Who’s who in #crypto? – The Sellers (part 2)

It’s May 2021 now. We are still in the middle of a handsome bull market/period for crypto. Some are buying, others are selling – all with joy & excitement.

In March I made my first foray into talking (writing) about cryptocurrencies. The article was called “Who’s who in #crypto? – The Buyers (part 1)” and you can find it here. Now it’s time to talk about the other side of the coin: who sells the cryptocurrencies we want to buy so fervently?

The sellers of crypto (and the selling process itself) is fascinating for me, given I’m still new to the world of finance and investing (my background is mostly in healthcare). That reminds me to remind you that anything I say here is purely my interpretation of things and should not be considered financial advice. It’s important that you put things in perspective, match what you read here with other research you have conducted and draw your own amazing conclusions ??.

The seller “personas”

My take after nearly 6 months of learning about and experimenting with cryptocurrency investing is that there are three personas who sell crypto-assets. A “persona” for me is an archetype/group of individuals or organisations who share same characteristics and behave in a similar manner.

1. The Reactive seller: is the group that sells their coins based on events that “happened” to them. If a coin price goes down, they sell out of fear of losing their capital. (and conversely, if a coin price goes dramatically up, they buy out of fear of missing out, FOMO). Being reactive in the market is 95% of times not ideal, as that is usually the loser side of the game. Sadly trading is often a zero-sum game … unless huge inflows of external capital come in and grow the entire “pie”. If not, somebody needs to pay, and that’s usually the reactive seller (also called “weak hand”).
2. The Proactive seller: is the group of people / institutions that trade based on analysis of charts & historical data and therefore tries to anticipate what could happen next. They build scenarios and usually place different sell orders at different key price levels, depending on scenario / probabilities. The problem is that they rely on past information and not always consider the “human”/irrational element of trading. And we know that the past is not always the best indicator of the future, especially in such a new and transformative domain as crypto / blockchain. If crypto market were a jungle, I’d say the Proactive sellers eat the Reactive sellers for breakfast. Sorry, black humour.
3. The Disruptive seller: is the fortunate group that can change the course of an otherwise “predictable” market either due to insider information, large amount of capital at disposal or strategic positioning in the crypto “supply chain” (e.g. miners in the case of Bitcoin). For example, when the technical indicators of a coin show price should increase, a large investor could start dumping millions of dollars worth of that specific coin, so much so that buyers cannot absorb … therefore the price goes down instead of going up. Or, when the chart of another coin shows price might be up for a correction, specific groups of key stakeholders in the supply chain (like again, miners for Bitcoin) could decide not to sell, therefore reducing the supply of the coin and making the price jump up. If crypto market were a jungle, I’d say the Disrupter sellers eat both the Reactive and Proactive sellers for breakfast – they have large bellies for sure.

+ Stop Losses. These are not really personas, but they count (to me) as an important source of selling. Stop losses are used in risk management techniques of most (serious) investors/traders. They are automatic sell orders at a pre-defined price -which is below the acquisition price-, protecting the buyer from downside movements/big losses. There is even a strategy called informally “stop-loss hunting” whereby disruptive sellers might force the price to go down unexpectedly, so that many stop-losses are triggered very, very quickly. If you see a long wick on a technical chart, you might be looking at a stop-loss hunt (see example below). This is the fastest way to sink a price, you guessed it.

Source: ?Tradingview.com (https://www.tradingview.com/chart/0kNvMB7l/)

Who are the crypto-sellers

Finally, let’s get to the meat of this article and be more tangible: who are really the ones that sell crypto-assets and how do they go about this decision? Before that, just remember how sellers got their coins in the first place: they either “created” them (like miners, stakers, early investors / founders of the respective project) or bought them from somebody else (re-sellers).

