Unless you’ve been living under a rock, you’ve heard or read about China’s recent cryptocurrency crackdown announcements and the subsequent market crash that left cryptocurrency traders around the world fuming and holding the bag when hundreds of billions of dollars were virtually wiped off in value.
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The point, though, is when, not whether, you heard or read the news. Well, apparently, it matters.
It appears insider information about the crackdown announcement had been circulating in Chinese social media, especially in private trader groups well before announced and reported. There was a day of false dawn recovery before another announcement from China about crypto mining hit the market again.
Armed with the soon to come market-moving news, the wealthy traders not only managed to offload their holdings and exit long positions, but also they went short on cryptocurrencies in anticipation of its impact when the news would break out.
Shorting or going short means investing your money in such a way that you will profit if the value of the asset falls unlike the more conventional “long” position where you buy and only make money if the asset price rises. Shorting is done by experienced investors and traders when they anticipate the price will fall in the short term.
This further heats up social media speculations that this might have been done deliberately given that the new announcement was thin (non-substantial) in content as there was nothing new given China already had multiple rounds of restrictions on cryptocurrencies.
The new note simply reiterated the same restrictions originally announced in 2013 and 2017 that bar financial institutions and authorities from providing any services related to cryptocurrency transactions.
In regulated centralised markets, trading such market-sensitive news would amount to insider trading which means non-public information is used to profit or avoid losses from an anticipated change in the price of a security. Having such information ahead of the market is not illegal in itself – however using to benefit is illegal.
Technically, in jurisdictions such as the United States where cryptocurrencies are considered commodities, insider trading rules would still apply although there is no precedent. This would, however, require another condition that the securities are traded inside the United States (such as US-listed stocks) even if a trader is from overseas. This would be likely not the case here due to the decentralised nature of cryptocurrencies.
Perhaps, the most well-known inside trader in the history of Australia is the late, Chinese-born Australian investor Rene Rivkin, who was convicted in 2003 of trading 50 000 Qantas shares on 24 April 2001 in a profit of $2,664.94 after being made aware of information in relation to an impending merger of Qantas and Impulse Airlines.
Trading based on insider information is illegal in the regulated markets because it is seen as unfair to other investors who do not have access to the information, as the investor with insider information could potentially make larger profits than a typical investor could make.
China has a checkered history when it comes to insider trading as a 2017 research on a million brokerage accounts found the wealthy investors must have brilliant timing to buy and sell unless they are insider-trading ahead of market-moving news.
The research concluded that the most successful investors were best at buying shares of Chinese companies just ahead of the official announcements of large stock dividend payments, which appears to be a direct result of insider trading. The portfolios of these investors weren’t diversified at all and were focused on stocks of local companies.
The crypto market has had a wild trading week as investors and speculators were rattled by a sudden plunge in cryptocurrencies, especially bitcoin after a constellation of dark clouds with traders fleeing in droves amid the current sour mood and negative outlook.
The world’s largest digital coin nosedived to just above $30,000 when China doubled down on its severe crackdown plans to root out cryptocurrency activities, including mining and trading.
As of press time, Bitcoin (BTC) is changing virtual hands at US $37,500, Ether (ETH) at US $2,300, ripple (XRP) at US $0.92, Binance Coin (BNB) US $300, cardano (ADA) at US $1.44, Dogecoin (DOGE) at US $0.34, ChainLink (Link) at US $23, UniSwap (UNI) at US $20, Polkadot (DOT) at US $22 and Stellar (XML) at US $0.38.