These whale accounts can cause significant price movements if they decide to sell (or buy) large amounts of BTC at once. When a whale surfaces, it can cause ripple effects in liquidity and price.
How Whales Affect Liquidity and Price
If whales sit on their holdings for extended periods, liquidity is reduced, meaning there will be fewer tokens available on the open market. With thinly traded digital assets, this can create imbalances when there are not enough circulating tokens available to meet demand. This generally drives up the price.
Conversely, when a whale begins to sell his or her holdings, liquidity (or supply) is increased. If supply outpaces demand, the price of the token often goes down.
Thus, whales have an incentive to keep their transactions quiet. A sell signal can trigger a wave of copycat sellers, which can lead to an instant haircut on the selling price.
It's harder for crypto whales to keep things quiet, largely due to the transparent nature of blockchain technology. For this reason, many whales choose to break up their holdings among multiple wallets or slow-drip sales over time.
How to Whale Watch
You've probably heard of "whale watch" tours, where they take you out in a boat to get up close and personals with live whales (spoiler alert: they smell like fish).
Crypto investors can "whale watch" big accounts using services like Whale Alert ($9.95/mo.), which monitor whale wallets and alert you when a whale moves a significant amount of crypto (more tools below).
Here are the five types of whale movements smart crypto investors can watch:
Wallet to exchange: Large inflows from cold wallets to an exchange usually indicates a whale with an intent to sell. This can reduce crypto prices by increasing the immediate supply and triggering panic selling by copycats.
Exchange to wallet: When whales move a large amount of crypto to a cold wallet, it can increase prices by reducing supply and creating renewed demand among smaller traders (often due to FOMO).
Exchange to wallet (stablecoins): If whales are converting crypto to stablecoins and moving them into a cold wallet, it indicates they're looking for a safe haven. This can reduce price by creating FUD, as smaller traders think they need to get out as well.
Wallet to wallet (OTC): Large investors often try to avoid exchanges to avoid influencing the market. Instead, they conduct trades over the counter or from wallet to wallet. While these transactions are immediately visible on the blockchain, it's impossible to gauge their true nature or the motive behind them. As such, they usually have smaller impacts on market prices.
Exchange to exchange: This is usually due to arbitrage, where whales find opportunities to buy from one exchange and sell on another to make a profit. Because these price differences are usually small, it requires a large amount of crypto to make it profitable. Arbitrage can improve the efficiency of the crypto market by narrowing the price difference for a crypto across exchanges.
The highest-impact transactions are usually wallet to exchange or exchange to wallet. They can directly impact the liquidity of a digital asset and set off a chain reaction of copycat trades. More importantly, they can indicate a specific intention (or at least that's how smaller traders will read it, so it becomes a self-fulfilling prophecy).
To some extent, whales can use this knowledge to manipulate the market. For example, when a large sum of BTC is transferred from a whale to an exchange wallet, it usually indicates an intent to sell. A whale might use this move to drive prices down so he or she could buy more at discounted prices.
On the other hand, moving crypto from exchanges to cold wallets can be used to artificially inflate the price for a short time by reducing the liquidity and signaling a "HODL." This can increase the price by creating a desire among smaller investors to buy and hold.
We can also end up reading too much into these strategies. Sometimes, whales are just looking to diversify. Maybe they need the money for a new yacht or an alimony payment.
Use whale movements as an investing signal, not your entire strategy.
