The Theory of Market Manipulation and Futures Contracts Analyzed

There is a theory that the Bitcoin market is being manipulated by investors who hold futures contracts. The idea being that this explains the price action of 2018. I discuss that theory and offer opinions on it.[1]

The theory goes something like this:

Since the advent of futures contracts, big players have been buying crypto Over The Counter (OTC buying has been ramping up) and then flooding the exchanges with cash or crypto to affect Bitcoin prices. This then effects all cryptos (because alts tend to follow BTC). Then these players take advantage of the state of the prices via futures contracts, leveraged positions, and more OTC buying. The goal being accumulation on one hand, making money / hedging via derivatives with the other, and gaining more and more control over the market in the process (potentially with the aim of price suppression). Further, the theory states that this explains why the market has seemed to change in late 2017 and especially 2018.

That theory is solid and it is honestly hard to imagine that people aren’t doing this to some degree and that the market isn’t changing a bit as new players enter (both big players like hedge funds and retail investors).

It all adds up for sure, however, for me that theory is only telling at best a small part of the story.

In my opinion that theory explains the price action in crypto about as well as MtGox explained the crash of 2014, the China ban the correction of summer 2017, the Binance hack that last crash from $11.6k, or the Chinese New Year the January 2018 correction.

This is my way of saying, “I really honestly don’t think this is the main thing going on given the history of the market.”

First and foremost what I believe explains what we are seeing is:

  1. Generally: The unequal distribution of resources, mania, pump and dumps (especially in lower volume altcoins, but generally in the crypto markets), FOMO, Greed, algorithms, indicators, and speculation in a low volume, global, lightly regulated 2/47 market paired with a lack of an agreed method for valuing cryptos. This being what explains everything from crypto’s many bubbles to its many corrections and crashes. In my opinion it is essentially always this first and foremost, and rarely a given bit of news or a new set of players entering or exiting the market. Simply, it is human emotion, logic, and nature working in tandem. Same thing that has created other economic bubbles and busts in other markets in history.
  2. Specifically: The Bitcoin market got pumped over the news of “futures” in late 2017, then the alt market followed, and both markets have been in going through a necessary correction since. We often see this pattern in cryptos if we look back through the history of each coin (the pattern being “pump” over news, and then “dump” over event, using methods such as “spoofing”). That said, crypto is hardly the only asset class where we can find like patterns and sets of events.

We tell stories to try to give faces to these things, and we say “Chinese New year, whales, cartel,” but that story is different than what is in my opinion both generally and specifically happening at the core.

Here is my more logical theory:

– When crypto is overbought, because it has been pumped for any reason, and then people FOMO’d in, and then it say runs into a tangle of fib and moving average resistances, it’s probably going to go down soon, not in any small part due to complex algorithms of the accumulation bots of big players reacting to these metrics. Although, this rule is sometimes broken in the short term, for example there seemed to be a serious lack of downward pressure on Bitcoin specifically from 2016 – 2017 (and especially in late 2017).

Likewise, when crypto is oversold, has been dumped, and then say runs into fib and moving average supports, it’s probably going to go up. Same basic logic. Although this rule is sometimes broken as well.

Otherwise keys metrics like volume trends, the buying / selling patterns of retail investors at certain prices (if there are no buyers and sellers at a price point, the coin won’t stay there), and the news of the day help tell the story.

Simply put, the big players are data driven, retail investors are driven by emotion, and thus a mix of logic and emotion is at play in the markets. Then events work as catalysts. The more players, the more of all that going on. The less regulations, the less volume in general, and the more speculative the asset, the more wildly the price swings.

Then, on top of all that, we can assume big players are nudging and pushing in one direction or the other with purpose (whatever that purpose may be).

Sure, futures finally give everyone a way to make money on crypto going down, but they have had a history of dumping often regardless, and it feels like blaming downward movement on new players is incredibly short sighted to the point it is somewhat nonsensical. –

With that noted, it is really important to also note this: although those who are looking hard enough can see slight changes in market behavior in recent months and weeks, that is valid, the overarching patterns described above didn’t start the other week when we heard George Soros got into crypto trading. Instead, a few details aside, and to the above points, the patterns have been almost eery fractals since the first Bitcoin exchange opened (meaning the patterns found in crypto look very similar in 2011 and in 2013 and in 2018 etc).

You can’t tell me “futures” explain the time Bitcoin went from a penny to eight cents and then back to a penny again. And what explains the constant bubbles and busts in all cryptos across the board since the start date of each coin? Did J.P. Morgan dump Zclassic after the fork, then pump it up again last week, only to dump it again the day after I wrote this?

