Charts tracking the price of bitcoin dominate six buzzing monitors in the third-floor office of a rotting, centuries-old tower block in the heart of Kiev. A pattern emerges among the shifting forms and shapes, and Brian – a 33-year-old trader who asks we use only his first name – reacts swiftly, punching his extemporaneous analysis into a chatbox on the messenger app Telegram. He has identified the distinctive downward twist of a “falling wedge formation.” To those in the know, that means: The price is going down at a diminishing rate, and should presently head moooooonwards.
A succinct bulletin summarizing this prognosis flashes on the cellphone screens of the roughly 300 traders in Brian’s VIP-only cryptocurrency trading group, “WhaleTank.” Each of these members is paying big bucks to hear Brian’s informed, round-the-clock insights and – quite literally – follow his every move. For the knockout price of 0.1 percent of a bitcoin per month (roughly $90, at time of writing), WhaleTank’s members are able to program their algorithm-enhanced “trading bots” to copy Brian’s trades, riding in the slipstream of each rollicking Fibonacci curve. He is the rising tide that lifts all boats … or, if he messes up, the whirlpool that pulls them under.
Mercifully, he is a “very good trader,” says one follower known only as “Adrenalin.”
ALSO FROM CONSENSUS MAGAZINE 2020:
The CoinDesk 50, by CoinDesk staff
Crypto in Corona: From Switzerland to Liberland, by Jeff Wilser
Michelle Phan: The Beauty of Bitcoin, by Leigh Cuen
The Changemaker: Glen Weyl Puts His Radical Ideas Into Action, by Jeff Wilser
The Man Who Saw a Currency Cold War, by Jeff Wilser
Generation Crypto by Jessica Klein
Brian belongs to an underground, largely anonymous collective of high-octane cryptocurrency traders who seek their fortunes in the scantily regulated – and heavily manipulated – crypto markets. While large funds dominate the broader sweeps in bitcoin’s price, thousands, if not millions, of traders exist at the fringes, working from Miami beach townhouses, grim Glaswegian bedsits, tricked-out studios in Kiev, a world apart from Wall Street. Instead of holding the asset long-term and praying for a windfall, they trade the twists and turns, profiting when it goes up and profiting when it goes down. If you’re a talented trader, why bother with an investment bank or a hedge fund or even a crypto hedge fund, when you can trade 100X leverage (read: very dangerous) on BitMEX, and get all of your trading tips from Discord?
The normal rules do not apply in the world of cryptocurrency. In the stock market, traders make predictions by peering into “fundamentals,” the reality behind a company’s valuation. They can check the news, call up the CEO, sleep with the intern. You can’t do that with bitcoin, or the embarrassingly unregulated “altcoin” markets, where useless money-grabs with names like “morguecoin” are minted ad infinitum. The controversial belief among many traders is that price movements in these markets rarely conceal a deeper reality – they reveal only the frantic movements of the traders themselves.
“Nobody can look at the P and L of ‘The Bitcoin Company,’” says Scott Melker, a 43-year-old DJ turned trader who goes by the name “Wolf of all Streets” on Twitter, where he has more than 70,000 followers. Cryptocurrencies go up and down because people buy them and sell them, he says. And why do people buy them and sell them? Because other people buy them and sell them. “It’s the ultimate self-fulfilling prophecy,” he says.
Reduced to raw numerical data, that wild rondelay of buying and selling begins to form predictable patterns, which can be understood through “technical analysis” – or TA, the practice of reading charts. Melker is an avid fan: every evening, after a day of comparatively normal life – doing the rounds on the cryptocurrency conference circuit (now largely relegated to Zoom), writing newsletter entries, shitposting on Twitter, relaxing with his children – he will pull up a chart on his computer and begin to search for patterns, specifically those which alert him to the “visitation of human emotions on traders – where are they going to be greedy, where the smart money is going to prey on their fear.” It could be any old coin, he doesn’t care. “They could be curing cancer or I could be trading stuff that could be giving cigarettes to children in Africa,” he laughs. “I wouldn’t know.”
He’ll look through Discord, Twitter, Reddit, hunting for signals. If you’ve spent time on “Crypto Twitter,” you’ll have seen the sort of stuff he trawls through each day. Frenetically superimposed scrawlings on charts bearing names that sound like military tactics: “moving wedge formation,” “double top,” “cup and handle formation.” Maybe the odd parody formation, like “vomiting camel.”
