Ethereum For Investors #23 – Is Ethereum Classic’s Price Being Inflated & Manipulated?

Tai Zen: Let’s move to the next bullet point here where you talk about the motivation, who are propping up the price for Ethereum Classic now?

Leon Fu: Well we’ve talked about a few things, I have my thoughts. As the 2 groups of people, there are people in the community, outside of Ethereum that I believe want Ethereum to fail.

I can imagine why because like the word we were saying that we hear many reports of the team being egomaniacs, it seems like to me, just looking at my Twitter feed that they’ve made some enemies for various reasons, I don’t really know but I get the sense that there are people in the community that do want it to fail.

Tai Zen: I think if they come down to ego also because if you look at Vitalik, he’s a young kid and he built a billion-dollar network and he’s the face of Ethereum. No matter what anybody says, you got Gavin Wood and all the Johns brothers, the Slock.it team, everybody contributing to them.

But the reality is that the face of Ethereum is Vitalik and what happens is there are people that been working on Bitcoin for years now, for years slaving away and nobody even knows who they are. And if I don’t have the kind of money that Vitalik has now and the popularity, the fame, the respect and they’ve been slaving away at Bitcoin and in their mind, they believe that Bitcoin should be the number one.

Bitcoin maximalist is basically Bitcoin fanboy or a Bitcoin die hard, they just refuse to believe that there should be any other Cryptocurrency except for Bitcoin.

Leon Fu: So that’s one group of people I think that is keeping the price of Ether Classic the other group of people seems to be in my mind, the Ethereum holders that didn’t invest in the DAO, that don’t agree with the hard work, I think that those are another large group.

We’re looking at the volume here that are being traded and I just have coinmarketcap in front of me it’s 107 million dollars in the past 24 hours of versus 97 million dollars in Ethereum at the time where I’m looking at it now. That’s too big to be just 1 guy.

It’s not individuals and it’s not even a group of individuals, there’s a big portion of the community now that I think just based on the trading volume that doesn’t support the hard work and they’re doing whatever they can, basically putting their money where their mouth is, to support the Classic chain. Now before this happened everyone thought that is it was up to the miners and I had always been saying that no, it’s not up for the miners, it’s up to mainly the exchanges.

And then once a major exchange such as Poloniex decides to list it, then it’s up to the users whether or not they want to trade it, whether or not they want to put their money into it.

The miners, many people say on my Twitter and saying that it’s up to the miner’s decision, the miners are not making any decisions, they’re just looking at like what makes us the most money, where can I point the hash rate that will earn me the most amount of money. And that’s a function of the price of the coin versus the difficulty of the chain.

Tai Zen: Now in case of people the audience that is listening, the last time you and I checked about 1 hour or 2 ago, the difficulty level was at like 3.6% on Classic chain and then it’s like 15% of the price for 3% of the difficulty.

Leon Fu: So you mine 1 Ether Classic, you get 15% of the value of the hard fork Ether, but you only spent 3% of the hash rate, get 15% for only spending 3% of the difficulty. So as long as the price stays up here, the hash rate will probably climb. And this is really a tragedy for Ethereum because it’s really splitting, hashing power is a resource.

It’s only a matter of time then it’s going to go up, we see the price versus the difficulty and we know that if you are an Ether miner, why would you not mine Classic? You have all the same hardware to do that, point your miner at a different chain.

Tai Zen: Who is supporting and propping up the price of the exchanges of Ethereum Classic? Here’s my thought, I thought that I’m gonna throw out there and I’m just throwing this out there based on the evidence that I see because I sat there literally today and watch the Ethereum Classic being traded on Poloniex for like 2 hours nonstop because this is just fascinating to me. So I sat there and I actually just sat there and watched it for like 2 hours.

And I can tell you something, a human being cannot update their orders that quick, there were orders that were just being updated. I tried to just buy 1 or 2 Bitcoins just to test things out, and I could not capture the price that I wanted, as soon as I see it listed it was gone.