1. Miners/stakers: These are the guys who “create” new coins, either by mining them with electricity power / hash rate (for the Proof-of-Work/PoW type of coins like Bitcoin, Litecoin, Ethereum 1.0) or by staking their existing coins in the Proof-of-Stake/PoS networks (like Cardano, Polkadot, Solana, Stellar, Avalanche and many more), for which they receive new coins in return. Miners sell their coins on a regular basis in order to pay for operational costs (like huge electricity bills), report quarter closes with specific P&L/profit levels or pay their year-end taxes. The influence of miners/stakers is decreasing over time in Bitcoin for example, it is said that miners’ coins make around 10–15% of the current market, while in the past they represented much more (due to — among other factors — Bitcoin’s halving cycles). Yet, keep an eye on them especially if you own Bitcoin during a bear market (i.e. the period in the trading cycle when volumes decrease and prices go down) as miners’ share of the total market usually increases then.
2. Investors/founders: these are the people who got their coins usually at the very beginning of the project, and at very competitive prices. They are usually not active on an ongoing basis as they tend to sell a portion of their coins at launch, or when they can vest them (think of shareholders in a traditional stock market). Also, for large market capitalization coins (above 10 billion USD) their influence is not significant either. It’s important to understand the token distribution rules and investor/founder behaviour especially if you own “young” and/or small crypto-assets. But if you buy more established/mature coins, don’t worry too much about these guys.
3. Whales: they could be institutions, but are usually family offices and high net worth individuals (HNW) who own a substantial amount of your coin (for example, a Bitcoin whale is assumed to hold <50 million USD of the asset). They have sufficient capital to develop/use algorithms and purchase detailed on-chain analyses to stay ahead of the market. Usually they are the “disruptive” sellers who pull the ropes from behind the curtains. They sell when they need to rebalance their portfolio (especially if the price grows too much, they sell a portion of if so that the percentage of that asset class stays constant within their entire portfolio). They sell when they need to close a quarter with a certain profit & loss target (and pay shareholders). They sell when year-end comes and they need to pay taxes. They sell when they fear regulations will negatively impact the crypto-market (many countries try to ban Bitcoin for example). And last but not least, they might sell if they have an interest for the price to go down in general (either to do short trading, win an options contract, buy cheap etc).
4. Retail traders: these are the individuals who work for themselves to make a living out of crypto (and usually other markets too). They are many in numbers, but not always their actions influence the market. They are mostly the proactive sellers, who follow charts/price action to decide when to sell: at next resistance levels, at Fibonacci targets, at their predefined profit targets (e.g. 20%, 50%) or when they want to circulate back their investment into another coin (as a side note, many are trading in & out of Bitcoin, and not via USD / EURO / stablecoins). When their position orders hit the stop-loss level (of which we discussed above) they join the group of “reactive sellers”, as of course this would classify as “I was forced to sell my coin“.
5. General public: you, me, our aunt, the shopkeeper, the barber … and everyone who has a friend who has another friend who bought crypto and made it… or has just heard about it in the media/on TV and decided to join the party. In each bull cycle (i.e. “high season” for trading) there are cryptocurrencies who catch the imagination -and excitement- of the general public. Think of Dogecoin or Safemoon more recently. Some “pump coins” (as they are also known in trading) are more legitimate than others, but in the end they all tend to lose 80-90% of their peak price (dumps). And the general public is usually the one that sells last, with those big losses and out of FOMO/panic. This is because most of us don’t have the time, knowledge or interest to follow deeply the market (this requires few hours/week for reading, analyzing charts etc). We are the “reactive sellers” and things “happen to us”. We are the prey, but hey … at least we had some fun (if we were clever not to put our rent / mortgage money in for the gamble ??).
6. Institutions: are less important as sellers, as their rigorous processes, strategy and sheer size make them slow and uninterested in “trader games” … of course, unless they themselves are investment/trading groups, acting on behalf of their clients. But here I think more of companies like Tesla, MicroStrategy, pension fund, telecom networks or even government bodies who invest in crypto for the long run (see the previous article on why they “buy” here). And when they sell, they mostly sell like whales: to rebalance their portfolio every quarter, to pay back shareholders/dividends or maybe close off some taxation matters??. Because cryptomarkets are so new for institutions we need more years to understand their selling strategies … in 3-5 years we might find out and then maybe I’ll write another article.

This has become again a huge article, despite my good intention to keep it brief. Instead of conclusions I’m sharing an interesting chart that depicts how many on the crypto trading world see the “natural rotation of capital”. 

Source: https://twitter.com/SecretsOfCrypto/status/1390407090645082112

Please bare in mind that these are hypotheses, possible scenarios (and sometimes attempts to “shape” the market in certain direction) which may or may not play out. Always do your own research and have your personal “fixed” goals, instead of chasing the market.

Enjoy the rest of your day and see you next time!