Who is the Competition?

Wolf of Wall Street
The Wolf of Wall Street.
A gazillion of people are active buying and selling in financial markets every moment all over the world. The cryptocurrency market is open 24/7 and can be accessed via the Internet from anywhere. You can buy or sell bitcoins from a smartphone in Yellowstone Park at midnight on New Years Day.

Who are these people that drive prices up or down? Sellers and buyers, bears and bulls? What do they do, and how are they doing it? Who do we compete with or against? Is there any cooperation in the market, or is there only competition?

Well, let’s start by saying that in the market, in a narrow sense of it, there is largely raw and nasty competition – buyers compete with other buyers, and so do sellers, respectively. There is one exception: when a deal goes through because a buyer and a seller agree. In the periphery of the market one might find cooperation as well as weighty investors and traders form implicit and explicit alliances based on their interests. Yes, they cooperate, but try to do so at the expense of those who are not part of their alliance.

So, how do you, the modest retail investor/trader, defend yourself from the deliberate and sometimes concerted buy and sell actions of individual and allied bullies? My answer is fourfold:

  • know yourself,
  • understand the scenery,
  • join a competend alliance,
  • employ time-tested strategies.

You may try to outsmart heavyweight players or market makers. Or, if you cannot beat them, just join them. Well, they may not let you join, but you can follow them – sort of shadow and trail them. There are strategies for that. All this reckoning is eventually reflected in what you must do: “employing strategies.” They have theirs, and we have ours!

Now, let’s see who the competition is.

Institutional Investors and Traders

whale
Bitcoin Whales?
It’s April 2018, and you can read all over the news that more and more financial institutions all over the world, including institutional investors and traders, are getting into the virtual currency act. However, it may not always be Bitcoin.

Even though, bankers like Jamie Dimon and other economic gurus have spoken out against cryptocurrencies this and last year – and it is no wonder. All things cryptocurrency are extremely disrupting to the established business models they support. On the other hand, their concerns are not necessarily unfounded as cryptocurrency and blockchain technologies are too new to have proven themselves extensively in the real world.

Nevertheless, a lot of that FUD (fear, uncertainty, and doubt) may be evoked intentionally by them in order to put their competitors at a disadvantage.

Institutional investors and traders harness a huge tool set (professional analysts and traders, analytical & trading software, etc.) to gain the advantage in the market to maintain and enhance their exploits. Obviously, there is no way to compete with them head on.

Whales
The term “whale” is frequently used to describe big money Bitcoin players that show their hand in the Bitcoin market. Early individual investors and traders who scooped up bitcoins by the thousands years ago when prices ranged in the tens or hundreds of dollars are commonly characterized as whales. However, over the last few years, another class of investor/trader quietly joined the fray.

These heavyweight players being referred to are groups such as hedge and investment funds. These high risk funds typically manage hundreds of thousands of bitcoins, which they strategically and covertly put through the exchanges via special arrangement – out of sight and obscured from regular retail traders. With their large capital mass, these speculators of bitcoins can move the market at will.

Eventually banks and pension funds might start buying and holding crypto asset long-term (as opposed to short-term as speculators might) and help reduce volatility. A nice uptrend in price might come about and newbies and beginners can “follow the trend, which is their friend.” I expect that to happen in the years to come.

Retail Investors and Traders

retail investor
Retail Investor.
A retail investor is an individual who purchases cryptocurrencies for his or her own personal account rather than for an organization. Retail investors typically trade in much smaller amounts than, say, the early whales who bought and might sell off 1,000 bitcoins at a time. Speculators such as hedge funds stagger and obscure their huge market entries by splitting large trades into hundreds or thousands of small orders and then drip these into the market over hours, days or weeks so as to corral but not to spook the “little fish.”

So, are fellow retail investors or traders your competition? Yes and no. Yes, because they do compete, and no because their competition is not that significant to the newbie and beginner. Unless you are a short-term trader or scalper, and thus not a newbie or beginner anymore, other “small fish in the ocean” are most likely your friends. “There is safety in numbers,” they say.

Speculators

It is so that the speculative and aggressive whales (private hedge funds, etc.) mentioned earlier game the market: they have access to non-populist news and facts to gauge wider market conditions, assess the retail sector’s “mood” and the willingness of market participants to go in a particular direction, and use the media to prep the public’s mood to their advantage, and employ trading tactics to achieve a greater return on their investment. They literally try to herd the bait – you and me and fellow retail investors – into a ball with their drip strategy.

But the scene is not just them (hedge funds) versus us (retail investors/traders), it is also much about them versus them, that is: one hedge fund is “battling” other hedge funds for the advantage. They are able to take speculative positions in derivatives such as options (CBOE, CME) and have the ability to short sell assets like Bitcoin. I do not know if anyone has figured out a way to detect their activities in the crypto market via price/volume indicators.

position trading
Do not hold forever.
Some recommend that it it’s most beneficial to just swim with the Bitcoin whales and get out of the way when the action gets frenzied near the surface. Be careful following speculators.

When you see a chart with a steep parabolic growth curve and it’s pointing straight north for quite a while, you should know it’s not institutional whales driving the market up, but a lot of FOMO-afflicted retail investors. Hedge funds and other smart folks know it’s time to sell or short the coin – and they do.

Be forewarned and alert in spite of a hedge fund manager saying on CNN: “Bitcoin to $50,000!” If nothing else, learn what support and resistance levels are, and learn to set up stop-loss orders.