For Short Term Crypto Plays One Might Want to “Buy The Rumor, Sell the News”
In cryptocurrency trading people buy the rumor and sell the news. Meaning prices tend to increase as a “rumor” spreads and decrease when rumored event occurs (“the news”).
- This means if you hear a positive rumor about a cryptocurrency, it can be a great time to buy.
- It also means that it is generally not a great move to wait too long after an event has occurred to sell (if your goal is short term profits)…. in fact, you might even want to take profits on a high before the event occurs to be safe!
That my seem counterintuitive, but it is for better or worse an effective strategy more often than not.
What happens is that a coin gets speculated on hard based on positive rumors, and by the time an event occurs traders are burned out, the price is high (due to the upcoming event being “priced in” and speculated on), and the market is full of people waiting to “sell the news.”
This leads to a market where even very big news can end up being disappointing, and where people are waiting to sell regardless of what the news is. If there are more sellers than buyers, then prices tend to go down not up.
I sometimes joke and say “the developers could give everyone a literal Unicorn and the price would still go down after the event.”
This sort of pattern occurs like clockwork in cryptocurrency.
From Bitcoin’s price being inflated in 2017 over the rumor of futures trading and dropping in 2018 as futures trading began, to the price action surrounding the Zclassic fork (where it increased 1,000s of percentage points when a fork was rumored and then dropped over 95% when the fork occurred) there are examples everywhere!
TIP: The opposite also works sometimes. If you hear negative rumors leading up to news and the price is dropping, it can often make sense to buy before the event occurs (before the news hits). When people expect the worse, there is often a rally upon the event occurring because the asset became oversold leading up to the expected-to-be-negative event. This inverse version is just as counter intuitive as the standard version. One example is the death cross that Bitcoin experienced back in late March – Early April.
Verge as an Example
As noted above, I can offer countless examples of buying the rumor and selling the news in cryptocurrency, including BCH and EMC2 (fine coins in their own right; just like Bitcoin and Zclassic), but it seems unnecessary to tell every tale to be told.
So let’s just focus on one recent example that explains every facet of what I mean, the example of the fine-in-its-own-right Verge (XVG).
- Verge’s price initially rose in December after John McAfee tweeted about it.
- That event had no rumor building up to it, so that event (that bit of news) sparked on a price increase. Thus we get our first lesson, when no rumor follows an event, buying the event can be sensible and profitable!
- Then, after an 800% increase, there was a rumor that a planned update to Verge’s wallet software called Wraith would not occur. That rumor caused the coin to drop by nearly 50%! Thus we get our second lesson, only positive and bullish rumors push the price up. A bad rumor, AKA FUD, tends to have the exact opposite effect (FUD often spurs on healthy corrections; after an 800% increase, we had to expect a correction).
- Then there was a rumor that Wraith would in fact happen at the end of the year. This caused a 40% increase over the next week or so. Thus, we get our third lesson and the core lesson here… buying the positive rumor is generally fruitful (although one might want to move those their stops up to lock in profits when doing this).
- Then on the last day of the year, the last moments in which Wraith could be released, Verge rose and fell a bit. This helps us see that the market was already a little burned out by the point that event/news was set to occur.
- Then Wraith was confirmed. The price rose for a few moments upon people hearing “the news,” but then it began dropping. Too many people were waiting to sell and that selling pressure meant that no matter what Wraith offered, it was not going to be enough.
Essentially, to sum this up, what happened is the biggest increases and decreases were seen not when rumored events occurred, but when unplanned events and positive and negative rumors occurred.
How to Play Rumors and News
Thus one could say the best moves would have been:
- Buy positive events that occur without rumor.
- Buy positive rumors.
- Sell negative rumors.
- Sell before or shortly after any event that positive rumors have been building up to.
- Sometimes it can make sense to buy before any event that negative rumors have been building up to.
- If an event doesn’t occur on time, the price will almost certainly drop, so consider having stops set.
- Always consider that this is all a matter of probability, nothing HAS to happen the way one expects.
In general the market tends to do the above, thus the above tends to be a good strategy.
This was the case with Bitcoin Cash going on Coinbase. This is likely what will happen with Ripple (“rumored” to be going on Coinbase). This is what has happened with most Bitcoin forks. This could happen with the Zclassic fork. This tends to happen with whole number price milestones like “$20k Bitcoin.” This honestly happens in just about every case you can imagine.
I’m not saying its great or cool. I’m just saying, don’t put your life savings in a coin thinking that a rumored event will trigger a bull run.
The bull run generally happens the second the rumor spreads, not after the event occurs. By the time the rumored event occurs, its often already too late.
Crypto can be highly speculative, and this pattern helps us to understand the ramifications of that.
A good trader is like water, they go with the flow. Trying to swim upstream because you’ve married a coin based on rumors is going to force you to exert more energy.
There is no magic rule that works every time, but as a general rule of crypto trading, one is generally better off “buying the rumor and selling the news.” If a coin has already gone up 800% based on a rumor, there likely isn’t too much more room for growth when the event occurs. The event is likely already “priced in” by speculators.
When on social media you hear that the coin that just went up 10x is the new Bitcoin, when you hear that this coin has an event coming up, consider playing that conservatively. When you first hear a rumor, and a coin has only increased a little in price, that is when you want to eye some entry points, build a position, and be sensible with stop losses…. as a general rule of thumb.
TIP: None of the above is unique to cryptocurrency. Watch for it in any asset class. When prices are inflated or deflated based on hype leading up to an event, watch for the opposite of what is expected to happen.