Whales and Bitcoin Price Suppression – Why it Matters

Whales and Bitcoin Price Suppression – Why it Matters

Bitcoin is often seen as being an investment vehicle, despite being treated like a currency. As more people buy in and out of the cryptocurrency, the value of it rises and falls. This may be due to news or findings related to the coin’s protocol, but it is often also attributed to whales that attempt to manipulate the market. This is important to understand because it means that the price isn’t always necessarily going to follow the true trend – great news coupled with a manipulative whale can still tank the prices. At the same time, bad news coupled with a whale could lead to increases.

Dead Bitcoin Whale 10-5-14

Dead Bitcoin Whale 10-5-14

How Whales Pump and Dump Prices

Running a successful pump-and-dump scheme can cost a lot. It requires a lot of capital as the goal is to manipulate the market by showing a lot more activity than there actually is. Essentially the process boils down to six different steps:

  1. Slowly build a position: this is when a whale will buy coins slowly so that they don’t artificially inflate the prices. The goal here is to obtain as many coins as possible for the least cost possible
  2. Price suppression: this is coupled with step 1, where the whale needs to keep prices down as they buy up more coins. Sometimes this will result in dumping coins in an effort to create a snowball effect (which can make others dump theirs, lowering the price further)
  3. Shakeout: this isn’t run by the investor, but others. Essentially this is the phase where others are exiting their position. This works in tandem with the price suppression mentioned above, in that it means there are even more coins available on the market
  4. Test pump: in this stage, an attempt to pump up prices is done, but very carefully. Rather than doing a full capital influx, only a portion is done. The goal is to see how easily the price jumps back to where it was
  5. Actual pump: in the actual pump, the market has shown its resilience already and it’s time to really push the bar. This is when the true capital influx happens, pushing the price as high as possible (with the community jumping on-board so they don’t miss the train as well)
  6. The exit: once the price has hit the desired amount, the exit is selling off the coins and taking the profit
    As you can see, the process is basically forcing prices to go lower in order to buy up as many coins as possible, then inflate them and dump before the market bounces back to where it should be. When done properly, this can result in massive gains, and it is seen quite often on various altcoins.

Understanding the Long-Term Effects

Pump-and-dumps can do one of two things to a coin: boost its floor value or crash the coin altogether. It’s too difficult in most cases to tell who is doing the pumping and dumping, and that often ends up being blamed on the coin’s creator. When this happens, it creates a distrust among the community towards the coin, with the assumption being that it was a scam to begin with. In these cases, coins can be completely destroyed.

The boosted floor value comes when a coin has already proven its worth and has community acceptance. If the holders feel that there was a reason for the price boost and that it may happen again, they are much more likely to help sustain the current prices (in the hopes that their investment will once again rise). And when this happens, it opens the doors for yet another pump-and-dump manipulation.

Why Long-Term Playing is Smart

If a market – like Bitcoin – is being manipulated by whales, that means the prices are going to go up and down over time. When the prices are low, that makes it the perfect fit for getting in before the next pump. When they are high, that’s when it is time to move out and re-buy later (after the dump occurs). The issue is that it’s not possible to know when this is going to be happening. For a lot of investors that feel Bitcoin is going to hit the $10k mark in a few years, they are buying and holding – irrelevant of the current market prices – in the hopes that this happens. That way they aren’t enticed (or manipulated) into selling their coins at a loss.

The long-term play is the smartest one, as Bitcoin has still been seeing an uphill trend in terms of adoption and usability. It’s safe to assume that the prices are more due to market manipulation than anything at this point, attempting to hold them down while some of the bigger whales are buying up as many as they can without having too much of an upward increase in the market. A huge sign of this can be seen in the 10/05/2014 “bear whale” dump, where almost 40k BTC were dropped on the market at 30-40% off the current market value. While it’s possible that someone was just attempting to cash out their coins, it is speculated that they were actually trying to lower down the price to gain more (by setting up huge sell walls, it gives the impression that a lot of people are trying to exit), but that their attempt failed.

Conclusion

Market manipulation is going to keep happening until there is enough money in Bitcoin to sustain itself. With a market cap of only 7-8 billion USD, there are many investors that could buy these off all on their own. And that doesn’t include investment firms with trillions of dollars. As time goes on and the market cap increases, however, it will become harder and harder to manipulate the markets – up until it is deemed nearly impossible. Until then, it is a good idea to play it safe and watch the news, rather than the price.

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One Comment

  1. Napoleon Butic says:

    I agree with a lot of what you are saying with respect to the mechanics of a pump and dump. However, in a typical pump and dump, the dump usually occurs at the highs after the conspirators have created hype that creates enough volume for them to sell into.

    Given that this occurred at the lows of the chart, at a major support level of 300, I would contend that this is capitulation at the lows. In other words, it’s probably a panic sell off by a large investor or group of investors that just wanted out.

    When we have capitulation volume at major support levels after an extended decline in the stock market, it is a major indicator of a change in trend or at the very least a sign of a temporary low.

    The argument I’ve been making is that the US dollar has been very strong this year and has been smacking all the regular currencies lately, so an upstart currency like BitCoin is going to suffer just like the Yen, Euro, Pound, Peso, etc.

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