Who’s who in #crypto? — The Buyers (part 1)
It’s March 2021 now. It’s been 6 months since I started following closely the crypto and blockchain market, reading the news, following the influencers and staring at incomprehensible trading charts for at least 1–2 hours/day.
At first what overwhelmed me most was that I couldn’t put the pieces of the puzzle together. When they say “bears and bull are fighting for the price” what do they mean — are these real humans/things “fighting” or is it just a metaphor? What on Earth could be the connection between the wet season in China and the price of Bitcoin? And last but not least: who are the “strong hands” in the market which always know when it’s time to sell “at the top” or “buy the dip”?
So I decided to make a mind map of my own, where I can plot all the critical stakeholders I read about, what’s their role in the crypto market and what drives their decisions to act in a certain way. I am now sharing my output (and associated thoughts) with you. But please bare in mind: this is my own interpretation of things and I’m sure I’m missing a lot of pieces of the puzzle still. Best is to read this article with a pinch of salt, do your own research to validate/invalidate the insights and most importantly … add your value-adding comments/thoughts in the forum below, so that we can all benefit.
Let’s get to business now. As in any other market, the price of a crypto-asset is formed -you guessed it- by offer and demand. In other words, the price is what a buyer agrees to pay to a seller. Nothing new so far, we surely don’t need an article to learn that 😉.
But let’s see if we unveil something more interesting if we peel off the onion.
Buyers of cryptoassets
Cryptocurrencies/cryptoassets are very new species of this world, still crawling babies compared to their peers in the traditional markets (stocks, world currencies, precious metals, oil etc). Therefore they attract a very special group of buyers, the early innovators/adopters. This profile of buyers is to be found in all types of buyer groups, from general public to retail traders and asset managers who deal on behalf of wealthy customers. Yet they follow very different decision-making approaches when buying.
1. General public:
You and me, we usually enter the market when we read about it in the news … or when a favourite influencer talks about it (like Elon Musk or Jay-Z). This is (maybe!) because we don’t have time to follow the news every day but mostly (I guess) because we need some reassurance that this thing is legit and cool. Once we buy a bit, we might buy just a bit more because of FOMO (“fear of missing out”): we see the price growing and we fear it will go even higher without us.
Unfortunately we (usually!) buy at the wrong time. That is: in an all-time-high (ATH) of a coin price. In the world of trading, professionals have indicators to see when we come in: like social media volume/sentiment monitoring and even a proper Fear & Greed indicator. Rule of thumb is: when we come in, they leave. In other words, when retail FOMO is at it’s peak, it’s time to sell. And so, we become the “weak hands” and the big guys (called “whales” or “strong hands”) buy our toys for cheap. But more on that when we get to the selling chapter.
For now we still have our crypto coins and we are very happy about our purchase. What do we do with them? Well, many things depending on our appetite for risk. Many of us would buy the more established “brands” like Bitcoin and Ethereum to hold them for long term (HODL) to buy a car or leave them to our children 😉. But some of us might be more daring and venture in the very new world of decentralized finance (DEFI). For this we need to buy different types of coins to stake or lend them for a yield/profit on platforms such as Uniswap or yearn.finance.
[NOTE: I realize we haven’t covered yet the types of crypto and many of you might not know them too well. I’m planning to make an entire article about them but until then you can check this beginner guide from Cointelegraph or just google “what is Bitcoin”, “what is Ethereum” etc.]
Buying habits of general population are also influenced a bit by culture/geography. Asian buyers seem to me less risk-averse and more innovative than their counterparts in Europe or USA. (NOTE: Until recently 50% of Bitcoin supply was in Asian hands, it only now slowly changes with the arrival of big American institutions). Personally I’m not at all surprised, given that our Asian colleagues are leading the wave in most things digital and (fin)tech.
2. Retail traders: These are individuals like us, but the difference is that they trade professionally (we, the general public, do it “for fun”). Retail traders work for themselves (not on behalf of other clients) and they buy depending on their strategy:
a. Day traders: They buy coins based on charts and patterns and sell them in the same day. That is: they don’t keep coins/investments overnight. From what I have seen, a 3–5% gain in 24 hours is good enough for a day trade (and possible in crypto these days!). In the book “How to day trade for a living” Andrew Aziz mentions he trades for only 2–3 hours in the morning of US trading. Generally you would see trading activity hyping during specific slots of a day, which are the mornings of each timezone: Asia/EU/US.
b. Swing traders: These are the guys and gals who keep their investments for more than one day but not forever, maybe for few weeks. From what I’ve seen from Telegram signal chatrooms, a swing trade with 20–30% profitability is achieved in 2–3 weeks.
c. Position traders/HODLERs: These guys, they just don’t sell. I mean … yeah, they sell, but after several years. Most clever buying for HODLing is done during bear markets (meaning periods/years when things are calm and prices go down … think of a beach resort in December 😊). In a bear market one can buy coins which will x2-x5 or even x10 in value during a bull market (high season). Another strategy is to just buy a bit every month, regardless of period. This strategy is called DCA (Dollar Cost Averaging) and what it does is that it averages out your purchase prices at a decent level, regardless of period. You might like this video of crypto analyst Michael van de Poppe.