Whoever is doing it, they have very advanced technology and they’re capturing prices and they’re connected to an API or something into Poloniex and they’re making high-frequency trade that’s much faster than the human being can ever do, so it’s not human that’s doing it, its computers are doing it. And here’s the other thing that I would say to check this out, I don’t have any evidence, I don’t have a fax to substantiate this, I just see the results, the effect, I can’t show you the cause but I can show you the effects.

When the prices change and the volume of Bitcoins change on the order books, it changes to freaking fast for someone that’s connected away from Poloniex. In other words, whoever’s doing it has a direct connection into the Poloniex servers. Whoever doing it has their software installed on either on the Poloniex servers or they have their servers, the computers colocated next to the Poloniex servers.

You know how Goldman Sachs or whoever it was that high-frequency trading firm in New York? They did like a billion dollars to improve the fiber-optic lines increase by through a few like milliseconds between New Jersey and Manhattan.

So whoever’s doing this is doing at the same caliber of trading and that’s why I don’t recommend anybody that’s listening to us trade on a small time frame like 1 minute, 3 minutes, 5 minutes, 15 minutes because if you do, you’re going to get crushed by these high-frequency Crypto traders. Because of their ability to put buyer orders and seller orders in as thousands of times faster than what you can do.

These high-frequency traders that have their servers or their trading software, it’s either next to the Poloniex servers or it’s on the Poloniex servers or I think it’s Poloniex themselves because they’re not being regulated by the goddamn SEC or anybody.

When you and I trade, there is a 1% to 2% slippage, slippage means that if you see it listed for $5 and by the time you get it, it’s like $503, $505, $510, that’s in terms of US dollars. In terms of Satoshi, most people don’t understand how to read those freaking 8 decimal places, so when they put an order in they don’t sit there and count how many decimal places it is.

So in their mind, that human mind is not used to comprehending numbers out to 8 decimal places, so even myself, I put orders in it, it fills and I’m good to go. On the Ethereum short, I got slipped an average about 5% getting in and getting out, in other words, I lost 5% of what I put in just to make that trade, that’s why I stopped sorting Ethereum because it costs like 5% just to get in and out.

But how does it cost Poloniex anything to make that same trade, does it cost Poloniex anything? Absolutely not, it’s just like when you were working in Manhattan for the Big Bang’s and when you were working for the man, they can short stocks that they don’t own, it doesn’t cost them anything, it costs them absolutely nothing.

So what’s to prevent Poloniex from doing that? They don’t have any proof of inventory, nobody can inspect them and determine how much Bitcoin inventory or how much Ethereum that we’re having, nobody audits them, and the other thing too is that they would have known who the hell they are.

Leon Fu: After Poloniex listed Ethereum Classic, every other exchange followed.

Tai Zen: I am convinced that the exchanges are running their prices because who can prove that they aren’t, who’s going to inspect them, there’s absolutely no way that anybody can come in and inspect them because it’s free money. Let me explain to how the bookies make their money, they don’t care who wins or loses, it’s about the volume and they make what’s called the juice.

When you’re a booking you make money on the juice that spread, the house takes a small piece at the top and they’re taking a quarter of a percent off the top and that’s not including the slippage, the slippage is even higher than the transaction fee.

The reason why the slippage is a lot higher is because people don’t know how to calculate the slippage, the slippage is if you see something that elicits for $10 and when you go to click the buy button and you buy for $10, instead of paying $10 you have to pay $10.5, so that extra 5 cents that you did not anticipate paying for, that’s called slippage.

So in the world of trading, we call that you just got slipped, Leon. I was trying to sort Ethereum and I got slipped 5%, that’s a huge percentage, do you think that the average trader knows that? Do you think that the beginning traders know that?

I didn’t for the last 8 years of my life and I saw that immediately when I got into it. Here are more clues that the exchange themselves is the ones I believe is running up the price, because what do they care if you went up to the price on them, they make the money on the transaction costs, it’s just printing money for them, it’s just a money-printing machine for them.