No, right? That wasn’t “China” or “Soros” or “Spoofy” or “the Cartel” that was like, a pump and dump + FOMO, Greed, and Fear + speculation + low volume lightly regulated exchanges + exciting new asset that people don’t fully understand. Whatever set of entities and attributes were behind that set of events is an aside. The point here is that what appears to be manipulation (and sometimes is partly we can assume) is not new to crypto whatsoever (and neither is what appears to be price suppression).

Crypto does the same pattern all the time, a pump and dump pattern, with periods of accumulation and consolidation, fueled by actors, algorithms, and retail investor reactions over, and over, and over.

I am not saying that new players aren’t going to shake things up a little and make it a little harder to pump and dump at times (the days when one spoof bot can drastically inflate the price of Bitcoin with no resistance are probably over, but then again I’m pretty sure crypto just rallied between 30% – 100% in two weeks and then dropped like 20% in a night; if I’m recalling April 2018 correctly… So I mean, the more things change, right?)

My point being, market manipulation wasn’t suddenly introduced into crypto in 2018 by “the Cartel,” and I sincerely don’t think futures contracts tell us even a substantial part of the story.

Even to the extent that these new players are substantial, at worst they are doing exactly the same sort of the stuff those in the market were already doing. In fact, this is so true I have to assume they hired old crypto pros to build their bots (or vice versa, the bots the pros were using originated in other markets).

Further, the whole thing about crypto is “open and free market.” Thus, to be blunt, if you don’t like the direction the manipulation is going… that is mostly just personal preference; a matter of tastes. I have often not liked the direction the winds blew on a given day, but not every gust of wind needs an elaborate story to explain it.

I know 2017 was bullish for Bitcoin, but look at the volatility of alts in that time. They had more than one pump-y / dump-y sort of experience. And Bitcoin itself went through a few major corrections in those times before continuing its bull run. I can see slight differences in patterns, that I think can be attributed to algorithm changes and new players.

However, I have a hard time attributing everything that seems manipulated to some new players who have entered the space. And again, even if we can attribute some things to them, they are literally just doing the same sort of stuff that was already being done before they got here.

To stress one last thing, and this is important:

I would argue that “futures” has less to do with those holding the contracts and more to do with this thing that happens in trading in general (but especially crypto) where people buy the rumor, sell the news, and spread FUD (now that is largely what happened to Zclassic if we are being honest; if we do need to tell a story).

The pump in November essentially used the “rumor” of “futures contracts” to justify this massive price hike (pump), which caused FOMO, that we all paid for in 2018 with a massive crash (dump), as the “news” of futures trading occurred, and then we all heard about related conspiracy theories (FUD).

Essentially while retail investors and media are telling themselves one story, another reality is playing out in front of everyone’s faces. And, if we acknowledge that, it seems at least a little unfair to blame new players for old shenanigans just because we don’t like the outcome we are attributing to them.

I’m not saying there aren’t heroes and villains here, or that if there are we should slap labels on them, I’m just saying price action on the crypto markets in general likely cannot be explained by a few simple concepts like “futures contracts” or new set of players who entered the market since November.

Crypto wasn’t always bullish and then it just magically and sadly turned bearish randomly when new players entered the market or when futures trading started. It has always been insanely volatile and it turned bearish after it was pumped quickly to unreasonable and unsustainable highs over the news of futures trading. That is a subtle difference.

Crypto markets are at best an advent of the human condition somewhat unrestrained in a speculative market (hence the bubbling), at worst they are manipulated purposefully to exploit the human condition (the artificial blowing of bubbles). Logically both hose things are happening, and there really is only so much we can blame any actor or set of actors. Further, there is only so much that can be done about it… because the root is largely found in the human condition itself in my opinion (this is why other markets have more well defined rules, none of this is new).

In conclusion, every theory above has weight to it, but I would suggest not taking the easy road and blaming this all on “institutional investors and futures contracts.”

First and foremost, it is just the human emotions Greed and Fear manifesting via algorithms, and actors (retail, institutional, miners, etc), in lightly regulated 24/7 global markets, with a speculative currency no one agrees how to price, with bits of news and some big players giving little nudges here and there, which creates a bubble and bust economy, and thus when we see bubbles, and should expect busts (with periods of consolidation in between).

In other words, it went down because it went up, and it’ll go up again after going down again, regardless of who is in the market, until there is a fundamental change… and there I think is little chance of a fundamental change. Therefore, I take the stance of being cautiously bullish personally, but how someone responds to all the truisms is really up to them.

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Citations

  1. First off, Google “bitcoin market manipulation” and read through the many stories and theories about market manipulation. Second-off, the particular theory being entertained here I think originates in the following Steemit post: 4th Dimension: Bitcoin-Manipulation-Cartel — Price-Suppression is the Goal. You’ll find lots of stuff on Reddit, Medium, tradingview, Steemit, etc. It is out there.

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