Why Liquidity Matters During Alt Season

By BitcoinGordon | BitcoinGordon | 8 May 2021

Hello fellow crypto-through-the-tulips-inians.

It's been over a week since I posted, not for a lack of ideas to share. I was on the road for a while... first time in quite a while, and somehow I've also suffered a shoulder injury by not partaking in any crypto-heroic activities. Go figure. Typing was too painful... still is... but I miss sharing of the brain-thinky thing. A third concern is that I really hate earning in alt coins I care nothing about. I haven't really taken to any other platforms to which I wish I could more readily adapt, so it is my love for this amazing community on Publish0x that I not only suffer pain while writing this, but also suffer knowing it pays in pennies worth of coins that I can barely move to a wallet, where they sit unused.

Rant over... time for the topic.

Everyone knows the bulls have been let loose upon the world and the alt season has officially been announced.

What everyone does not seem to know... perhaps does not care to know, is that there is a finite amount of resources, that most of what is taking place in the market is gambling, and the house always wins. Even more more, the unknown issue of liquidity continues to plague the market in ways that most are simply going to have to learn by way of the school of hard knocks.

I will share a little of my journey. You probably read it before, and will read it again. Thus, I share in brief and try to keep it entertaining.

2017 I learned, studied, analyzed, paper traded, and found I was extremely good at the high pace scalping and day trading that forces most traders out of the market within the first year. I believed in trends, so I did well adapting to the ups, the fast downs, and the patience-taxing sideways movements of the market. 2017-2018 was the first genuine alt season. Though people had experienced a crypto rollercoaster in 2012, 13, 14, 15, 16 to lesser degrees, Binance really changed the game. Sure, there were 'legit' exchanges like Kraken, Coinbase, and Mt. Go... scratch that last one hehe, and others, but Binance truly mainstreamed the role of official centralized exchanges pushing new coins onto the market with high exposure and massive short-term liquidity. Prior to 2018, one could pump small cap coins on Cryptopia, a site which honestly had the most amateurish of engine qualities and surely played zero role other than to provide pump groups a means to exit-strategy within seconds of trading. 

With Binance, things were a little different for so many reasons. The interface looked more legit. The presence in the crypto community encouraged platform confidence. The high profile of CZ and his coverage in Forbes and other print gave credibility to the industry, at least in our own minds, which in turn lent a thinking that if a coin was listing on Binance, it must be worth the pump. This was supported by the fact that for the most part, the engine could handle the pump better than prior exchanges, but in truth, the only coins I have ever been permanently stuck in, finally to purge of bad old bags, were positions that I did in fact guess 100% accurately, in most cases all partial fills, and the liquidity simply bottomed out with a fast dip never to recover.

It is true, that under longer trend boring market conditions, the top ranking coins by marketcap are much harder to trade. They have so much  volume entering and exiting, that increasing interest stabilizes the price instead of the opposite effect. I will go into this in more depth in a separate post, but the point is that Ether, Bitcoin, Litecoin, and sometimes 20 others near the top will have enough liquidity to keep trading near the market price for extended times, and whenever there is a sharp boost or cut, historically it has been deliberate and by a few hands that are both massive and typically successful. But, this has been changing the more that the traditional sectors take interest in these top coins, and more because exchanges, the casinos of crypto, are borrowing a few tricks from the traditional sector, playing economic trickery that folds more funds towards the house every time. Margins, leveraged trading, binary options, futures, leverage coins and the like are all trending and dramatically shift potential risk towards liquidations that impact the market in timed cycles. A ton of hands get liquidated when contracts expire. People may try to avoid this by trading perpetual contracts, but they have to watch their margins carefully, and often people are so driven to defend their positions that they will continue to fund them to avoid liquidation, but the reality of the actual value of these positions is propped by lending, staking and locking of coins. Therefore, it is important to keep in mind that every position protected in a bad extended call, be it short or long, is money that is NOT moving in and out of shorter term trades.

A lot of focus is placed on the HODL, and a lot of counter-focus is placed on the pump. Somewhere in the middle is the truly important value in intra-day trades, OTC, swing and weekly trades. The top coins truly require millions of these trades to move continuously in order to support the market value. If too many small hands were HODLing, you would see liquidation from the market by whales, because a liquidity shortage is a risk to their investment, where shifting assets in and out of short term hype seems to be worth the risk to them.

Lets get to the meat of the topic: why liquidity matters the most in alt season. One thing that I learned in 2018 is that every single price value in cryptocurrency is artificial. There are billions of dollars moving around in crypto, yet the mainstream billionaires all seem to poopoo the credibility of the market. Technically, there is, in fact, a finite number of positions possible, though there isn't an economist on planet erf sophisticated enough to construct a viable model of the real bottom-line cash value of all assets. There are people who support longer existing coins like EOS, recent high-credibility coins like ADA, and others that pile on the Tron hype train, BNB and its chain, and the all-divisive memologist Doge. Fun, controversy, celebrity endorsement, news coverage attracts people who believe it is not too late to become the next Doge billionaire. Much Fun, So Illogic... happens in a highly manipulated market, that it just could happen, that a new generation of Dogeillionaires emerge, but in most cases, this is something that happens to a select few, while others simply have no clue about the market they are entering.

A few words about what happens when slow and long trend pumps reach their target goals. 

