update 19 August 2021

Cryptocurrency Whales: How They Affect the Market

Several factors within the cryptocurrency market are essential determinants of their outcome. Some of them are volatility, demand, regulations, media presence, listings, technological advancements, etc. One that most people do not account for is the crypto whales. Over the past couple of months, the number of crypto whales has been rising as more people get into cryptocurrency trading. Due to more cryptocurrencies, professional traders can earn more coins presenting the opportunity to become whales.

Cryptocurrency whales are individuals or organizations that hold large amounts of investments in digital assets, usually stored in a single wallet or address. For the longest time, whales have been an enormous source of anticipation and anxiety due to their high profile in the cryptocurrency world. They are closely monitored by sites such as Chinalysis and WhalesAlert to report their activities as they largely influence the market. 

Common Whales in Crypto

Early Adopters

When cryptos came into the market, few people knew what they were. However, others took the initiative to purchase and store a large number of them during those times. Since cryptos spiked in prices over the years, these individuals got an accumulation of the crypto value. 

Some of these early adopters have had no wallet activity over a long period due to death or losing their private key, hence earning the term ‘lost’ whales. They hold nearly 4 million BTC, with the value expected to rise.

According to a Chinalysis economist Kim Grauer, there are few trader whales, most being buyers rather than sellers. Grauer also says that many crypto wallets that appear on the internet’s “rich lists” are mere speculation as whales by amateurs. Instead, they are balances held by exchanges and commercial institutions in their daily financial operations.

Criminal Activity

Some of the crypto whales are individuals involved in significant cryptocurrency illegalities. For example, in 2013, the FBI discovered the Silk Road illegal marketplace funds, seizing the collective funds. They later combined them into a single address worth 1.6 Billion dollars. 

Authorities cannot track whales earning their crypto illegally pronto because of the semi-anonymous nature of addresses. For example, WhaleAlert.io was still following up on funds from a BitFinex theft back in 2016. UpBit hack is also being traced after six months. “Whale alerts” can avail exchanges with information necessary to blacklist criminal-related addresses to protect all users.

Major Exchanges

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

However, large transactions may show manipulation, such as massive sell-offs, and indicates the relationship between the involved companies.

How Whales Control the Market

Whale activity can have a significant impact on the cryptocurrency market at both crypto price and market capitalization. Though rarely, when crypto whales trade, they do so for thousands of dollars and because such high amounts can cause a significant shift in the market. The several ways in which they achieve the same is through:

Using Large Sell or Buy Orders

The large sell or buy orders lead to sudden and considerable price changes. After an individual places a large buy order, signals get sent out that the demand for 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 look like it is being unloaded. The cryptocurrency price hence goes down. By making a large sell or buy order, the whale can shift the market to their advantage.

Placing Hidden Orders

Whales can place large undetected bids on exchanges’ order books. They wait for the automatic replenishment (iceberg) after each fill; therefore, avoiding the detection of exchange-order books. 

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

Wash Trading Using Multiple Trades

Whales can deceive the general public by posting large trades on heavily monitored exchanges while posting small trades on smaller ones. Professional traders also use this strategy to profit from funding rare arbitrage or hiding 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 an inexistent buy and sell flow.

Forced Liquidation

Sometimes, a whale may prop prices to liquidate their exposure. They take advantage when other traders over-leverage the market, measured through 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 partnerships. Involved entities are highly unpredictable. 

Significance of Price Swings by Whales

Whales often cause prices to swing to their advantage. However, cryptocurrencies tend to shake off any influences by whales over a short time. For example, in the late summer of 2017, the bitcoin price dropped from $5,000 to $3,300. Quickly it shot back to even a higher value than before. It identifies the general trend under observation where cryptocurrencies crash, recover and surpass their amount.

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Despite the adverse effects of manipulating whales on the crypto market, it will be hard to discard them presently. Most crypto holders hope that with the increasing market cap of cryptocurrencies daily, whales will eventually lose their playing field. Nonetheless, as a crypto trader, you should investigate other activities affecting the market to prevent whales’ activity speculations.

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