In cryptocurrency trading and trading in general, investors often buy the rumour and sell the news. This is generally because prices tend to rise as a rumour spreads and then drop when the actual rumoured event occurs.
In the simplest possible terms, a buy the rumour, sell the news situation is where traders buy into an asset, be that a stock, commodity or crypto on the breaking of a rumour and ride a gradual rise in price up to the point where the news actually breaks.
A buy the rumour, sell the news or also known as a buy the hype, sell the news strategy sounds rather counterintuitive but tends to be the case in most instances, especially in financial markets. It works as follows. Traders hear a rumour about a positive future event and this rumour gets them buying in order to cash in as the price rises prior to the announcement. The event eventually happens as expected and then the price starts to drop and by then most smart traders are already out and have taken much of the profit out too. Buy the rumour, sell the news makes very little logical sense but turns out to be the case a lot of the time.
A fictitious example of how buy the rumour, sell the news could look
Let’s imagine a fictitious scenario and use a company like Apple and Apple stock as an example to illustrate how buy the rumour, sell the news works.
Imagine that rumours start circulating about a brand new foldable iPhone that people say will be announced in a few months time by Apple. It will be a game-changer for the iPhone lineup and give Apple a foldable phone to compete with Samsung and their foldable smartphone. As the rumours grow, screen renders appear around the internet and on social media, the price of Apple stock rises. Then, a few months later Apple announces their brand new foldable iPhone to much fanfare and applause. At this point, the price of Apple stock will likely begin to drop. Now, this makes no logical sense as the rumour turned out to be true and therefore the price should continue to rise and not fall as there will most likely be a huge amount of sales of the new foldable iPhone. This is however how markets tend to react and that is what counts in the end if you are a speculator/trader. It is worth noting that typically, this drop in price tends to be temporary.
Due to this buy the rumour, sell the news phenomenon, clever traders buy when the rumour surfaces or perhaps even before the rumour leaks if they have a hunch or an early indication and then they sell shortly before the news is released, hence buy the rumour, sell the news. If this is predicted and executed correctly the trader can ride the rise, take a profit and get out before the price drops. Timing is absolutely everything in this game.
The primary reason why the price rise occurs just after the rumour is that traders are already buying into the future event that has actually not yet taken place and when the event does occur traders have already taken the profit during the rumour period, think of it as the profit being delivered before the event and not after. If the news happens to be even better than expected traders may often continue to hold for a little longer and enjoy a little extra profit as new buyers can often drive the price even higher.
The reverse can also be true
Rumours of a negative event can sometimes drive prices down and then when the negative event does not come to pass the negative sentiment reverses and the price can begin to rise again. A kind of sense of relief price rise when the expected bad event didn’t actually end up happening. This reverse negative rumour situation can also allow smart traders to profit.
Some general pointers on how traders can use a buy the rumour, sell the news strategy
These are of course not exact or a complete list but can provide some examples of buy the rumour, sell the news strategies:
Buy positive events that occur without a rumour – when a positive event occurs unexpectedly it could be good to jump in and ride the price increase
Buy on positive rumours – when a positive rumour breaks jump in and ride the price rise up to or just before the point where the news actually breaks
Sell on negative rumours – do the exact opposite of the above, sell on negative rumours and buy when the news breaks
Buy before any possible negative event is about to occur – and ride the possible price rise
Use a stop - for a situation in which an event does not occur in time as it’s possible the price will drop and you can limit any losses
Do your homework and be fully prepared for things to go wrong - nobody really knows what will happen with any level of certainty so it’s best to exercise some level of caution when it comes to trading and speculation
A possible example of buy the rumour, sell the news in crypto
When Coinbase listed in April 2021 on Nasdaq, Bitcoin prices had been rising significantly before the listing took place and reached a high of almost $65,000 around the time of the listing and then, Bitcoin lost almost half of its value in a matter of a few months. This could certainly be a buy the rumour, sell the news type situation although it’s impossible to say for sure.
Buy the rumour, sell the news is a very well worn expression in financial markets and with just cause. Very often price rises and drops can be expected to some degree and this is where smart traders are able to jump in and out of assets, be they stocks, commodities or crypto. These traders through their timing and knowledge have a feeling about what to buy, when to buy and when to sell based on situations like buy the rumour, sell the market and will often take much of the profit out of the event prior to the event taking place, i.e. they have already been there and taken the bulk of the profit before later comers show up to enjoy what’s left of any profits still sitting on the table!
ELI5 Buy the Rumour Sell the News
Traders will buy an asset when there is a rumor of it going up. If and when the news of that is out, they sell it for profit.