When he spies an opportunity – let’s say “Thorecoin” is eyeing a bullish increase past its $0.00034 support price – he’ll plan a trade and set an alarm. Sometimes he’ll take a chart’s predictions at face value, if he trusts the source. But he’s not normally one for the astrological stuff. (“The pattern doesn’t work because it’s the ‘natural flow of nature,’” he says. “Those patterns work because everyone is watching them.”) Most likely, he’ll engage in a sort of meta-play: making predictions based on the credulity of those who do believe TA speaks to some sort of ineffable cosmic principle. If everyone’s watching the same line on a chart, he says, “It becomes a thing, and the price breaks out, and you go, ‘Oh my God! Technical analysis works so well.’”
If he’s lucky, he’ll then cash out – in USD.
“My interest isn’t to have tens of millions of dollars worth of bitcoin,” says Melker, who believes in the technology’s promise but is hardly an evangelist. “I have to sell my bitcoins for actual dollars. A lot of people think they’re professional traders but they’re not taking profits in dollars. The most essential part of being a trader is, you have to ring the cash register, you know?”
Melker, trading only ten minutes a day as he does, lives life a little more fully than certain other traders. Consider the case of “Young Tilopa,” a pseudonymous trader based in Glasgow, who, every day, rises at 7 a.m., showers, walks his dog, slams down a coffee, pulls up an app called “Sierra Charts” and proceeds to gaze unblinkingly at charts for pretty much the rest of the day, doing very little else. Most of the charts are black or dull grey, streaked through with wild white zig-zags that pulse arrhythmically, like blips on a heartbeat monitor.
“It’s kind of a lame profession,” he says, noting that many of his fellow traders are single, fairly lonely males in their twenties and thirties. (Many of them are students enrolled in his trading course, one of his few respites from … trading.) Traders are often super smart and razor sharp, he says, but in that tragicomic internet way – their jokes belie the essential bleakness of their lives. “Essentially, you’re an independent trader sitting in your room all day, staring at charts, and sometimes you think, ‘What the f— am I doing?’” he says. “It’s sometimes meaningless – you’re not interacting with anyone.” (COVID-19, as you can imagine, has not made much of a difference.)
Named after an 11th century Buddhist monk, Tilopa takes a singularly Zen-like approach to trading. He analyses “technical events,” market shifts determined by idiosyncrasies in trading platforms (that is, exchanges). Unlike other traders he doesn’t merely predict: He seeks to understand “market microstructure, how the market moves,” he says. The atomic, subatomic order of things. Suppose you’re trying to figure out whether a car will stall: it’s the difference between observing the actions of the driver – a flashing indicator; a rightward pull on the wheel; a foot on the accelerator – and checking the engine.
For years, Tilopa did exactly that, inhaling volumes of academic papers on market dynamics. One of his favorite “technical events” to exploit involves a “stop loss.” When a trader activates a stop loss, he is effectively saying to the exchange, “Hey, if the price dips below X, sell all my holdings! I’d sure prefer to not be wiped out if the market craters!” It is a purely technical thing – a command to an algorithm. But the use of stop-losses, says Tilopa, betrays a certain amount of greed: in a time of cautious optimism, traders hungry for profits will edge their stop-losses lower and lower, as if playing chicken with themselves … and then, if it’s their unlucky day and the markets lurch into freefall, the stop-losses will trigger and their worldly assets will be sold off.
Whereas Tilopa merely surfs the riptides churned up in the wake of these movements, “whales” lurk in the deep, making tremors. They are immensely wealthy, capricious, and anonymous. They have accrued such a large share of the market that they can effectively bend it to their will. Word is, many of them exist in a criminal underworld, and use a dollar-denominated cryptocurrency called “Tether” because they cannot access real dollars. And they prey on the weak. Spying a large gathering of stop-losses, for instance, a whale may deliberately crash the market below the stop-losses’ threshold – profiting from the ensuing rout. This move is known as the “stop-loss hunt.” Predatory indeed.
With whales at large, traders are advised to remain vigil. Joe McCann, a Microsoft strategist who moonlights as a cryptocurrency trader, knows that letting his guard down could cost him. By way of defense, he has designed and coded a labyrinthine, fully automated risk management system, which “monitors my positions off-exchange,” he says. “If my account ever gets blown up, then it’s 100% my fault.”
