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How to protect your cryptocurrency from whale ‘rinse and repeat’ trades
Lessons we can learn from the legend of Napoleon Bonapart’s defeat at Waterloo and Nathan Mayer Rothschild’s reaction
As a general rule of thumb, the top 500 holders of a cryptocurrency are considered ‘Whales’.
- The history of ‘rinse and repeat’
- How to protect your cryptocurrency from rinse and repeat trades in today’s cryptocurrency markets
Why do cryptocurrency investors fear Whales?
I love history and I love great stories. If you want to better understand a problem, history can be a great guide. If we want to better understand the problems created by the power of Whales moving their assets into and out of cryptocurrency markets, I think it’s a good idea to go back to a well-known example from history that can help to illustrate the problem.
Nathan Mayer Rothschild, Napoleon Bonapart and the legend of Waterloo
Napoleon Bonapart was a French general who conquered and ruled much of Europe and was even crowned Emperor. The Battle of Waterloo was fought on Sunday, 18 June 1815 near Waterloo in Belgium. As you probably remember from your history lessons, Napoleon lost the battle.
What you may not know is a guy named Nathan Rothschild bought the fastest boat money could buy and sent a spy to bring back the results of the battle of Waterloo to Rothschild who was waiting in London. Napoleon lost the battle and Rothschild’s spy got on that incredibly fast boat and sailed for London.
Of course, in those days there was no faster way to transmit information than by sailboat. Even though the battle was over in Belgium, no one in London had any idea what the result of the battle was. The only thing people knew was that a battle was coming and the future of Europe depended on the outcome of the battle. Market moving stuff!
The spy arrived before anyone else from the European mainland and he delivered the news secretly to Rothschild. Now normally, if you have news that will be positive for the stock market, you start buying stocks. However, Rothschild realized he had a unique situation. He had knowledge that no one else had. This unique situation needed a unique trading strategy.
With the knowledge that only he knew of Bonepart’s defeat, Rothschild went onto the stock exchange trading floor and started quietly selling stocks. He then started selling stocks faster and faster. He started selling larger and larger volumes and made his selling more and more obvious. Other traders started to notice.
‘Rothschild knows … Rothschild knows!’
Other traders seeing Rothschild selling stocks correctly assumed Rothschild had knowledge of the results of the battle of Waterloo but they incorrectly assumed Bonepart had won the battle.
Suddenly, a panic sale ensued. Traders convinced Bonepart had won the battle of Waterloo suddenly started dumping their own assets as quickly as they could find a buyer. As the panic reached a fevered pitch, Rothschild started buying and buying and BUYING. Panicked traders threw their assets away to Rothschild in an attempt to save themselves from complete financial ruin.
Other, slightly slower boats, started arriving in London and the real news started to spread that Napoleon had actually been defeated. When the news made it to the stock exchange, stock prices soared, catapulting Rothschild into the financial legend we know today.
Rince and repeat
In the cryptocurrency world, the phrase ‘rinse and repeat’ refers to crypto Whale(s) who use their immense wealth to force the price of a cryptocurrency down through rapid and heavy volume selling of cryptocurrency, with the aim to create a selling panic. What triggers the panic sale is the unknown reason for a sudden drop in a cryptocurrency’s price. Retail investors are at risk of panic selling when faced with an unknown reason for a price drop. Retail investors incorrectly assume there IS negative news that they simply don’t have access to yet. Retail investors incorrectly assume Whale(s) have some special knowledge and are selling quickly before the news becomes public.
The Whale(s) then watch the panic selling continue for some time before starting to buy back the cryptocurrency at a lower price. Sometimes this behavior can be disguised by doing the selling and buying on different crypto exchanges. If you are a small investor, panicked by losing 10 or 15% in only a few minutes, you might be induced to sell your cryptocurrency into the panic selling, and by selling, you become a victim of this age-old scam.
How to protect your crypto from ‘rinse and repeat’
First, realize these kinds of scams have been around forever. Gold prices and thinly traded stocks have been plagued by this very same unscrupulous trading strategy even in recent decades. Whenever you have a thinly traded asset with very big players moving large sums of money in and out of the thinly traded asset, you will see very large movements in price.
Unfortunately, due to the decentralized and private nature of bitcoin and many other cryptocurrencies, it is essentially impossible to bring a ‘bad trader’ to justice. However, maybe we don’t need to bring them to justice after the fact. The best way to protect yourself from this kind of dishonest trading is to recognize it as it’s happening and maybe even take advantage of the deception by buying into the sharp downward correction.
As the market matures, this problem will solve itself
Over time, Whales will sell some of their holdings into the market. As the market matures and decentralizes, it will get harder and harder to execute a ‘rinse and repeat’ trade. It will become harder because as Whales make up a smaller and smaller percentage of top crypto owners, smaller cryptocurrency players will be able to ‘absorb’ and ‘mop up’ unusual downward spikes in cryptocurrency prices. Software, data, and AI will also contribute to this effort by making automated trading more and more accessible to the average investor.
As the cryptocurrency market matures, the ‘rinse and repeat’ problems will go away by themselves because Whales will start losing money when they try to execute these trades. Smaller market traders won’t get fooled into panic selling. Instead, they will lean into unusually aggressive selling and start buying up cryptocurrency at a discount. As soon as Whales start consistently losing money from rinse and repeat trades, this kind of dishonest trading will disappear with no help from regulators.
In the meantime, how can you protect yourself?
- Monitor the Whale Twitter feed. Sign up for Whale Alert on Twitter.
- If you’d like a complete list of bitcoin Whales, you can find an updated list here.
- Don’t panic sell
Know WHY you’re selling before you sell. If you don’t know why the price of your cryptocurrency is tanking, don’t sell. Investigate, research, call people, sleep on it … whatever it takes. Don’t fall for a 200 year old scam.
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If you want to take a look at some of the other pieces I’ve written about cryptocurrency and blockchain, head over to my profile.
P.S. – If you’re worried about the safety of your cryptocurrency wallet, check out the following video for some practical tips.
