Contents
There is this cliché about happiness — “it’s the journey that matters, not the destination”. Replace “journey” with “rumor”, and “destination” with “news” and you will have a TLDR of this article.
Trading (crypto trading in particular) is all about psychology; you have to understand what the market is thinking and what it is pricing in. Fortunately, the crypto markets are often inefficient with respect to certain events. One example is when there is a known event happening in the future at a known date (e.g., mainnet launch). In such instances, we often witness a “buy the rumor, sell the news” pattern; price will (slowly) move up leading up to the event, only to head back down after the event has materialized.
This article will discuss the characteristics of such patterns. In particular, we will discuss when and why we see such patterns in crypto markets. First, we will first talk about expectations and how they influence the market. Next, we will look at the difference between expected and unexpected news. Lastly, we will go over some past examples to see what the market did in the past.
Expectations
Why do people buy coins? Because they look forward to some sort of change in the future. The primary thesis for buying nearly any cryptocurrency is increased adoption. This is a valid argument for Bitcoin and Ethereum; they have real use cases and the more they are used, the higher their prices will become. But there are also precursors to adoption: think of a mainnet launch or a significant upgrade of the mainnet. These are believed to be bullish because it is expected that such upgrades will lead to more adoption. This often causes the price of a cryptocurrency to rise in anticipation of such an event.
But adoption is a meme for basically any coin except BTC or ETH. Adoption is not coming to a random altcoin. Hence the comparison with the cliché about happiness; as long as there is something to look forward to, people have a reason to buy. When the news comes out and that reason is gone, why buy?
The Keynesian Beauty Contest
Now, what would you do if one of these buy-the-rumor-sell-the-news plays presents itself? Imagine a mainnet launch of which you know the exact date: would you buy the rumor and sell on the day of the news? What if others will also sell on the day of the news? That means there will be a big dump and it would be better to front-run those people by selling just before the news. But maybe those people will do the same, then you’d have to sell before them, etc. This is known as the Keynesian Beauty Contest or K-level reasoning.
The data shows that it is rare for sell-the-news events to occur on the same day of the news; more often than not, the top is made before the event. In many cases concerning altcoins, this ‘selling of the news’ can be likened to a game of hot potato: you don’t want to be the last one holding the bag.
Priced in?
What happens when there is a sell-the-news event on an asset of real value (Ethereum)? If you hold ETH and expect a dump after a certain event, you might sell before the event in the hope of buying back lower. But what if the majority of people do this? This happened with the EIP-1559 upgrade in 2021: many expected a sell-the-news event. So, they either sold their ETH before the event or were holding off on buying until the event had materialized in the hope of buying back lower after the event. But since the majority of people expected this, it had the opposite effect. Although price started dumping a few hours before the event, after the upgrade, when it didn’t dump further, the people who were waiting to buy lower started buying. Thus, the result was a buy-the-news event.
A famous bird on Twitter said the following about the incident:
There is truth to this if we are talking about assets with real value (mainly BTC and ETH). However, you should not think this holds for your typical altcoin. The dynamics described above play out because people that want to buy lower are sidelined. Thus, they have to “fomo back in” when price doesn’t dump as they had expected. With altcoins, people will not fomo back in.
Expected vs Unexpected News
The most important thing to understand is the difference between expected and unexpected news. Sell-the-news trades only happen when:
- The event is known
- The date of the event is known
- Price has appreciated in anticipation of the event
When the event itself or the date is not known, news often has the impact you expect it to have: good news will cause a pump and bad news a dump. One example of unexpected news is when Tesla added Bitcoin to their balance sheet (February 8th, 2021). this allowed BTC to break through $40k and head towards $60k:
Another example is when Ripple won their case against the SEC (July 13th, 2023). XRP’s price doubled within a few hours:
Similarly, we will at some point get a spot Bitcoin ETF approval. Some people think this will be a sell-the-news event. In my opinion, this is wrong; it will likely be a buy-the-news event similar to the previous two examples, simply because the date is unknown. If, hypothetically, it were known that on date X, the SEC will approve a Bitcoin spot ETF, the market will front-run this and price it in, that would be an entirely different story.
Examples
“The past can be a great teacher” — Avatar Aang
To have an edge in the future, one must study the past. The future is more predictable than you may think, given that you have the necessary information at your disposal. Markets are made up of people, and the majority of people, as we know, never learn from their mistakes. Below follow three examples of sell-the-news events. There are many more examples to be found of sell-the-news events (thus far, I have only seen one counterexample; the EIP-1559 upgrade).
1. ADA: Cardano smart contracts upgrade:
- Event: Cardano’s ‘Alonzo’ upgrade, bringing smart contracts to Cardano.
- Date: September 12th, 2021.
- Price: +70% from announcement to peak.
- Result: ADA pico-top.
2. DOGE: Elon on Sunday Night Live:
- Event: Elon Musk hosts Sunday Night Live.
- Date: May 8th, 2021.
- Price: +200% from announcement to peak.
- Result: DOGE pico-top.
3. OP: Base mainnet launch:
- Event: Coinbase’s Base launches mainnet.
- Date: August 9th, 2023.
- Price: +50% from announcement to peak.
- Result: OP makes a local top the day before launch.
These are just three examples. If you search around, you will find many more. Note how much more violent the tops are in the first two examples. These events marked the pico-tops of ADA and DOGE primarily because they occurred in the bull market. These coins had just made ATHs and there were a lot of paper hands who had bought near the top.
If Base (or, more recently, Shibarium) were to launch in a bull market, we would likely have seen much more volatility both leading up to the event and after it. Thus, it is important to always be aware of the current state of the market when trading such events: what is the general sentiment and what type of traders am I up against?
Conclusion
In summary, buy-the-rumor/sell-the-news is a strategy that has worked many times in the past when (1) it concerns an altcoin; (2) the news and date are both known; and (3) price has gone up in anticipation of the event. We have seen these patterns play out many times and we will surely witness them again. Study the past if you want to understand the future.