This article explains exactly what buy and sell walls are, as well as how to interpret what they mean for cryptocurrency trading.
In the broadest sense, buy walls and sell walls indicate a market-trend. So, if a currency is strong, the sell walls are a little lower because traders are more interested in holding on to their coins. To contrast, with the same strong currency, the buy wall is a little higher, because there are more traders who want to buy the coin at the best price possible.
Take a look at the image below. This is a depth chart of Bitcoin from Binance at the time of this article. It is an example of a pretty healthy buy to sell ratio for Bitcoin. What it indicates is that the currency is strong and desirable, and therefore traders are buying and selling at a fairly steady cost. So the green (left) shows the bids, and the red (right) shows the asks.
The other reason that we can read this chart positively is that it is fairly symmetrical, and kind of looks like a staircase. All this means is that there are no radical dumps or sells on the horizon and that the coin is being traded steadily and normally. This is fitting because Bitcoin is a strong currency.
What is a Buy Wall, and How to Read Them
Large buy walls represent a healthy trend for a currency. They occur when traders want to acquire more of a coin that they want to sell. In order to acquire coins, traders compete to purchase as many low-cost orders as they can. This is so that they set a bid at a price they want to acquire the coin at and they can buy as many as they can. When this happens to a healthy coin, the bids are fairly consistent in price and the orders to buy are filled quickly.
Large sell walls indicate that the cryptocurrency is being liquidated quickly, and they’re often a negative indication of a coin’s health. A big sell wall means that traders plan to get rid of a large holding of a coin. When this occurs, traders will sell their holdings for the best available bid, which may be quite low.
A sell wall is then when there are large blocks of sell orders for a coin set at a certain price. The wall is meant to work to prevent sell orders from being executed at a higher price than the limit of the wall. This causes downward price pressure on the cryptocurrency, so the coin is valued at a lower price. Large walls, therefore, have the effect of slowing or stagnating the growth of a coin in the short term.
Buy and sell walls are useful short-term trading strategies for cryptocurrencies. Sell walls are useful because they tend to ensure liquidity. So, buy and sell walls are not particularly useful if an investor is holding their coins.
However, there is a pretty big caveat when it comes to reading buy and sell walls. The main concern is that sell walls can be manufactured by investors with large holdings, referred to as whales. This is the classic and concerning “pump and dump” orchestrated by a whale, which will be explained shortly.
An order book is a list of all the activities regarding buy and sell orders on a trading exchange. A buy or sell order is just a request to purchase or sell cryptocurrencies through the exchange platform.
If you visit a cryptocurrency trading exchange like Binance or Bittrex, you can see all of the listed orders to buy or sell right there. There is a lot of information offered on these exchanges because they are managing many wallets for multiple cryptocurrencies. So you need to poke around and find what you are looking for.
On the trading screen of most crypto exchanges, a trader can get a good sense of market depth. That means checking to see what the highest and lowest prices are for active orders. How much orders are going for is a good indication of what kind of sentiment and speculation surrounds these currencies. It is important to follow these trading trends if you want to invest wisely. To be a prosperous investor you need to get a sense of where the market is heading in order to make quality predictions.
Depth, Bids, Asks
But when we are talking about buy walls and sell walls specifically, you’ll want to look at what is going on with the depth, bids, and asks.
Bids are offers to buy a coin for a certain price, while asks are requests to sell a coin at a particular price.
It is pretty straightforward; if you are buying multiples of a coin you want to pay less for each coin so that you can acquire a larger holding.
To acquire coins, however, a buyer often decides the price they will buy at and the number of units they will buy, then the order is executed immediately. This is “as-is” purchase, where the coin is bought for the price offered at the time of the transaction.
But in many cases orders are not made as-is. Orders are made when the coin an investor is watching reaches the desired price. For example, if BTC price is $10,015, an investor can place an order to buy at $10,014. That way once the coin reaches $14 and the investor has a good chance of getting matched with a willing seller. So, using the order book, a buyer indicates a particular price at which they would like to buy a coin, and how many they want to buy.
Real Sell Wall v. Artificial Sell Wall
As I mentioned earlier, these walls can be useful to suggest when to invest or divest in certain coins and currencies. The primary concern with using buy and sell walls as an indication of a coin’s health is that they can be manufactured. It is therefore important to figure out if the sell wall is real or artificial.
How do we know what is real? A real sell wall occurs when the company and the coin are performing negatively. This could be the result of negative news or sentiment about the company or a failure for the company to meet expected goals. They can also be the result of hacks, scams or a panic sale in a bear market.
