Iceberg Orders in Crypto Trading: A Retail Investor’s Poison, An Institution’s Meat?

We have all experienced moments when we have been fascinated, or maybe even shocked, by the sudden revelation of the unknown aspects of our old friends’ personalities.

Sigmund Freud, the founding father of psychoanalysis, had this very famous theory — iceberg theory — noting that the conscious mind is like the tip of the iceberg, while the subconscious and unconscious mind is like the part beneath the water which is way bigger than the surface you can see.

Now, take a look at your neighbor, is he/she really who you think he/she is?

Enough of the mess-around.

Coming back to the point for today, the iceberg order (or the hidden order), which has been universally applied in the trading of traditional financial assets, is now widely used in the crypto world.

Such orders are either not displayed on the order book at all, or not with the complete size — a size that is so enormous that it would inevitably twist the supply-demand balance significantly enough to trigger a drastic price fluctuation in seconds.

Imagine that you acquired 10,000 Bitcoins in 2010 at the then peak price of $0.39, and now — despite the regrettable miss-out of the insane historical high in late 2017 — you decide to cash in and spoil yourself with a house in Beverly Hills, neighboring with a bunch of Hollywood stars.

Although, it might be puzzling that a person who is so smart and has seen the great potential of Bitcoin since almost a decade ago would want to torture himself/herself by living in an area frequently hit by paparazzies.

If that’s the case somehow, you wouldn’t want to offload your BTCs in a one-off sell order, as such a huge amount of “supply” would quickly lead to a price plunge, which would eventually cause you non-negligible loss.

The situation is similar the other way around. A large-size buy order would swiftly boost the price as the market senses the heavy “demand”, making the buyer pay a lot more than a reasonable premium.

However, with iceberg orders, one can find the way out of the above-mentioned dilemma.

The large single order would be divided into smaller orders, with only a tiny portion of the total amount being seen on the order book. Accordingly, the deal would be executed progressively without tipping off the market and causing the trader a high impact cost.

Now you might be thinking:

Wait, I am not such crypto whale, quite the opposite actually. Why do I need to know about a tool that might in fact stop the sardines from taking advantage of the sharks, given that the latter usually eat up the former without blinking an eye?

Simple. Because the tool exists and will be increasingly used in this ocean regardless of the sardines’ will.

And now you might be thinking: fine, I quit, it’s not the game for me or any other small-scale traders.

But let’s not jump to conclusions, shall we?

For starters, it is the reality that the crypto world has been and will keep importing rules and tools from the traditional financial market, as the latter is indisputably matured. The iceberg order is a small instrument in the imported toolkit.

In the sense of long-term development of the cryptocurrency world, there is no reason to shut the door towards a more advanced and healthier market.

Secondly, it is a one-sided judgement to simply conclude that big sharks — institutional and large-scale professional individuals– do more harm than good to the market.

On top of the occasional (maybe more often than that but hardly constant) exploitation of retail investors, they help to make thicker order books, and ultimately contribute to the global crypto market with better liquidity.

Besides, the retail investor group is not necessarily the only counterparty of the big players — there are other institutional traders.

We’ve all seen, or even been burnt by, the so-called “pump and dump”, when a malicious big player tried to wind the supply-demand curve and manipulate the price for unethical gains via a sudden large-volume order.

However, if there happens to be an iceberg order from the counterparty side, the “P&D” wouldn’t work at all, or at least the impact would be cushioned, protecting retail investors to a great extent.

Last but not least, there is no guarantee that any trading strategy, no matter how smart it is, will be executed impeccably every time. Iceberg orders are no exception.

Here comes one trick shared by some traders that might help to identify an iceberg order.

As, sometimes, the iceberg order is put in the bid-ask spread, a retail investor could put a minimum-size limit order with the price sitting in the spread, then cancel this order right after. If an iceberg order did exist as suspected, the deal would be executed outright with the cancelation order failing, costing the little trader almost nothing.

So, you see, the sharks are not always undefeatable and, even better, they may sometimes be protective of sardines.

Plus, why must a small sea animal be nothing but a sardine? It might be a baby shark!

Still feel like it is pointless to put some effort into figuring out iceberg orders? Come on, you’re smarter than that.