the impact of the event/news in the grand scheme of things:
In relation to everything going on with Waltonchain, would a silly contest on Valentine’s Day really be its demise?
If I believed that the answer to that question was yes, then I wouldn’t have made any purchase after the crash because it would become worthless. But because I believed it wasn’t a big deal, instead of avoiding Waltonchain like the plague, I saw the crash and embarrassing event as an opportunity to make some quick profit once the market price corrected itself and moved on from the event. It wouldn’t take long; after all, in the cryptocurrency space, breaking news occurs almost by the minute! Within 24 hours, I saw recovery of the price and sold my holdings for a profit.
This is an example of rumored news — rumors are commonly spread as truth in the cryptocurrency space. The rumors did not come from any official announcement made by Waltonchain; instead, it came from an unofficial Twitter account (usually, unofficial pre-announcements/rumors are the first red flag of an impending price disaster).
On March 5th, 2018, a picture of a handshake was posted on Twitter that circulated quickly into a rumor of a partnership between Waltonchain and Alibaba, one of the largest companies in China. The price shot up from around $19 to $26 by mid-day less than 48 hours later. After the rumors were dismissed, the price plummeted to below $14.
In this scenario, the situation was slightly different because the rumored news was actually positive, rather than embarrassing. But it was unsubstantiated.
Despite the fact that it didn’t come from a source, speculation drove prices up immediately from around $19 to $26. This sudden bull run lasted for almost 48 hours. But as with most sudden increases in cryptocurrency prices, if I didn’t hold the coin prior, I would not be buying in. I wouldn’t think about buying a ticket for a bus that you intend to jump on at 120 miles per hour. Other people, who held the coin before the pump, will eventually start selling for profit, which leads to the other end of the pendulum, a potentially devastating dump.
Unfortunately for Waltonchain, the dump that followed was a combination of both holders profiting and the fact that the unsubstantiated news was debunked. In this entire 48 hour span, Waltonchain had little control over the price of its coin because it was driven by factors that were influenced by the community and group mentality, not by facts or official events.
The crash dipped the coin to $13.85, which was significantly lower (by around 27%) than before the rumors started spreading. At this point, I asked a similar question about the event and whether it had long-term implications to Waltonchain. Yes, buyers that bought during the skyrocketing prices were severely burned, but this was not due to a manipulative incident directly caused by the Waltonchain team in an attempt to pump its price; instead, it was an unofficially published rumor that spread like wildfire. People that got burned got burned by the rumor, not by any suspicious activity from the actual team.
With that thought process in mind, I bought the dip again because I believed the price would correct once the event became old news. Just like in the previous incident, the correction happened within a short period of time (less than 48 hours) and the dip could be profitable if I had bought at the lowest point. Unfortunately, I didn’t buy at the lowest point this time, so I only broke even. Like I said, it’s a very risky move — I’ve heard that trying to sell at the tip of a high or buy at the tip of a low is like catching falling knives. I believe it — I consider myself lucky to have even broken even.
A separate strategy to think about in the event that I did buy during the bull run or didn’t have the opportunity to sell at that point: by buying more on the dip, I would have lowered my average entry on the coin, which means that I would need less of a price increase (compared to before) to profit from a sale. For example, if I had $500 of WTC at $20, and then bought $500 more at $14, my previous average buy price was $20 but afterwards it would be $17.
The simplest answer is: no one knows. If you’ve read my previous article on Technical Analysis (TA), you’ll know that analysts use TA as a strategy for predicting possible prices based on past information. But past information is not applicable to future effects — you’ve just seem how much effect two incidents can have on the price of a cryptocurrency like Waltonchain.
From a TA perspective (take a look at my article on TA if you want to learn more), Waltonchain is currently fighting a strong historical trend that turned over from resistance to support right before mid-January (which is also when the cryptocurrency market made its very aggressive bull run). If it cannot break out of this range again, it may possibly drop down to previous support at $10. That being said, I am not a professional technical analyst, and this is just my personal opinion, don’t take it as professional advice. So while no one knows, I know even less.
While I used Waltonchain as an example due to its recent incidents, the fact of the matter is, this type of correlation between news and price sensitivity is pervasive across the cryptocurrency market. For example, the recent unofficial rumors about Ripple being added to Coinbase resulted in a similar debunking fiasco as Waltonchain’s Incident 2:
Unfortunately, speculative, unofficial rumors, whether on purpose or in good faith, will have unintended or intended consequences on cryptocurrency prices in the future. I don’t like that this happens because it can burn buyers, but it exists. I suggest that when you see an unofficial rumor in the future, speak up about it in the community. Maybe even link to this article. Because as a community, we want to make sure that newer, less-informed investors do not get burned.
Overall, though, I hope that this article made a strong argument that profit opportunities are in all the nooks and crannies of the cryptocurrency market. At cursory glance, situations like price drops can seem like intimidating, scary events that result in losses, but the reality is, they can be opportunities to earn profit. The trade-off, though, is that it is a very risky endeavor, and not to be attempted by anyone who doesn’t have a high risk tolerance.
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