I believe a small group of people with millions of dollars in resources is manipulating the Bitcoin market, artificially injecting extreme volatility and reaping huge profits.
They start rallies by gradually, relentlessly buying when the price is low. These rallies become self-sustaining as more and more investors pile in, not wanting to miss the runaway Bitcoin train. Then they create flash crashes by selling huge blocks of bitcoins at the top, accompanied by DDoS attacks to further increase the panic selling and completely trash the price. Then they start the cycle over again.
They don't give a damn about the success of Bitcoin and scoff at the idealistic dreams of the true believers. The long-term effects of their actions are extremely damaging to Bitcoin, as article after article points out that Bitcoin is useless as a currency because of the extreme volatility.
Its impossible to call all the tops and bottoms without being privy to their plans, but I believe we can reduce their profits, add stability to Bitcoin, and yield some profit for ourselves at the same time.
The secret is for the true believers to start acting like market makers. A market maker is a company, or an individual, that quotes both a buy and a sell price in a financial instrument or commodity held in inventory, hoping to make a profit on the bid-offer spread, or turn. Market makers add liquidity and price stability to markets.
We cannot succeed simply by buying and holding. We must actively fight against the forces that are working to undermine Bitcoin.
This is my proposal for a Volatility Reduction Group (Market Makers):
1. We do not need to act in a coordinated way. We are better off with a distributed defense, where each individual acts independently. Specifically, we should not all pile onto the same buy and sell points, as that leaves us vulnerable. However, we can use this thread to share our successes, failures, and ideas with each other.
2. No one needs to sacrifice profits to participate. The goal of a market maker is to buy low and sell high, profiting from most trades. As long as the market shows significant volatility, we can expect to do better than those who just buy and hold.
3. The actions of the manipulators are carefully crafted to psych people into panic buying when the price is high and headed for the moon, and into panic selling when the price falls into an endless black hole. The market maker must resist these panic errors.
4. Market makers buy when the price is lower than usual. The lower it goes, the more we buy. We know that crashes are often accompanied by DDoS attacks, so we use long-standing limit buy orders to make sure they happen. We know that most crashes are relatively small (10-40%), so we gradually buy all the way down and don't try to time the bottom. At the bottom of every major crash, we stay all in and patiently wait for the next cycle.
5. Market makers sell when the price is higher than usual. We use long-standing limit orders to make sure the sells execute at the appropriate time. The higher the price goes, the more we sell, waiting patiently for the inevitable correction. Just when you're certain it will never crash again, thats when the bottom drops out. (However, as true believers, we know that Bitcoin will eventually be worth $1 million each, so we never sell our last few coins.)
6. We expect the average price to increase over time, so after each crash, we wait until an even higher price before selling into the next overheated rally.
7. This is a thinking mans game, played gradually over weeks and months. The enemys tools are patience, cynicism, and panic. Our tools are patience, discipline, comradery, and optimism for a better future!
Heres how to join us. First, figure out what you think Bitcoins price should be, if all the manipulators went away. As of this writing, I'm estimating that that the unmanipulated price would be around $125. At that target price, you should be half in fiat and half in Bitcoin.
The higher the actual price is above the target, the the greater percentage you should hold in fiat. The lower the actual price compared to the target, the more should should hold in Bitcoin. Buy or sell as necessary to adjust your percentage holdings.
Place buy orders totalling all your fiat scattered below the current price, and place sell orders totalling most of your bitcoins scattered above the current price.
When the price goes up and some of your sell orders execute, place buy orders to reinvest those funds at a lower price. When the price goes down and some of your buy orders execute, place sell orders to switch those coins back into fiat at a higher price. You profit on every pair of trades.
Never sell all of your coins. If enough people join this strategy, the new stability will be good for long-term strength. Eventually we hope to leave the 3-digit and 4-digit numbers for good.
Prepare yourself mentally for the fact that you'll be mostly in fiat, missing out on some amazing rallies, and mostly in Bitcoin when the future seems most bleak. Be ready for the fact that some of your limit orders might just sit there for months. It will not be easy, but stick with the plan, and it should be profitable!