They don’t give a sheet if it goes up, they could care less because when it crashes and goes back down, they know that the traders have to get out of their position, so guess what they have to do? They collect the transaction fees and the slippage on the downside, they don’t care.

And during the 2 hours that I was watching it, because this is fascinating to me that a dead Ethereum chain is coming back to life, that’s why I took the time to sit there for over 2 hours to watch the order book and the receipt, the time and sales window to see what comes through. They flash 300 or 400 Bitcoins at 1 time and then they disappear, they flash it and it disappeared. Because it spooks people and when you say it spooks other traders, it scares off other traders.

And here’s how they do it, they are big time algorithm, high frequency because they know how to code, I mean obviously, if you want to exchange Poloniex, you’ve got good coders that work there. So what happens if you got the mom and pop coders, like the amateur coders that think they know how to create a bot and they go in there and they see it and they have some protection inside their algorithms, the trading bots, and then you see the volume go up this much then get out.

So they’re doing this to spook people on purpose, to scare off the smaller boats, all they care about is transaction costs and slippage. The slippage is where they make their money, people don’t know that, the exchange makes their money on the slippage, they don’t make it. They make it on the slippage, slippage is a way to mark up the product before you deliver it to the customer.

Let’s say you’re selling Ethers at 100,000 Satoshi and I want to buy the Ethers. So you’re a seller and I’m a buyer when I go to hit the buy button to buy 100,000 Satoshi, if I just buy 1 Ether from you then I can see the slippage. If I buy one Satoshi from you for 100,000 Satoshi and then I get it and I saw that I paid 105,000 Satoshi for it, I can see hey I got slipped 5,000 Satoshi.

However, when I started buying 100, 200, 300 Ethers from you, I don’t see that unless I sit there and do the math and you think most people can sit down and log their trades in like I do and analyze it and look at how much they got slipped, most people don’t do that. They have it in the fine print that they do their best to fill your order.

So if it’s all individuals putting in limit orders, there’s what’s called a limit sweep, that’s something that I talk about in our Cryptocurrency investing program that we have, that we’re working on, that’s something I talk about a buy sweep and a sell sweep where you just sweep in all the orders and just get the best price that you hope to get the best price you can.

Because you really cannot put in a limit order, you really cannot put in a limit order because they actually see it so you have your force to either do a buy sweep or a sell sweep, and especially if you buy more than 1 or 2 Bitcoins worth of any Cryptocurrency, you have to sweep it, you cannot do a limit order.

If you are listening right now and you only buy half a Bitcoin or a quarter of a Bitcoin or a fraction of a Bitcoin, you won’t understand what I’m talking about, but if you start getting into larger volumes where you’re buying several Bitcoins at a time worth of a Cryptocurrency, you have to do a buy sweep or a sell sweep in order to get it. So what happens is when you do that, the exchanges get to mark it up.

Let’s say that if I want to buy 1,000 Ethers from you and you advertised on the ask-side that you are selling 1,000 Ethers and I advertised on the bid-side that I want to buy your 1,000 Ethers. What it happens so quick that Poloniex can actually go in there and mark up your price and fill my order, they can actually do that and there’s nothing to stop them from doing that and they make it killing off doing that, there’s absolutely nothing to stop them.

If you and I own the exchange, you and I would do the exact same thing, because you’re a coder and I would tell you whenever this guy’s buying, I want you to mark it up by X amount of percentage and sell it back to this guy and we’re going to jump in front. Because they know where the orders are at and they can wash and rinse your ass.

Let’s see what they see that everybody’s order buys or sell is that a specific price, they will go up there and push the price up to stop everyone out or to trigger their orders it forces them out and they just made a quick profit. And to us, it doesn’t seem like that, why would they waste time doing that, then they made 5,000 Satoshis or 10,000 Satoshi’s but what people don’t realize is that do they’re doing that on thousands and thousands of Ethers at 1 time or whatever Crypto that is being traded.

