Beyond Bitcoin Series: Profiting from Altcoin Pump & Dumps
Jul 28, 2014 --- Altcoins
The allure of a quick buck is difficult to resist which is why many traders are drawn to the high volatility and large potential returns of cryptocurrency “altcoin” trading, but there are some things one should keep in mind when looking to play in those markets. FYI, altcoins are decentralized digital currencies like bitcoin that are secured by cryptography.
Nearly all altcoins are copies of Bitcoin with only a few inconsequential modifications and a shiny marketing campaign. Multiple new altcoins are released every week and despite having no fundamental value, there can still be a nice trading opportunity therein. We will walk through the life-cycle of the typical, pre-mined, “pump & dump” altcoin to highlight the factors you should be considering in planning your trading strategies:
(1) A developer forks the bitcoin codebase (or that of another altcoin), makes some minor changes, and comes up with a catchy name and logo.
(2) The developer(s) and a few people they know personally begin mining the coins and building up stashes of the coins before the public gets the opportunity. *There are exceptions to this
(3) The coin’s team creates a thread in the bitcointalk.com announcement [ANN] forum giving the coin’s specs, and communicating the philosophy and goals of the coin. Sometimes they will also create a subreddit or their own forum site.
(4) Others who see the announcement thread start mining the coin and buying/selling it from person to person, often on the coin’s IRC channel or through forum private messages.
(5) If the coin continues to be mined and the announcement thread (community) remains active, those who have a stake in the coin will start requesting exchanges to add support for trading the coin.
(6) Once an exchange lists the coin either (a) Volume pours into coin driving the price up rapidly (hours/days), or (b) the miners use the opportunity to immediately cash out all their coins and the price stays flat or falls dramatically.
(7) If the coin survives the initial listing and continues to get added to other exchanges, the price will spike on the rumor or anticipation of each new a exchange(s) adding the coin, and will typically sell off within minutes/hours of being added to that exchange (“buy the rumor, sell the news”).
(8)(a) A flaw in the coin is discovered, (b) the early adopters dump massively and the price never recovers, or (c) the price is a slow bleed down and volume dries up.
(9) exchanges de-list the coin, the forums threads and subreddits go dark. The coin’s life is effectively over.
Not all altcoins follow this pattern. In particular, there are a few that have unique properties and their market life-cycle will look different, such as namecoin and coins based on the cryptonote platform (Monero, Boolberry). However, the vast majority of coins you will be betting on will follow this general pattern, so it is key to pay close attention to a few things when considering your investment: Premined? (if so, to what extent), community activity and enthusiasm, developer competence/integrity, network hashing power, mentions outside of the coin’s thread/subreddit, and sentiment as gauged on exchange trollboxes. If you catch these coins early and you happen to pick one that gathers some steam, you are looking at the possibility of making returns on the order of 100-1000%.
These are almost always short term trades (weeks/months) making exit timing crucial. Generally you will want to take profits on the way up, particularly if the asset doubles, to recoup your original investment so you can be “playing with house money.” This generally enables traders to make more rational, less emotional decisions since the risk of losing principal money has been reduced to 0%. After that, it is up to the individual to determine when to cash out and at what price.
Nearly all altcoins will eventually fail, and investing in them/playing the markets is a high risk/high reward scenario which requires intense vigilance to be profitable. Manage your risk and remember to never invest more than you can afford to lose!
Happy trading and have a great BITday!