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How to profit from the price manipulation of counterfeit coins?

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Short-selling transactions are more likely to occur in low market value or low trading volume altcoins.

Original Title: "Foresight Ventures: How to Profit from the Empty Market of Shanzhai Coins?"

Original Author: Jonas@Foresight Ventures

One, what is empty trading?

Short selling can allow traders to profit from falling asset prices. This is a common way to hedge existing positions or bearish market conditions. However, short selling can sometimes involve high risks. Firstly, when buying pressure suddenly increases, a large number of short sellers are forced to close their positions and continuously buy assets. This can lead to a short squeeze when demand far exceeds supply in the short term, causing prices to rise due to a shortage of supply. Secondly, when a manipulation group absorbs and concentrates the circulating shares, causing short sellers in the market to have no other source to buy back chips except for this group, it can also trigger manipulative short selling.

Short selling is more likely to occur in small-cap or illiquid altcoins. Especially in the leveraged crypto market, continuous forced liquidation can cause a waterfall effect, leading to more drastic price changes. Some advanced traders will observe potential short selling opportunities, accumulate positions in the early stages, and take advantage of the opportunity to quickly sell when prices rise rapidly.

二、Key Indicators of Empty Trading

1. Funding rate of contracts: The premise of a short squeeze is that the number of short positions overwhelms the number of long positions. Specifically, when the funding rate of a certain altcoin contract exceeds -0.1% (i.e. short-term interest rate of shorts is 0.3%, and the annual interest rate exceeds 100%), it indicates that the short-term bearish sentiment is extreme, and it will accelerate the upward trend if it exceeds -0.75%. Extreme negative funding rates have been observed in several case studies later on.

2. Contract positions: More importantly, the more trapped liquidity there is, the greater the volatility brought by short selling. This is mainly reflected in two aspects. Firstly, the closer the contract position is to the market capitalization, and the closer the contract transaction volume is to 50% of the spot transaction volume, the more likely a short squeeze will occur. Secondly, if the contract position increases by more than 50% in the short term, it indicates that the main funds are entering the market. If the position decreases, it indicates that the main funds are withdrawing and it is time to take profits.

3. Chip distribution: applicable to market manipulation by market makers. The more concentrated the chip structure, the more extreme the market fluctuations.

Three, Analysis of Several Classic Cases in Recent Period

1. LINA: Linear is a cross-chain compatible defi synthetic asset protocol with poor fundamentals. Starting at the end of May, it pledged to mint stablecoin LUSD, with a pledge ratio of up to 22% of circulation. The yield of mining token LINA for LP with stablecoins LUSD and BUSD is as high as 60%, attracting an expected 10% of hedging mining ratio. Market makers have bought 23% of the circulation, so the 22% pledged plus the 23% controlled by the market makers, a total of about 50% of LINA chips are locked up. This is a typical manipulative short-selling, with market makers holding spot and manipulating contracts.

We can observe that LINA's contract funding rate has significantly exceeded -0.1% since May 28th, with the highest funding rate reaching -2% on May 31st and June 3rd. Contract positions have also increased significantly since May 28th, with a position size of 50 million US dollars, while the circulating market value was only 70 million US dollars at that time. Contract trading volume was 50 million US dollars, which is close to 50% of the spot trading volume of 90 million US dollars, making it easy to trigger a situation where short positions are forced to close due to insufficient supply. As a result, from May 28th to June 3rd, LINA's coin price rapidly rose by 2-3 times.

2. ARPA: ARPA Network is a decentralized secure computing network and a privacy-focused blockchain launched in 2018. Recently, the construction of the random number generator has been completed, and the second phase of the testnet is underway. The mainnet is expected to launch soon. In April, the market maker was replaced by DWF, which has a history of manipulating other cryptocurrency projects.

We can observe that ARPA's contract funding rate has significantly exceeded -0.1% since May 12th. Although there were some setbacks in between, the high rate persisted until May 16th, with the extreme value reaching as high as -1%. More importantly, the contract position has surged since May 12th, with a position of 30 million US dollars, close to the circulating market value of 40 million US dollars. The contract trading volume is 30 million US dollars, which is close to 50% of the spot trading volume of 70 million US dollars. As a result, ARPA's short squeeze has rapidly increased by 3-4 times within two weeks.

3、MTL: Metal is a cryptocurrency payment platform with user incentives, and it is an old project from 2017. The market controls about 10% of the circulating supply, and recently, the trading volume on the Korean exchange Upbit has been very high.

We can observe that the contract funding rate of MTL experienced anomalies on May 6th, but the rapid short squeeze ended in one day. Then on June 6th, anomalies occurred again, with extreme values reaching as high as -1.8% at one point. More importantly, since June 6th, the contract position has increased significantly, with a position of 60 million US dollars, which is close to the circulating market value of 80 million US dollars. The contract trading volume was 80 million US dollars, which is close to 50% of the spot trading volume of 160 million US dollars. During this short squeeze, MTL rose 2-3 times in one week.

There is a similar short-selling method that happened to small-cap altcoins like LEVER and BEL last year. For example, high funding rates, high contract-to-spot position ratios, high contract-to-spot trading ratios, and sudden increases in open interest. I won't go into detail about these here.

4. Risks of Rolling Empty Trades

Each coin has two sides, and there is a certain degree of uncertainty in zero-knowledge transactions.

1. Cryptocurrency trading platforms may temporarily modify their rules. If the default position limit increases, it is bullish; if the default position limit decreases, it is bearish. For example, Binance trading platform temporarily adjusted the LINAUSDT leverage and margin ladder on June 3rd, and the MTLUSDT leverage and margin ladder on June 7th. These are strong warning signals that "we are going to change the rules at any time", meaning that you should not expect to make money and let our trading platform take the blame.

2. The value regression of altcoins. Although many altcoins have risen after being shorted, more of them have continued to fall as their prices skyrocketed. There is a commonly used indicator for identifying the top, which is the comparison of the trading volume of altcoin spot (or contract) and the trading volume of the altcoin king ETH. From historical data, once the trading volume of altcoin spot (or contract) exceeds or approaches ETH, it is likely to be a short-term emotional top. In addition, it is necessary to take profit when the 4-hour amplitude exceeds 20%. Overall, the short-selling market tends to be a technical pattern rather than a fundamental event, which often leads to losses for some retail investors.