A short analogous story that will break down how prices move in the crypto markets.
One day after a particularly terrible trading day, my Uncle Dave took me aside and gave me some hard facts about how markets really work. You see, Uncle Dave owns a unique company, which has given him an insider’s perspective on how price movement is managed.
His company Dave & Co, is the only company in the City that distributes light bulbs that never die, and it does so under licence from the government. These light bulbs have an intrinsic value, they never die, and the number in circulation at any one time is much the same.
Being a reasonably intelligent guy, Uncle Dave soon realised that just buying and selling light bulbs to his customers was rather unrewarding. The amount of money he made each time he bought and sold was quite small, and the number of transactions per day was also low.
In addition to this, he also had the expense of an office, warehouse and staff. So something ‘creative’ had to be done.
Having given the problem some thought, he began to wonder what would happen if he mentioned to his neighbour that his light bulbs would soon be in short supply. He knew that his neighbour was well connected and, quite frankly, was a gossip – so this was almost as effective as putting out an expensive advertisement in the local newspaper. Uncle Dave also knew from checking his warehouse, that he had enough stock to meet any increased demand should his plan be successful.
Several days passed and light bulb sales remained flat.
However, after a week or so, sales started to pick up with more customers coming to the warehouse and buying in larger quantities. It seemed his plan was starting to work and everyone was happy. His customers were happy as they knew that everlasting bulbs would soon be in short supply, and so their value would increase. Uncle Dave was happy because he was selling more lightbulbs, and making more money every day.
Now, with everyone buying these light bulbs, what would happen if he raised his prices? After all, he was the only supplier and demand was high at the moment.
The following day, he announced a price increase but, still believing there would be a light bulb shortage, his customers continued to buy in even larger quantities!
As the weeks passed, he gradually increased his prices higher and higher but still, the buying continued. A few of his more “observant” customers started to sell their bulbs back to him, taking their profits, but Uncle Dave didn’t mind as he still had plenty of willing buyers.
This was all good news for Uncle Dave until, one day, he realised with some alarm that his warehouse was now looking quite empty. He also noticed that the volume of sales each day was decreasing. He decided to keep hiking his prices, so that everyone would think that the situation was unchanged.
Now Uncle Dave had a problem. His original plan was too successful. How was he going to persuade all of his customers to sell their light bulbs back to him, so that he could continue in business?
He thought about this issue for days. Then, by chance, he met his neighbour again in town. The man pulled him to the side to ask if some “gossip” he had heard was true? Uncle Dave had learned that his neighbour had heard that another, much larger, distributor was setting up shop in the area.
Being quite intelligent, Uncle Dave realised that the solution to his problem had just been served up on a silver platter. Appearing shocked, he admitted that the rumour was true, and that his business would suffer badly. More importantly, light bulb values were likely to drop dramatically in price.
Within days, Uncle Dave had queues of customers outside his warehouse doors, begging him to buy back their light bulbs. Now, these are still the same light bulbs – they last forever and are in short supply. But, with so many people selling due to hysteria, Uncle Dave dropped his prices quickly, making people even more desperate to sell before their bulbs became worthless!
As the prices fell further, more and more people cracked under the pressure. Uncle Dave was now buying back an enormous volume of light bulbs. After a few weeks, the panic selling was over – as there were the smart few who were brave enough to hold onto their bulbs despite the pressure.
Uncle Dave could now begin to sell his light bulbs again at their old levels from his warehouse full of stock. He didn’t mind if it was quiet for a few months (long-term trade), as he has made a great deal of money very quickly. He could now afford to take it easy. His overhead costs were covered and he could even bestow a healthy bonus upon his staff members. Everyone soon forgot how or where the rumours had started and life returned to normal.
Normal that is until Uncle Dave started thinking one day to gear up and repeat the entire process again.
The above analogy is of course fiction, but describes the process of accumulation and distribution.
It shows how skilled traders use windows of opportunity and a variety of trading conditions to manipulate prices.
Any and every piece of news is merely a tool to manipulate supply and demand. Just like Uncle Dave, traders who buy into a coin during the accumulation phase have a huge advantage over everyone else, as they are literally able to set their own selling prices when volume builds up.
Now I don’t want you to run away with the idea that the entire Crypto market is rigged. It isn’t.
No single trader can achieve this on their own.
It all comes down to realising that trading is as simple as understanding the difference between retail and wholesale pricing.