In cryptocurrency trading more generally, discipline is key. “The best way to know what techniques to use is to patiently study your character, emotions and ways of thinking,” says the Venezuela-based Luis J. Sarmiento, the 23-year-old co-founder of AltSignals, a Telegram trading group which charges $107 per month to its over 40,000 members. Sarmiento claims to have generated profits of 529 percent since early 2018, and learned The Way from an old hand who, once training was over, simply vanished into thin air, like Yoda. (“I met my trading master in a forum in 2016,” he said. “I never knew his name. And in 2017, he simply did not reconnect to the chat.”)
For the few who are sufficiently disciplined/lucky – an increasingly small number of people, as traders point out – the sheer weirdness of the cryptocurrency markets can also make for a thrilling, if financially lethal, day-to-day. Traders speak especially fondly of what they call “crypto native” opportunities, trades that would be impossible in the mainstream financial markets. McCann, for instance, is intrigued by cryptocurrency-based “flash loans” which are instantly originated and repaid. A confident enough trader can conceivably take one out, trade it to profit, then immediately pay it back with no loss incurred. Such a thing is inconceivable in the mainstream financial markets.
Picture it: You borrow, say, $1 million from Wells Fargo. You blow it all on the stock market and then, somehow – in the space of mere milliseconds – you’re able to generate enough money to pay it all back, and keep a massive surplus. Impossible. Yet, in crypto, a trader actually pulled this off, sucking $350,000 from decentralized exchange “BZX,” in a matter of seconds. The wildest part? Had the trade fallen flat, the loan would have never happened. The blockchain just … wouldn’t have recorded it.
“There’s really no real-world analog” to flash loans, notes Nic Carter, a partner at Castle Island Ventures. “Which is maybe why people are so fascinated by them.”
While cryptocurrency trading is a risky business, to some it’s simply … business. Clad in a crisp, white shirt and creaseless trousers, Brian rocks up to a literal office every day, in Kiev. Working around the clock with his fleet of analysts, he makes use of complicated statistical models built up from a variety of sources: historical data, arcane predictive “indicators,” tabs kept on rival traders. (Even second-rate traders can offer valuable “counter-signals,” he says. “Those who want to be as accurate as possible must take every single factor into account, and analyze every single indicator.”)
The walls of the office are yellowing and worn; a six-screened, 3.60 gigahertz hydra of a computer stares the traders down, flashing with to-the-nanosecond updates. Harvesting as much raw data as exists on this material plane is Brian’s secret sauce, and he boasts of an astonishing prediction rate, of well over 90 percent. “Our price predictions are not only correct, but accurate to the dollar,” he says. His analysis “goes much deeper than your everyday trader – we go way back in time into the chart, years, decades.”
Read more: Bitcoin Halving, Explained
The highs are high, the lows are low. Brian recalls a bumper week in which he turned $15,000 worth of Bitcoin into $60,000. “I nailed every single trade that week,” he recalls. (Although, he adds, he “managed to lose it all months after.”)
Sometimes it doesn’t quite pan out. Once he let $200,000 shrink to $30,000 in a matter of days, although this, he explains, was well before bitcoin’s legendary hockey-stick swerve to $20,000 in 2017, when people mostly bought and held the asset. That left them at the mercy of market forces, he says. “We were just holding bitcoin as believers – I wasn’t as immune as I am today.” (Although the record shows that people were doing bitcoin technical analysis at least as early as 2011.)
Now, Brian plays the market – obsessively. Although he is operating his business at a 100% loss (roughly $10,000 a month in revenue, $20,000 in expenses, much of it on marketing), he trades as close to 24/7 as humanly possible. Passion propels him – and unlike in traditional stocks, the markets never close. “To get such good results, you must be in love with the asset and follow it through 24/7,” he says. “Bitcoin is something many have fallen in love with, and they open the bitcoin chart every 10 minutes. You won’t ever see something like that with the traditional stocks.”
