How to trade 51% attacks

Dump it, baby, one more time

Decision

Buy or sell? Depends on when the attack happened relative to news.

Disclaimer: This article does not constitute an investment advice. Always do your own research before making a financial decision. If you’re interested in reasoning behind each point, see “Explanation” section below.

A 51% attack occurs when a single miner obtains 51% or more of hashpower on a particlar blockchain and gains the ability to double-spend the coins (e.g. deposit the same coins twice to exchange). The media will likely release the news about this event — the only question is “when”.

If you notice an attack before the news release, you can short-sell the coin using margin trading functionality (see below for list of exchanges). If you notice an attack after the news release, it’s better to check when the attack has actually started:

— If the attack started long before news came out, then it’s better to refrain from placing any orders: just wait until the price action forms a well-defined support level & open a long position.

— If the attack started just a little before the news came out (= it was a surprise attack), then you can place sell orders & trail your stop at some distance from last trade price.

Exchanges

To make money on a downtrend, you need to use an exchange with margin trading functionality:

Bitfinex (3.3x leverage).

Huobi (2x leverage).

OKEx (3x leverage).

Moonbase (20x leverage) with demo account — learn playing a 51% attack event without risking real money (disclosure: I’m the founder of Moonbase).

Explanation

To make the right decision, we need to understand the psychology of the attacker.

First, we need to find out whether attacker has built a short position before initiating chainsplit. This could be detected by price difference: target exchanges should have lower price — so called “discount” — compared to others.

If the price difference is negligible, then the attacker doesn’t have a short position, and his primary goal is to perform a double spend. This risk will push the price to the downside over time, so if you have noticed the attack early — congratulations, you’re welcome to open your own short (with a stop above the price at the moment when the attack has started). For closing the short, you can trail your stop at certain distance from last trade price. This way, you’ll maximize your profit in case the attack becomes prolonged in time & minimize your risk in case the attack finishes quickly.

If the price difference is significant, then the attacker has built a short position, and he will attempt to exit it at the most favorable price. Since 51% attack costs money, his position size must be large enough to cover the cost & make some profit. That means he’ll have to exit the position over time via small orders, creating a support level. Also, at the end of attack, he’ll probably exit the remaining part of his position via buyout spike (to minimize the time he needs to maintain the attack). This price action should be visible on the chart. If you are able to identify a support level & match it with decreasing hashpower, it’s better to open a long position, since the attack will stop soon, and the traders will recognize this as “buy the dip” opportunity. The best time to close the long depends on market conditions: in bear market, it’s better to close the long some time after attack has stopped; in bull market, you might want to hold the position a little longer: simply sell when it breaks a local support level (formed after pullback).

Summary

Playing a fundamental event can be a lucrative opportunity if you can align your own position with attacker’s position. If you see clear resistance-support levels, then the attacker has already built a short position, and he will use panic selling for exiting. In this case, you can either refrain from placing orders, or try to play the bounce from the long side. But if you see regular price action with a sudden drop, accompanied by double-spends on the blockchain, then the attacker doesn’t have a short position, so you can place sell orders safely right after attack begins (with a tight stop).