So whenever you say that could it be a hedge fund, could it be a high-frequency trader, it’s definitely a big player, a big whale that’s moving the prices, that’s propping up the price of the Ethereum Classic at the moment. Because think about that, the average investor that comes in, why would they jump on the Ethereum Classic for?

And most of the DAO token holders, they just got their refund back, why would they go back and support the other chain and risk losing their Ethers. And the bulk of the people that got into the DAO are people that have some type of experience in investing Crypto, even if it’s not a lot, at least they are familiar with it.

So they know what the difference between the Fork chain and the Classic chain is, so it can’t be them because that would jeopardize like you and I are the only people that I know of that invested in the DAO, and now we bought a small number of Classic Ethers just do some testing so we can report it back to our viewers. But most people that I know, they’re not going to do that.

That’s my thoughts on the motivation behind propping up the price, I believe it’s an inside job and I believe that it’s the exchanges that are doing it and until somebody shows me evidence, otherwise I’m going to base my comments on the effects that I see.

I don’t actually see the cause but I do see the effect, the volume is real but who owns that? Let’s just take a hypothetical example, you have 100,000, a million Ethers and you throw the Ethers back and forth between the buy and sell. Let’s say you take your million Ethers and you put up 100,000 of it on the sell-side and then you run in there and you turn around you buy it from yourself.

You buy from yourself and then you went back and you prop it up on the buy-side and then you sell it back to yourself, so you’re just sloshing the Ethers back and forth between the buyers and the sellers and to the untrained eye, they think that there’s a lot of volumes, a lot of buying pressure, there’s a lot of selling pressure but really it’s just you, the exchange, sloshing the price back and forth.

Now you might say how’s it impossible? Well, of course, it’s possible, they’re the ones that own the Ethers and it’s their chain and it’s their software, it’s not like you can go in and audit it. If you try to do that and people are listening now might say well Tai, Leon, why can’t we do it? I’m sure there are people that got in early on the Ethereum, the ICO and they have 100,000 Ethers, why can’t they do that and just push the price up or push the price down?

The problem is they have to pay transaction fees and slippage where the exchange doesn’t, the exchange does it completely free without any cause of slippage in any cause of transaction fees. If you took 100,000 Ethers and you try to buy and sell to yourself, what happens is every time you make a transaction, you lose 3% to 5% of it, and every time you do it again, you lose another 3% to 5%.

So how many times can you do that before your account goes down to 0 Ethers, whereas the exchange can do that all day long, there are no transaction costs and there’s no slippage cost? I’m looking at the effects, I can’t look inside their servers, I’m not technical enough like you are, I don’t have access and even if I did, I’m not technical like you are to be able to review what they’re doing and do it.

But here’s the thing, I’m a trader, so if I see transactions coming through the time and sales and I look at the order books, I know how to read it and I know what a human being is capable of doing with a mouse and a keyboard, and I know what an individual is capable of doing with their account sizes. So that’s my thoughts on what’s propping up the exchange prices because if you look at Shapeshift and Bittrex and all them, they’re jumping on the same bandwagon.

Why? Because it’s easy, it’s free honey, you just cycle through and you just pump it up. And with the exception of Shapeshift, they’re more of a broker than an exchange. Let us say that if you want to buy some Ethereum Classic, you have to put up your Bitcoin and they hold that in escrow.

That’s a little bit different for them, but for like Poloniex, Bittrex and Kraken, none of that exchanges are regulated, nobody expects them, nobody audits them. This is like a free printing press for them, every day they’re collecting transactions and slippage fee and they’re making a killing. Do you have any thoughts on that?

Leon Fu: No I think you covered it very well, let me get going here, it’s getting late for me here so I’ll catch you later.

Tai Zen: I’ll catch you later and thanks for watching these guys. If you liked it give us a thumbs up, you don’t like it give it a thumbs down. I’m a little passionate about this but I hate it when the exchanges rip off the public, so take care.

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