Cryptocurrency Whales: How They Affect the Market

Over the past couple of months, the number of crypto whales has risen by 2% after the halving event on May 11. According to glassnodes, the number of whales will keep on rising approaching September.

Cryptocurrency whales are individuals or organizations that hold large amounts of cryptocurrencies, usually stored in a single wallet or address. Small whales hold about 1000BTC or more, while mega whales hold about 10,000BTC. About 47% of the total bitcoins in the cryptocurrency market are owned by whales, who are just a small number of people compared to thousands of small investors.

How Did This Small Group of People Become Whales?

Criminal Activity

Some years back, criminals carried out illegal transactions online using bitcoins. Through crime, they gathered numerous bitcoins.

Among large addresses would be the one created from the shutdown of Silk Road, an illegal marketplace. The FBI seized the site’s funds in 2013 and combined them into a single address with 144,000 BTC. That balance has been split up since then.

Another criminal address would be the fifth largest Bitcoin address currently contains funds stolen from Mt. Gox in 2011.

Whales that have earned their crypto from crime take time to be tracked contributed to the semi-anonymous nature of addresses. For example, WhaleAlert.io is still tracing funds stolen from Bitfinex in 2016, even three years later. UpBit hack is also being traced after six months.

Such addresses cannot be shut down. However, by following “whale alerts,” exchanges can blacklist dangerous addresses, and users can avoid interacting with them.

Major Exchanges

Large companies like Bittrex, Bitfinex, and Binance hold huge amounts of bitcoins for small retail crypto traders. Exchanges like these may make small transactions for their users or make large transfers between their own addresses. The exchanges often do not have a huge impact on the cryptocurrency market.

Large transactions may however show manipulation such as massive sell-offs and indicates the relationship between the involved companies.

Early Adopters

Individuals who accumulated large amounts of bitcoins when it was easy and cheap to mine would come to be known as early adopters. Around this time, the bitcoin rates were very low because few people actually got into cryptocurrency. Through this they were able to accumulate a large number of bitcoins. According to Chainalysis economist Kim Grauer, the trader whales have typically been buyers not sellers when Bitcoin’s price falls contrary to popular belief. The findings of chinalysis also state that there are very few of these whale traders.Grauer also says that many Bitcoin wallets that appear on internet “rich lists,” are the mere speculation by amateurs, are not whales at all. Instead, they are balances held by exchanges and commercial institutions in the course of their daily financial operations.Chinalysis reported that they sell some of their bitcoins but on rare basis and they tend to HODL it for the long term.

Some of these early adopters have no wallet activity over a long period of time due to death or loss of their private key hence earned the term ‘lost’ whales. According to a chinalysis research, nearly 4 million Bitcoins are held by lost whales. This amount of bitcoins could one day total to 21 million dollars,which cannot be recovered whatsoever.

So, How Do Whales Control the Market?

Whale activity can cause a major impact in the cryptocurrency market in both crypto price and market capitalization. Though rarely, when crypto whales trade,they do so for thousands of dollars.

Using Large Sell or Buy Orders

These large sell or buy orders lead to sudden and significant price changes. When a large buy order is placed, signals are sent out that the demand of that specific cryptocurrency is high. The cryptocurrency price shoots way high all of a sudden due to this.

Similarly,when a large sell order is placed, signals are sent out making the asset to look like it is being unloaded. The cryptocurrency price hence goes down. By making these larges sell or buy orders, the whales can shift the market to their advantage.

Placing Hidden Orders

Whales can sometimes place large undetected bids on the exchange order book.. They wait for the automatic replenishment (iceberg) after each fill, therefore avoiding detection on exchange order books.

They act opposite to the large buy or sell walls. Here, instead, the whale makes an order without planning to actually act on it. Hidden orders are available for the general use of the crypto traders as they would like.

Wash Trading Using Multiple Trade Exchanges

Whales can deceive the general public by posting large trades on heavily monitored exchanges and at the same time posting small trades on smaller ones. Professional traders also use this strategy to profit from funding rare arbitrage or just to hide their real flow.

Market traders are usually paid for bringing flow to these small exchanges. Although this strategy is legal, it causes volume inflation and creates inexistent buy and sell flow.

Forced Liquidation

Sometimes, a whale may prop prices to liquidate their exposure. They do this when the market is overleveraged, which can be measured by a significant funding imbalance. To benefit, whales open an opposite position of a similar case.

Forced liquidation leads to a cascade of similar order flow and small retail traders suffer while the whale has its large short positions liquidated. The entity responsible for their liquidation boosts their earnings on previous long term partnership. Involved entities are highly unpredictable.

Significance of Price Swings by Whales

Whales often cause price swings to their advantage. However, cryptocurrencies have a tendency of shaking off any influences by whales, over a short period of time. For example, in the late summer of 2017, Bitcoin price dropped from $5,000 to $3,300. Quickly it shot back to even a higher value than before. This is the general trend that has been observed where cryptocurrencies crash then recover and surpass the value they had when they crashed.

Generally,whales are a significant part of the cryptocurrency market. As more people are trying to venture into cryptocurrency and many others are trying to become whales, discussions of whether whales are a positive or negative impact, will continue to be a source of controversy.