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The cryptocurrency markets are infamous for their volatility—a well-deserved reputation. However, despite the 1,000%+ gains and 99% losses, the crypto market is simply that: a market. At a high level, crypto price swings are simply a tug of war between buyers and sellers, demonstrating the core economic principles of supply and demand.
While one of the breakthroughs in cryptocurrencies is its true peer-to-peer (p2p) nature, trillions (in USD value) are traded annually via intermediaries. In the case of crypto, the market consists of millions of different traders, investors, HODLers, etc. across the globe, trading 24/7/365, expressing their intentions to buy/sell on a minute-by-minute timeframe. A crypto exchange like Coinbase, Binance, FTX, and others provides a central platform where buyers and sellers can come together to trade.
Within these centralized exchanges (CEX) that operate an order book structure, for a trade to execute, there must be a buyer, seller, and an agreed-upon price. This means, in its simplest form, if there are more buyers than sellers, the price of the cryptocurrency will go up. Alternatively, if there are more sellers than buyers, the price goes down. That’s how the price of Bitcoin is determined to be $65,000 one month and $35,000 the next.
However, beyond this simple framing are countless other factors that influence how the trading price of an asset is determined. One aspect that impacts the crypto markets more so than in traditional markets is the presence of “whales.”
Whales are individuals and/or institutions who hold such a large percentage of a cryptoasset that they can single-handedly move the markets based on their buy and sell orders. Obviously, because these actors can manipulate or “move” the market to varying degrees, their actions are incredibly relevant to other token holders. Crypto whales can have magnified impacts on the market, especially due to some crypto assets' thin liquidity, scant exchange listings, and unsophisticated trading infrastructure. Because of this, on-chain whale activities are ruthlessly monitored and analyzed by users and entire data analytics companies!
Identifying whales in your crypto market is important, but equally so is understanding the size, liquidity, and market depth of your cryptoasset. Market depth refers to a market's sensitivity to relatively large market orders. Beyond that, market depth encapsulates the breadth of open orders and is calculated from order book data. The more money it takes to move the overall token price, the greater the market depth. Because Bitcoin’s market cap is ~$600B, a $10M sale would not substantially affect the overall price. However, a $10M sale could affect the price of a smaller alt coin—therefore, Bitcoin has greater market depth/less slippage.
Slippage is the difference between the expected price of a trade and the price at which the trade is executed. Slippage can occur for two reasons: A change in the bid/ask spread in between the time a trade is placed and the trade is filled, or insufficient market depth.
Examples of slippage across Coinbase and Binance BTC markets in 2020. Source
Crypto whales can use their capital (and the power it provides) to their advantage, much like if there was one poker player with $1M playing vs 10 others that only had $100 each. One tactic often seen in the crypto market is the “sell wall”—when a whale lists an oversized sell order on the exchange’s order book lower than current sell positions. The intent is for other traders to see this huge “negative” position and influence them into also selling, creating volatility and falling prices (like a snowball down a hill). Whales profit from this by creating panic, dropping the price down to a level where they can eventually buy back, and profit/accumulate more coins.
Whales remain one of the bigger factors for investing in cryptocurrencies, especially in newer/smaller projects outside of Bitcoin and Ethereum. Whales can be entities who wish to see the project prosper, like the project’s foundation, team members, or early investors. In these instances, whales are less likely to do anything to harm the project or its market, but still hold a tremendous amount of power and sway. This dynamic, ambivalent as it may seem, still introduces a certain level of trust that a new user of the protocol must take into account.
Conversely, whales can also be entities whose incentives are not aligned with the project. They can be competitors of sorts—like in the case of Justin Sun of Tron being an ETH whale, or Roger Ver of Bitcoin Cash being a Bitcoin whale. Whales can also be profit-maximalizing mercenaries like some venture capitalists (VC) firms. In these situations, VCs obtain a large portion of the token and, rather than looking to help the project succeed, they simply look to make the highest ROI on their investment, sometimes at the detriment of the project or project’s users.
In either case, it’s now evident that whales cannot be ignored in the crypto markets. Luckily, due to the transparent properties of public blockchains, whales and their movements can be tracked through on-chain analysis. This real-time transparency is not available in most traditional markets. Anyone can gain insights into a token’s supply, distribution, transaction volume, wallet concentration, and more while also following its biggest holders’ movements. Understanding whale movements can provide an edge over the broader market and help avoid catastrophic downside risk in a worst-case scenario.
While there are many on-chain data analytics tools available, the starting point for all analysis is the blockchain’s explorer. Blockchain explorers track every transaction on the chain, but also allow users to filter based on address, token, and more. As the industry and its tooling have matured over the years, explorers have added new helpful features, like labeling exchange wallets, labeling the transaction type, and providing their own analytics.
Whales are also often used as a gauge of market sentiment. Whether right or wrong, whales are often assumed to be “smart money” or sophisticated market participants. Because of this, market participants look to them for signals. If whales are HODLing or buying, this is often interpreted as a bullish indicator and vice versa. This is analogous to the traditional markets when a high-profile investor like Warren Buffett or Cathie Wood makes a trade/position public. If a famous investor comes out as bullish on a certain stock, retail investors (sometimes) follow, driving up the stock price. The issue with this is that the whales know the market is watching their moves and will use that information to their advantage.