But there are several indicators of a legitimate sell wall. For starters, the sale should be on the books for a longer period of time. Also, coins with higher volume will be at the top of the order list. These sell walls are valid because they are the result of pessimism in the company. It could mean that it is a good time to buy if you think the coin will recover. But it could also mean that the coin is destined for extinction.
The positive of a sell wall is that there is significant liquidity because there is a high volume to sell. But without a high enough buy demand for a coin, there is no good reason to have active sell orders. As I said, it could well be a losing coin. This is partly because the liquidity might indicate that the whales are dumping their coins on the market to get rid of them as quickly as possible. So if you think it smells bad, don’t take the bait!
Reading the Writing on the Walls
So when do you use buy and sell walls then? Basically, buy and sell walls can represent traders’ sentiments. This is because bids and asks demonstrate what coins are desirable and what is hot on the order book. Moreover, buy and sell walls do not need to be isolated to a single trader.
When a large buy or sell order appears, it might also be that other investors will place their orders for the same price point. It is also possible that sell walls can be seen as an indication of high liquidity, which suggests that there are many units of a coin available to purchase.
What are whales? Whales are investors with large holdings of a coin. In the crypto-world, this is usually because they were early-stage investors, so they got in when the market was low. However, a typical whale-strategy for later investors is to accumulate large positions discreetly so that it does not trigger major market reactions.
Because crypto markets are young, those with enough funds can manipulate the market easily. However, a strategy for the smaller fish is to use these fake walls to follow the money of the whales and buy the dip. Buying the dips is a useful long-term strategy if the coin has a strong uptrend. It counts on the uptrend starting after the dip.
This is how it is done: a whale puts a wall in place just by initiating a large order. If a whale does not want the price of the currency to drop below $15, they can place an order for a large number of units, maybe 15,000 units at $15. Now, for the price of the currency to drop below $15, the large order must be completed. In response to this large order, sellers add on a total of 15,000 units for $15. Now that there is a large order to buy at $15, and a response to sell at $15, this blocks the price from dropping.
Naturally, the more of a coin you hold, the more you are affected by the price changes. Holders with significant amounts of Bitcoin or Ethereum are called whales. It is in the best interest of a whale to control the prices of that currency. To control the markets, whales will manufacture buy and sell walls. This is a strategy to keep the currency from getting too high before they have acquired enough. So, just by placing a large order, a whale can make a wall on their own.
What’s Wrong with a Whale Wall?
You may be wondering why this a problem. It’s because when whales set these orders, they create large unfillable sell orders to keep the price low in order to buy more coins at a lower price. Once they have accumulated whatever they can, they can remove their sell orders. This causes a dramatic elimination of the wall that they created and the price shoots back up.
Because they have such large holdings and capital, this process can be repeated until they have acquired a large portion of the coin. Now the whale will benefit from the higher coin value that they purchased at a manufactured low. Two such infamous whales are Roger Ver and Jihan Wu. These guys manufacture disruption in a currency, buy low and sell high. And because this technique creates liquidity, the whale takes advantage of smaller investors and uses them as chum for them to get rich.
Guidelines for risk management
Traditional and institutional investors manufacture sell walls as an investment strategy as well. It is simply a method to make a perceived downturn on an otherwise profitable stock. The primary difference is that it is a bit easier to do in the crypto-world because it is such a young market.
Right now we are still dealing with earlier investors that control the market, but do not necessarily act in the market’s best interests. However, this strategy is not as effective in a bull market, where investors are snapping up holdings. But it is still possible in slightly smaller, younger crypto-markets.
Despite the manipulative nature of whales, buy walls and sell walls can still be useful for investment information. As I mentioned earlier, if the buy wall and sell wall look like a staircase, this can be a positive signal. At a glance, it suggests that bids and asks are operating on a healthy level.
There is also an element of risk and chase in the volatility of a coin. It is possible to benefit from large sell walls because of the instant liquidity. And for day-traders that might work out alright.
Beware of the whales! If you are in this for the long haul, do your research and know who’s holding what. Stay on top of your investments and make sure you know how the company is doing generally and not just the coin’s market performance. One of the major challenges for any market is that not all ideas are good or designed to last. ICOs and IEOs are flooding the market these days.
If you are interested in investing, it is important to understand market patterns and what to avoid when day-trading. If you want your wallet to grow, you need to be able to interpret charts and patterns. But you also need to know how the company providing the coin is performing. Currencies like Bitcoin and Ethereum may seem safe because they have already found their niche, but other coins are still working on it. This could be an opportunity to get in on the ground floor, but it could also mean you get swept up by the undertow.