B I T C O I N M A R K E T S
Bitcoin Whale Alarm
What are Bitcoin Whales?
The term “whale” is often used in the crypto scene to describe Bitcoin wallets or addresses that hold a considerable amount of the total of 21 million coins. The ocean serves as a suitable metaphor for the entire market as it is home to large and small fish. In addition, waves can be understood as market movements and news/announcements as fish food. (I get commissions for purchases made through links in this post.)
Bitcoin dolphin or Bitcoin whale?
The exact definition of how many Bitcoins an address becomes a whale is spongy, leading to the misuse of the term Bitcoin whale. Real Bitcoin whales cannot be found on stock exchanges and they do not place order orders of 1000 BTC. This is a considerable sum but does not correspond to the actual largest animals in the ocean. Such sums are rather so-called Bitcoin dolphins, which play a more important role for small fish, but are not whales. The fact is that there are even bigger players than Bitcoin dolphins. Actors who do not participate in the Bitcoin market via the web interfaces that the stock exchanges offer to the small fish (the retail market).
Real Bitcoin Whales
Real Bitcoin whales are players that buy and move hundreds of thousands of Bitcoins. This is usually done undercover and strategically under a special agreement with the Crypto exchanges, out of sight of the small fish. This serves not to influence the Bitcoin price and to cause a short-term price slide or a price explosion with orders and to buy entire order books empty. These major players are hedge funds and Bitcoin investment funds. So companies like Pantera Capital, Coin Capital Partner, Falcon Global Capital and many more.
Bitcoin Whale Alarm: Are Bitcoin Whales Manipulating the Market?
With their large amount of capital, institutions can move the market at will. Here the metaphor of a Bitcoin whale comes to the fore because every other sea dweller simply has to avoid it or is violently moved in the direction targeted by the whale. In addition, no current is strong enough to distract the whale from its course in the short term, so that its intention becomes the way at least in the short term.
Bitcoin Liquidity — Buy low, sell high
The “injection” of, for example, 50,000 BTC in the course of a week can bring about a massive price change. However, the goal of whales, like small fish, is to buy low and sell high. In other words, to make a profit after every investment.
How exactly such large purchase requests in the amount of 50,000 BTC influence the price can be clearly seen in the Bitstamp API in the IRC channel #bitcoin-otc:
[14:01] | | ;;;market buy 50000
[14:01] | Bitstamp | This order would exceed the size of the order book. You would buy 19,434.758 Bitcoins for a total of 19,191,083.3531 USD (US Dollar) and increase the price to 99,999.99 Euro.
The current purchase of 1 BTC and the sale of a fraction of a second later leads to a trading loss due to the difference between buying and selling price. So if you buy 10,000 BTC at once and assume that the exchange could absorb this amount, this would not only change the market price but would also trigger ask orders on the way up and allow many participants to make profits at higher levels. (The following are not current prices and are just an example)
Large market transactions are therefore suitable for exiting transactions, but not for initiating them, since the effect of spreads and the triggering of obstacle limit orders reduces the net effect of large orders on the market. Instead, the largest players must stagger and darken their market entries by splitting large trades into hundreds or thousands of small orders and then dropping them into the market for hours, days or weeks.
How Bitcoin whales affect the market
Let us assume that the fund’s desire is to maximize the profitability of a large trade that it initiates. Here the small fish (small investors) play an important role because they swim along on this journey. It is therefore extremely important for a fund to defining a strategy before a trading plan is drawn up and to correctly assess the market environment in order to identify the direction in which the current is moving and will move.
Once an opportunity is identified, the task is to “massage” the market and steer participants in the desired direction. The institutional player thus achieves a higher return on investment.
The strategy described above is the standard practice of hedge funds. Large banks, the market makers for most of the foreign exchange market, have huge teams of traders who do nothing but implement such trading strategies and plans. The duration of execution of these plans can then range from days to weeks.
That’s why the Bitcoin market is so interesting for whales.
The Bitcoin market has several characteristics that make it ideal for high-risk institutional investors such as hedge funds:
- Low market capitalization
- Relatively naive participants
- No banks as competitors
- No or hardly any regulations
Some of the institutions listed above have only become active in the Bitcoin market over the last two years. Although it makes no sense to talk about collusion, it seems only rational that large players should (at least sometimes) coordinate their actions. Given the fact that there are community members who are known to hold large amounts of Bitcoin, one could imagine that they would reasonably discuss their interests and coordinate with other potential market participants.
So what can the little fish do?
So Bitcoin-Whales is not about the 1000 BTC orders you see in the Exchange Order Book. It’s about really big players with incredible market power. So the BTC market has become a dream come true for speculators and will, therefore, remain in the hands of a few large players until there are uniform regulations on the market. The BTC market only corrects itself downwards because the biggest players control and hold back the bait and thus also the swarm of small fish.
The only thing the small fish can do is to adapt to the movements of the Bitcoin whales and swim with them when they move forward again. But it is important to recognize when you should distance yourself from the whales again when the surface becomes restless. It’s all a question of timing. Buy low, sell high.