Our cryptocurrency markets aren’t any different to the financial arenas that have been in existence since the opening of the world’s first public stock exchange in Amsterdam, in 1602.
Since then, the art of buying something cheaply and then selling that thing at a premium has remained the same.
Initially the trading of securities and commodity futures was a practice reserved only to the wealthy elite and their financiers.
During the 17th century this practice was conducted behind the private walls of European coffeehouses – where international spice and herb traders met to plan and finance voyages to east India and other exploitable areas of the new world.
In 1792 The New York Stock Exchange began its life as the Tontine Coffeehouse.
…they moved to a private room at the Tontine Coffee House on Wall Street to conduct Business. From these beginnings, they would morph in 1863, into a more formal organisation known as the New York Stock Exchange.Scott B. MacDonald – Separating Fools From Their Money, 2007
By this time, there was less of an emphasis on socioeconomics which boosted the involvement of the criminal classes who were conducting activities that were less than honest such as; gambling, after-hours securities dealing and other reprehensible forms of enterprise – all within the same walls as merchant bankers, insurers and politicians.
All of this combined to give rise to what is today referred to as market manipulation.
We look back to these formative years of financial trade because the cryptocurrency market has several similarities.
In fact I hazard to suggest that the manipulations that occur across the crypto markets, are exactly the same as the tricks that were pulled by the sketchiest Coffeehouse traders, as far back as the 1600s.
The Insider’s Edge
First – I must highlight the most historical and famous act of market manipulation that quite frankly shook the world and solidified a particular financial dynasty as a force to be reckoned with.
In 1815 the Emperor of France, Napoleon, was engaged in attempting to conquer and absorb the entirety of Europe into his French Empire.
With this being the case he sent a portion of his army into a Belgium municipality named Waterloo, where his enemies – the British, had positioned a number of troops.
However the British army, led by the Duke of Wellington were able to defeat Napoleon and bring an end to his attempted conquest of Europe.
While all of this was taking place, the most tactical financiers were rubbing their hands together and formulating strategy to turn this chaos into revenue. One of them was a Bond trader by the name of Nathan Rothschild.
Nathan had taken part in funding the British army via his purchase of government bonds valued at £3 Million GBP.
To protect his investment he dispatched a courier to the battlefield in Waterloo to observe the events unfolding from a safe distance.
Once the outcome of the battle had been decided, this courier immediately set out for England and brought the news of Wellington’s victory to Rothschild a full day ahead of Wellington’s own official courier.
With this information in hand, Nathan was now able to conduct severe market manipulation – with an aim to drastically line his pockets with vast wealth.
Nathan began to instruct his staff to begin selling his bonds onto the market.
At that time British bonds were called consuls and they were traded on the floor of the stock exchange. Nathan Mayer Rothschild instructed all his workers on the floor to start selling consuls. They made all the other traders believe that the British had lost the war so they started selling frantically.Andrew Hitchcok – The History of The House Of Rothschild, 2009
This accomplished two things.
First – it had the effect of fooling other traders into believing that the British had lost the battle which would ultimately make their bonds worthless.
Second – Nathan’s plan could only work if prices actually began to fall. So he forced this to occur by dumping his vast holdings onto the market causing other traders to follow suit which pushed prices even lower.
Then, Rothschild made his bold move.
Being the only trader on the floor with knowledge of Napoleon’s defeat, he went ahead and instructed his staff to begin to buy up all British Bonds that were now being sold at a fraction of their true value.
Due to this act of market manipulation, Rothschild had realised an immense profit of greater than twenty times his original investment.
Outsiders would refer to this as insider trading. But, it’s more akin to a game of poker. The player with the best hand never reveals this to his opponents, in fact he hides this information and uses it strategically.
Some may say that the emergence of new technologies prevents such market exploits from taking place. But that is far from the truth. The fact is the DNA of financial markets remains the same.
In reality, it all boils down to the art of buying something cheaply and then engineering – or taking advantage of a scenario in which that thing can then be sold at a premium.
In line with this reality, we look towards the exploits of a fund manager by the name of George Soros.
Profiting When Others Manipulate
In the situation we are about to explore, Soros was not himself the manipulator. Instead he exploited an opportunity that became available due to manipulation which, in this case, was carried out by the central bank of Germany: The Bundesbank.
The Exchange Rate Mechanism (ERM) was a system created in 1979 to reduce exchange rate variability in Europe.
Member nations were required to ensure that the value of their currencies remained within a specified range for a number of years.
To bring this to fruition, member nations with strong currencies were directed to engage in devaluation, whilst at the same time being expected to prop up the weaker currencies of member nations via intense buying. All of this to ensure that the value of these currencies remained within the ERM specified range.
This was the state of affairs when Britain joined the group in 1990.
Out all the member nations, Britain had one of the weakest economies and had been in recession since the start of the decade.
However, the Pound was valued very high in relation to the currencies that were already signed on.
This made devaluation inevitable and tactical traders such as George Soros were lying in wait.
In fact George Soros had obtained loans of greater than £1 Billion GBP and instantly converted this amount to Deutsche Marks in order to short the British Pound.
It was in 1992 that Soros became a household name, when Quantum and related funds, largely using piles of borrowed money, made more than £1 billion in a few weeks by betting against the British pound. Britain’s central bank wasted its reserves in an unsuccessful effort to defend the currency’s value. The episode derailed Britain’s membership in a European initiative seeking to rationalize exchange ratesTimothy O’Brien – NYTimes, 1998
Although the leaders of Britain at the time were intent on avoiding devaluation at all costs to prevent forcing their country into a deeper recession, the German Bundesbank had other ideas.
The German economy had slipped into its own recession, causing the Bundesbank to increase interest rates.
Being a member of the ERM, Britain had to do the same – but, its leaders refused.
Thus – manipulation had to occur in order to force the hands of the British.
With this being the case, the president of the Bundesbank at the time, Helmut Schlesinger, gave an interview to a journalist in which he remarked that he was certain that devaluation of the British Pound was imminent.
This unleashed an avalanche of selling onto the foreign exchange markets.
All over the world, traders began to offload GBP believing that their holdings were about to become worthless.
This pushed the British into a situation that required that they increase their national interest rate, so as to dissuade speculators from taking out GBP loans and then dumping them onto the market in return for other, stronger, currencies.
Simply – the British Government were forced into a battle with short sellers such as George Soros.
Within the space of just one day the British boosted interest rates from 10% to 12% and finally to 15% in order to prevent a run on the pound.
But this did nothing. The value of the pound continued to plummet.
Mr Schlesinger’s remarks turned the selling of Pounds Sterling into an irresistible flood. ‘This generation at the Bank of England had never seen anything like it. It was as if an avalanche was coming at us,’ one official said.Christopher Huhne – The Independent, 1992
Through market manipulation, the Bundesbank had achieved what it wanted.
Not only was Britain forced to increase their interest rate by a similar percentage as the Germans but, the run on the pound forced an even higher increase and severe devaluation.
Due to this, George Soros had nearly doubled his investment once he closed his short position. It is reported that he pocketed a sum greater than £1 Billion GBP.
This reality allows us to conclude that it pays to understand market manipulation.
In the crypto market, the same thing happens on a regular basis.
Even in Crypto, Manipulation is an Inevitability
Whether it’s Jamie Dimon publicly making negative remarks about bitcoin whilst secretly buying in, or – a developer conducting wash trading to boost the value of his own currency.
You must take steps toward learning the patterns and traits of manipulation, so that you can take pre-emptive measures to ensure that you are positioned in such a way as to benefit from this inevitability.