Trading Order Flow In Crypto

The Blockchain Sector @ 2023-11-04

James Bachini

Nov 4

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Order flow is the measure and analysis of buying and selling pressure for current and future market participants. It provides traders with insights into market trends, sentiments and the overall momentum of a digital asset.

If a trader knows the price of an asset today and can accurately estimate the inflows and outflows tomorrow, they can predict the price tomorrow
price today + inflows - outflows = price tomorrow

While it is impossible to have perfect information, we can do a rough calculation on the known inflows and outflows.

Inflows

New participants coming in at the discovery stage when a project is first gaining traction is very powerful. A coin gets bid as investors make room for it in their portfolio
Token buybacks can cause significant inflow from fees, Binance’s BNB is a good example where fees are used to buy back and burn the token creating demand on exchange.
Fee burns, we see a slightly different model with Ethereum where the network gas fee is burnt. This creates a less predictable but consistent inflow of funds if the network is being used.
Short squeeze, when a coin is heavily shorted on futures exchanges you can tell by the funding rate. If there is positive news or price appreciation it can cause a squeeze where shorts have to exit at any price and creating predictable flows.
Spot bids, obvious spot bids where someone is TWAPing into a position can affect order flow as it creates predictable buying pressure. When Microstrategy raises capital from tradfi markets, all eyes turn to Coinbase to frontrun their spot bid.
Institutional investment, when the Bitcoin spot ETF get’s approved it’s predicted to become one of the fastest growing ETF’s of all time. It enables traditional finance funds to allocate capital to crypto in a new way creating an institutional onramp.

Outflows

Existing holders, becoming impatient and exiting their position. The older the coin, the more disillusioned bag holders there are waiting to get out
Investor and VC unlocks, often sold programmatically
Mining rewards are often sold off at predictable rates to cover expenses for miners
Staking rewards, farm tokens have a bad reputation for a reason. When there is a constant distribution of new tokens it’s hard to find consistent matching inflows to ensure price stability or appreciation
Team unlocks or distribution of founders tokens
Liquidation cascades, when a coin is traded with leverage on perpetual futures exchanges. Often traders will place their stops directly under support or a trend line creating a cascading effect as price moves through these levels.
Forced sellers, we might see this with FTX and their $1B+ of SOL tokens over the next few months. If there is a known distribution of assets its possible to front run the forced seller.
Security breaches can often cause an outflow of tokens from a protocol both from the hacker as they sell off their position or from holders that lost confidence in the team.

In a bull market when new money is pouring in to the sector and looking for a home, new participant inflows dominate everything else. However, in a bear market, new supply and unlocks create a headwind and new participant flows should be modeled as rotations due to narratives across the industry.

Attention shifts fast and is rarely logical in the blockchain sector

Practical Ways To Trade Order Flow

Traders can use various tools to analyze order flow, including screeners, heatmaps, unlock calendars and network inflows. For instance, if a new network, most recently Base, is getting a lot of ETH bridged in, it might be an idea to focus attention on that ecosystem.

When researching new projects consider how early you actually are. Is there still a significant number of investors that are going to discover this and allocate capital in the near-term.

How can this discovery stage be modeled relative to similar digital assets in the past?

Token holders on Etherscan
Time since launch
Relative traction and social signals

By modeling order flows, traders can make more informed decisions and potentially avoid becoming bag holders during that slow bleed out stage where no new money is coming in.

If you are really early to a new project that has significant potential then it’s a big opportunity. This is more rare in bear markets because good projects sand bag their development waiting for favorable market conditions (and users) to launch.

In my experience “being early” happens most often when conducting my own internal research. By the time I hear about something on Twitter, it’s likely too late.

Do your own research and don’t follow the herd to become exit liquidity for someone else’s bags.

ethLondon Hackathon Write Up

Incredible event, thank you to Encode Club for organizing and making it a success.

Our team was lucky enough to be considered as one of the top 10 finalists and walked away with a $2.5k bounty from Wormhole.

The product we created was a multichain staked Ethereum token which aggregated stETH and rETH and then bridged the ERC20 to Aurora using the Wormhole messaging coms.