First, the experts are already there, have their targets placed, and for the time being it is their secretly placed limit buy and sell orders that provide much of the liquidity that makes it possible for newbies to buy a position. People at the top of the food chain are NOT, I repeat, NOT long term hodlers in sketchy alt coins, but they DO have the funds available to cash out at precisely the right time.

Next, the biggest, most robust longer standing alts always defy the market expectation, and once they have benefited from their relationship to Bitcoin dominance, the surge in price does end and they come down just as extreme as tiny alts. We saw multi-billion-dollar alt coin projects take an 87% dive, followed by an 82% dive, followed by a 92% dive just in 2018 and 2019. At this point, depending on whether you value an asset in USD(t) or Bitcoin, these have recovered some of their losses, and in some cases encouraged pumps to boost back over previous all time highs. But, re-enters Binance. With the success of promoting a weekly sea of alt coin pump and dumps, Binance created a logical launch pad, an incubation for new coin projects, adding credibility to projects where (maybe) they see potential, or possibly just want to see pump harder. The constant injection of new coins to pump means there are people savvy enough to stack more sats or $ hopping on the pump train and getting off before the tracks lead to destruction, while others are no longer contributing to the marketplace because they got in too late and their positions are hodlbags with near-zero value, or they took a loss to get out and have drastically less funds to re-invest.

Let's take a middle ground and look at people who managed to join the pamp train and are certain, positive that their coin has only begun to 1000000X. Some of these people are going to see the reality of whales selling the top. Scared, they will try to exit, only to find that the inflated value is no longer propped up by people willing to sell. There is always attention placed on the so-called liquidity crisis of big coins like Bitcoin, but in truth there are positions to fill all the way up and down. You could get Bitcoin for $1 all the way up to $1M and never run out of positions that would fill the range. It takes billions of dollars to throw the price of Bitcoin by more than $1000, and positions are filled so often, so fast, it is literally always available at market all the time. When a small coin pumps hard, though, it takes less funds, which also means it takes fewer people with real money to make the change happen. On top of this, the cost of the coin does actually matter in the pump. 

Since the market values the price proposition and sits at certain key targets, people are willing to buy or sell hard when they see a coin approaching a certain range. Right now, people are dead-set on a $1 Doge. Last year when attempts were made to pump Doge to $10, it budged from something like 0.000003 to 0.0000066 in USD(t). I'm not going to check my facts, so adjust zeros as needed- it was microscopic in scale, yet hundreds of millions did eventually boost it by 100%. This was profound, and possible to analyze that it would have taken trillions of dollars that do not exist to pump that price to $0.10, but to the investor, the incentive to get "more" coins matters more than whether there is liquidity in the coin they are purchasing. If it gains popularity, then there is a pyramid effect, where newbies are providing liquidity increasingly later in the game. They buy the hype because they are only now aware, while there are soon-to-be-billionaires that have been hodling until a crucial peak. It would be financial suicide to hold some of these coins beyond a target peak. So, what happens to all of the less experienced newcomers who are pouring every penny they can get a hold of into the future of the coin, only to find that the mass sell-off usually occurs just shy of one of those target numbers.

The real issue of liquidity is that there simply, truly, absolutely is not enough money in the market to support the radical market buys expected. You can't have a massive pump on 100 top coins and 30 alts spiking in popularity all at the same time while new coins are getting pumped simultaneously. Someone somewhere has to be left hodling the bags while sophisticated longer term traders dump on the market. The only reason there continue to be massive whales buying up the correct crypto projects is because they got out of something else fast enough and with profit. The amateur is excited by a spike in price. The professional is aware that the order books thin out outrageously at the top, and the price matters very little. I will explain.

When a small coin pumps, it requires a snow-ball of market buys, meaning that people are buying at the instant they want the coin and they will pay whatever is currently available in limit sell orders. Once there are no more people willing to sell at the current price, the order book will climb up to the next value and the next after that. Whatever volume of coins available at the next price up determines how fast the price rises higher and higher.

The higher coins go, the more we see a slowing or stall of momentum in a price pump, because people get nervous they will be stuck at the top and they start selling off, while more cautious investors simply wait to buy more, watching to see what happens, and those whales who already had limit sell orders sitting at ridiculously high prices pre-pump are the only ones who have an offer for you to take. When the momentum stalls, people panic sell, and many of the whales who are just there for the sell-off will go ahead and market sell. This causes a massive drop in price, but they are at an advantage. So many people are piling on limit buys they do not get a chance to cancel orders if the price starts to tank. By the time a pump is over, the small guy and the late-comers are the ones who now have positions stuck too high. They were ready to sell, but there was simply not enough at market to match the price. Who cares if "x" coin pumped 1000% if only $20 worth of it is available to sell at that price? Get it?

So, have fun, enjoy the hype, play with money you are willing to gamble, but if this is serious business for you and you stand to lose a lot, you need to stop what you are doing and grasp liquidity, or I promise you without any question, you will be the next person unintentionally carrying a HODLbag that isn't going anywhere in the near future.

And on that lovely note, the crypto-centric super hero Gordon Freeman... out.

How do you rate this article?




Hi! I'm Gordon Freeman (I hear they made a likeness of me in some video game... totally unrelated... or...).


Welcome! This is my blog for all things crypto, from my day trading and tutorials to general crypto news.

Send a $0.01 microtip in crypto to the author, and earn yourself as you read!

20% to author / 80% to me.
We pay the tips from our rewards pool.