Round and Round the money goes… Big cap trading pair alts and the liquidity suck phenomenon.
Today I share with you a secret. A secret a lot of people know, but perhaps even more don't, so I figure I'll (probably arrogantly so) let you in on it. This is somewhat complex to explain, so excuse this eyesore of a text wall.
The liquidity suck in a rotational market
As some of you may already be aware, the crypto market is now acting a lot like traditional markets in that the hot ball of money rotates around in it. When one sector is overbought, large participants sell out of it and into the oversold sector. In the past, this was simple – BTC would run up, get into overbought territory, the money would then rotate into alts, which in turn would run up and then selloff into a then oversold btc. Round and round it would go until eventually alts would act as an offramp into fiat.
Today, the market has matured enough that we not only have different caps (large, mid, low) but also sectors (defi, nft, storage, doge [haha] etc etc). In addition to this, we now have major, large cap trading pair alts that behave similar to btc in this scenario (eth, bnb, okb etc etc). This has made the rotational market much more complex, making following it difficult to predict/preempt, but the effects on the alts we love is inevitably the same. So I figured I'd try to type up this idea in hopes it helps my fellow degens stay ahead of the game.
When these large cap trading pair alts run, they suck all the liquidity out of the coins they are paired with. The example most are familiar with is when BTC runs. Late last year, you may have noticed when btc went parabola, the majority of the alt market went to sleep, in some cases, even went down. This is the liquidity suck – basically every alt is paired with btc, so when it ran, participants sold off their speculative trades into it as it ran. Conversely, when btc then hit major resistance at 42k in early january, you may have noticed that was when the first major alt runs kicked off – large participants were then selling an overbought btc into a then very oversold alt market. But why did they stop in February? This is when the next secular rotation occurred – the rise of bnb.
You can check this out for yourself – Go to tradingview, take any alt that topped during that time that has a bnb pair and using the compare function, overlay its usdt and bnb pairs, as well as the bnb/usdt pair – notice anything? you may immediately notice how terrifying the drop is on the alts bnb pair. But what I want you to note, is the correlation with where those alts topped in relation to the start of bnb's run. This is how the chad whales operate (magnified, in part, by arbitrage): They rode BTC up 400%, sold into alts that then ran up 10-20x, then sold into bnb that, in turn, itself ran up 20x. Doing this gives them mindboggling returns – for example, $1000 ran through this process would of equated to roughly 800k 6 months later.
The Rise of Eth
Which brings us to today. Right now we are witnessing a secular rotation to eth. Money is starting to sell out of bnb into it, in some cases using alts paired with both to bridge the gap with insane profit. 1 example off the top of my head is vet – do the same exercise as before – take vet/eth and compare with ethusdt and note where vet topped – right into the ethusdt lows. pretty convenient, huh? The same phenomenon happened with defi – you may have noticed a bunch of major defi coins have started running lately – compare these with where bnb initially topped on april 12th (MKR springs to mind). Im guessing at this point, some people's jaw's have dropped. Don't worry, mine did the same when I figured this out. Which brings us to what we should be doing now.
If Eth *really* starts running (which it kinda already is) there is going to be another liquidity suck out of coins paired with it. Conversely, when it stops running, alts paired with it will likely blast off, probably eventually selling off back into btc, but that may be weeks/months from now. In the meantime, monitor the eth pairs of your alt. Strong alts will maintain/rise in value against it. Weak alts will go into decline. Weak alts may still rise in usdt value, but if they are suffering against eth, well, you might as well just be holding eth.
The easiest way to mitigate this is via stop limit sells on your alt's eth pair. If hodling btc, stop limit buys. This way, if it does run, you wont be left holding the bag when the liquidity suck really gains momentum, because when it does, arbitrage will more than likely drag them down in usdt value as well.
Thanks for Reading
I could ramble on endlessly about this, and I have only really scratched the surface, but understanding this concept, I have found, is what separates the winners from those treading water in this market. Far too often, I see people jumping on alts which have simply pumped into a rotation, who buy up their declines and are left wondering why their bags aren't moving afterwards. Nail these rotations and you will achieve chad status. With enough practice, soon it will be your transfers popping up on whale alert. Apologies if this all comes across as big headed. Playing this game has turned me into a jerk. Good luck frebs.