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| Health, Wealth, and Happiness |
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| “One of the most efficient ways you can improve your life is by simply thinking in a more positive way.” – Robert Norman |
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In today's issue: We all know about "whales" (individuals and institutions that hold significant amounts of crypto).
When whales make a move, it can make a big splash.
What do the rest of us ordinary fish need to know about whales, and what can we learn from watching their occasional surfacing to clear their blowholes? Read on to find out. |
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| Webcast: Byron Gilliam on What's Next in Crypto Thursday, October 27 at 6:30 pm ET |
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One of the best blockchain newsletters (besides this one) comes from Blockworks, where Byron Gilliam explains what's happening in crypto in a friendly, funny, easy-to-read format. We're thrilled to welcome him to this one-night-only online event, where he'll give us deep insight into where crypto is headed in 2023.
As part of our "user-friendly" series, we hope you'll join us for this entertaining, informative Q&A that will be accessible for everyone no matter your level of crypto or blockchain knowledge.
This online event is next Thursday Oct 27 at 6:30 pm ET. It's free and open to all! RSVP here to get the details. |
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| How Crypto Whales Affect Cryptocurrency Markets by Stephen Robert |
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Summary: Crypto whales are individuals or institutions that hold significant amounts of a digital asset. Whales have enormous control over many assets in the crypto world, so their movements can greatly affect the fortunes of a particular token. Here's what us ordinary fish need to know about whales. "The rich get richer" is a financial saying that's especially true in crypto markets. It's the snowball effect; accumulation tends to lead to more accumulation because money makes money.
Thus, most crypto assets have "whale" accounts that hold an outsized portion of the overall pie (the percentage you need to own to be considered a whale is subjective, though it typically varies between 1-10% of the total supply).
With bitcoin, for example, BitInfoCharts reveals the top 100 wallets own about 15.5% of all BTC: |
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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. |
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The Outsized Power of Whales
At Bitcoin Market Journal, we're huge believers in diversification. Just as we encourage a diversified portfolio of stocks, bonds, and crypto, we encourage investors to look for cryptos that are diversified among many holders.
Consider two digital assets, one in which the largest holder owns 3% and another in which the largest holder owns 30%. The more outsized influence they have, the more damage a single whale can do.
Smaller crypto assets are more sensitive to whales due to lagging liquidity. If you have only a few investors (i.e., the project founders or development team), it can be difficult to sell your tokens if no one else is willing to buy.
It's also possible for whales to act in collusion to drive the price up or down. In a regulated market like stocks, these tactics are illegal. In an emerging and poorly regulated market like crypto, these tactics fall into a legal grey area. On the flip side, some whales signal their long-term belief in crypto by hodling. For example, Cameron and Tyler Winklevoss, founders of the Gemini crypto exchange, are known to hold thousands of bitcoin units worth over $6 billion. They are the ultimate "blockchain believers," and as others follow their example, this provides price stability.
Whale Watching Tools
You can watch whale accounts using free and paid on-chain metrics like Glassnode, BitInfoCharts, and Chainalysis. You can also use tools like Whale Alert to get notified when there's a whale sighting. Another way to watch whale accounts is by using blockchain explorers like Ethplorer. |
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Investor Takeaway
Whale accounts are useful indicators in watching the price action of a crypto asset. Just use them as signals, not your entire strategy.
A whale has a bigger effect on smaller, more speculative tokens as they're often the “big whale in a small pond.” They're a single holder with outsized influence (whether you want to invest in thinly traded tokens in the first place is questionable).
Whale actions can cause ripple effects by either increasing or reducing the price of a crypto asset. This depends on whether they're buying or selling. Hodling can lead to stability; trading can lead to volatility.
Smaller investors may copycat whales (especially if they’re splashy), which leads to a self-fulfilling prophecy. More people believing the price will go down can cause the price to go down (and vice versa). The bottom line is you can rarely get rich from copying the strategies of others. Whale watching can be a useful signal on what the rest of the market might do, but always think for yourself.
That’s how you grow to be a whale. |
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Bitcoin Market Journal is a daily newsletter that makes you a better crypto investor. It is created by John Hargrave, Nick Marinoff, Steve Walters, Anatol Antonovici, Ben Burn, Danielle Greving, Preetam Kaushik, and Daniel Joel.
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