3. Whales: ohhh, ahhh. These guys/things are to be feared. Why? Because: (a) they have a lot of coins, usually in the range of $ millions so they can influence the market price, (b) they are usually anonymous, so you won’t be able to follow/anticipate their moves and © they use sophisticated trading algorithms/techniques so it’s hard to fight against them. They usually don’t jump into buying until a bottom is close (of which they know better than us of course 😉). The good thing about this behavior is that you know your coins will not lose 80% of their value overnight if whales are behind them. The bad thing is that whales will likely move the price at times when you least expect … so you always need to have spare cash and some diversification of portfolio to make the most of any outcome/scenario.
4. Institutions:
That’s how large organisations such as banks, pension funds or corporations work: they don’t move for years, then they disrupt the market. I like to call them tectonic plates 😊.
Since we are at the chapter about buying behaviors, let’s see how these giants think and act. Firstly, they are risk averse: they have shareholders to pay dividends to, they have strategic priorities to follow, they don’t like volatility on their balance sheet. Secondly, they are slow: it took Michael Sailor of MicroStrategy nearly 6 months to convince his board to invest in Bitcoin and get all approvals. Most large organizations work with such timeframes from the moment a proposal is made until it can be executed. Thirdly, when they buy, they generally buy to HODL: no day trading, no swing trading, no market making (aka manipulation 😊). They believe their investments will gain value over time. Therefore, they are not concerned about inherent volatility of the crypto market, neither do they want to make profits out of it.
Why are institutions interested in crypto (Bitcoin mostly, to be honest)? The most important narratives I’ve heard are:
a. to protect themselves against inflation: were they to keep all their money in USD or other fiat currencies, their value would decrease over time due to inflation
b. to diversify their portfolio with a new asset class: now that Bitcoin surpassed 1 trillion USD market capitalization, this became a “serious” asset to consider for big players who already might invest in other stocks, commodities, government bonds etc.
c. to get exposure to new technologies (or payment methods 😉): especially for technology corporations who might use blockchain technologies or crypto-tokens in the future, holding them in advance is important. Tesla just announced that US-based customers can now buy their car with Bitcoin. Another example are companies (like LVMH) who start using blockchains to track and confirm the authenticity of their very expensive products (and for that they need tokens of the respective chain).
When institutions buy crypto, they buy usually massively. Earlier in 2021 Tesla bought 1.5 billion USD worth of Bitcoin. The price of Bitcoin at the release of this news, on February 8th, raised by more than 20% from roughly 38k USD to 46k USD.
Final thoughts
We’ve been discussing in the last 1.500 words about who buys crypto, how and why. This section ended up much longer than I expected, so will draw a line here and prepare a follow-up article on the seller and “shaper” side of things.
Before saying good-bye, I’m leaving you with my top lessons so far about crypto buyers …
Lesson #1: Incentives drive behavior. Each crypto buyer has their own incentives to buy crypto. Some do it for daily gains, others for long term portfolio diversification. It’s useful to have an idea (e.g. from crypto media such as Coindesk or Cointelegraph) which actors are dominating the market when planning to buy. I am trying to put myself in their shoes to anticipate how they might think.
Lesson #2: Small fish make small waves, big fish make big waves. As obvious as it sounds, volume matters in trading. Unless we land in another crypto bubble like the one from December 2017 — January 2018, a market driven by general public or retail buyers shouldn’t have huge volatility on price (assuming we are talking about the “big crypto-guys” like Bitcoin, Ethereum, Litecoin, Chainlink etc). When whales or institutions are playing, I’m fastening my seatbelt.
Lesson #3: Crypto market is dynamic and it WILL surprise me. Different buyers come to play in different periods. For example, the 2017/2018 bull run of Bitcoin was driven by retail investors, whereas the 2020/2021 one seems to be driven by institutions. Especially as I’m new to the market and/or don’t have time to follow it 24x7, I just assume it will surprise me (positively or negatively). The longer I keep what I bought (hopefully not at all-time high prices 😉) the less I will care.
If I haven’t convinced you NOT to sell your coins, the next article will be for you: The Sellers. Stay tuned.