Currently, Brian is working on an uber complex trade relating to the breathlessly anticipated May 11 “halving” event. That event, which will see the supply of new Bitcoin’s precipitously drop, is expected (well, hoped) to cause a huge surge in demand, and a long-term price boost thereafter. Believers support their conviction by drawing on elaborate theories of supply and demand, and point out that similar rallies have followed previous halvings. And it’s looking pretty hopeful: Bitcoin’s price has been climbing steadily over the past few days, as if excitement is steadily mounting…
Brian, regrettably, has looked at the charts and arrived at a very different conclusion. It’ll probably be a case of “buy the rumor, sell the news,” he imagines: a brief, self-fulfilling frenzy – caused by people buying into what they think will be a fundamentals-driven rally – followed by a quick plummet as the winners cash out. Not only does the data on previous halvings support this, he says (at 3 a.m. on a Wednesday), but the patterns on the charts tracking Bitcoin’s current, prodigious rise don’t bode well either.
He delivers to me his jargon-larded, fully incomprehensible prognosis. “I got bearish divergences on 4H charts, overbought on the 1D chart … And the ichimoku cloud is only going to give us that bullish cross once the price corrects itself, and it breaks out of the cloud … Therefore I can say we are to correct ourselves, most likely to 0.3fib…”
To translate: Brian is referring to two different timeframes on the chart, one which staggers the price movements into four-hour batches (4H) and another which staggers them into one-day batches (1D). Each of these timeframes gives a different sense of the trajectory: The 4H timeframe displays a “bearish divergence,” evidence that the price rally isn’t going as well as expected, and could be in for a prompt “reversal.” The 1D timeframe signals that the rate at which the price is increasing is actually too fast compared with historically successful rallies. That’s what “overbought” means: a surfeit of people have bought in, and the uptick may not last long.
After parsing these signals, Brian plotted the two lines together and colored in the shape subsequently formed. If the price trends below that shape – known as the “Ichimoku cloud,” after the Japanese journalist who invented it in the 1930s – he expects any emerging “bullish” trend to be short-lived. Which, unfortunately, is the case now. But crucially, he also has a hunch that for this halving, the fundamentals are stronger than usual – that is, the real-life changes behind the price movements are tangible enough that mere chart-reading could be insufficient. For once, Bitcoin is subject to a readily visible, quantifiable change in its supply. That has caused Brian’s predictions to falter more often than usual in the past few weeks, implying external forces are at play.
This all goes to show how TA is far from infallible. Traders acknowledge the discipline is better understood as a “risk management tool,” a way to avert the more dramatic losses. And treating chart-reading as an exact science, in general, is controversial. “Hard” scientists stress an epistemic distinction between the financial models that crypto traders employ and those employed by physicists or chemists. That latter group builds predictions based on carefully controlled models intended to approximate the structure of reality. TA advocates, by contrast, can only use “pure induction,” assumptions based on past trends whose future results cannot be guaranteed: Just because a well-placed Golden Cross formation resulted in an “upside rally” the last twelve times doesn’t mean it’ll happen again.
It’s like driving your car “using only the rear-view mirror,” as one person put it on Reddit.
Writer and former options trader Nassem Taleb, in his book “Fooled by Randomness,” argued that people who use TA are in thrall to the vicious, circular logic of “survivorship bias”: they declare it useful because it works for them. And those for whom it doesn’t work? They’re not doing it properly! Alas, it comes as a mighty shock when they, too, wind up destitute. Writes Taleb, “Option sellers, it is said, eat like chickens and go to the bathroom like elephants” – tiny gains, immense, ruinous losses. Similarly, Brian notes the prevalence of “confirmation bias” among traders. “It’s easy to find both bearish and bullish signals in the charts, and traders often choose whichever aligns with their emotions,” he says.
Worse, through the very process of trading, crypto traders often end up disrupting the very systems they are trying to observe. Their own interventions – unlike those of scientists – can’t be controlled, and they ripple out into a chaotic system that responds to the very act of trying to predict them. How can you predict a thing that’s being manipulated before your very eyes?
These are criticisms that largely ricochet off the thick skins of cryptocurrency traders; indeed, there is a broad recognition that although these diagnoses are legitimate, they are hardly terminal. As with much in the cryptocurrency world, the very elements of cryptocurrency trading that make it so attractive to speculators – wild volatility, theoretically unsound underlying principles – also make it attractive to the ethically challenged. Melker gives an example of a particular fraud he’s observed, endemic to paid Telegram groups.
“There are players who literally draw the charts with their orders,” he says. “A [Telegram group] leader would be like, ‘I’m watching this coin, it’s about to break out.’ And then it breaks out – because he bought it.”
“It’s guaranteed money, every single time.”