The idea of this post came to me when I saw some Alts making dozens % growth these days. It seems that one can easily earn by jumping on this train (and quickly, before it left), But is it really so?
I formed an understanding of this topic during conversation with many market makers (MM) which cooperate with top tier exchanges. A prerequisite for placing a coin on an exchange (both IEO and regular listing) is the presence of MM, if there is no agreement with MM, the exchange offers options from a list of its partners. There are basically two different categories of MM:
- “Good” guys. The contract clearly states that the task of MM is to provide liquidity. Project (coin) pays for MM services (e.g. monthly) and additionally pays for the whole inventory: a certain amount of project’s coins and stock of every pair which the coin will be traded against (BTC, USDT, etc.). They have no task of earning money on price movements; their task is only to provide liquidity. Moreover, if the inventory is spent, the project has to add it in order for MM to continue its activity. There are very few “good” guys in the crypto market.
- “Bad” guys. These MMs have established algorithms to maximize project’s profits by distributing coins among investors on exchanges. Usually good liquidity is not in the scope of their direct interest. Contract with such MMs additionally involves sharing a big chunk of distribution profits (~50%, may differ). The overwhelming majority of MMs in the crypto market are “bad” guys.
How does the distribution of coins occur? What algorithms are used? There are 3 phases that can be clearly distinguished:
- Accumulation. In this phase MM accumulates coins pushing the price down by filling buy orders to establish downtrend. MM’s goal is to buy as many coins as possible in a downtrend as cheaply as possible.
- Net buyer. In this phase we see a pump on the coin’s chart. MM market buys heavily removing own sell orders in the process or even filling them where possible to achieve better volume. The price spikes and fires up retail investors’ FOMO.
- Net seller. This is the distribution phase. MM starts to sell coins keeping the price in an uptrend or sideways as long as possible. At the end of this phase MM starts to market sell heavily to dump the price and transition to phase 1 afterwards.
Given the above information, it becomes clear that retail investors play in casinos with very negative expectation. The most obvious “profitable” option is not to participate in such games, not to succumb to FOMO. But is it possible, knowing how MMs work, to exploit them? Is it possible to make money on Alts in principle and which Alts to choose? We will talk about this in the second part of the article.