To understand what bitcoin whales are, we don’t think there could be a better example to start with at this moment. On February 8, 2021, Elon Musk disclosed about Tesla’s USD1.5 billion (roughly Rs.10,920 crores) investment in bitcoin, and the next day, the crypto price reached its all-time high of USD48,204.67 from what was below the USD 40k mark a day before.
We saw how a single investment from one individual was able to stir a dramatic change to the bitcoin’s pricing. Such investors or traders who have the capability to influence the market are known as whales. However, in this case, an emotional thing is also associated. Elon Musk is a popular persona and being the richest man on the planet, people are most likely to get influenced by his word or action.
The big fish has become an adjective in the world of cryptocurrency trading even before the entry of Elon Musk. Literally, it refers to individuals or entities that hold large amounts of bitcoin. Their minor actions – buying or selling – stir the market and triggers the price change.
Around 1,000 individuals own 40% of the bitcoin supply
Let’s take a look at some of the poplar whales. We’ll talk about the individual, institutional, exchanges, and state investors of bitcoin.
Michael Saylor chief executive of US company Microstrategy holds more than $560 million worth of bitcoin. The tweet below reflects his bullish take on bitcoin.
UK investment fund Ruffer has USD 760 million of Bitcoin. The disclosure came in December quotes Telegraph.co.uk. Square, the payments company founded by Jack Dorsey, bought $50 million of Bitcoin in October (which is now worth around $150 million). A wallet belonging to the Huboi exchange holds $4 billion in Bitcoin.
Skepticism of sovereign countries regarding bitcoin or any cryptocurrency investment is common, but here comes an uncommon news. Telegraph.co.uk reports that the Government of Bulgaria holds almost $6 billion worth of Bitcoin that was seized in a raid. One unknown account with leftover cryptocurrency, associated with the Silk Road dark web drug market has $1billion.
The British daily newspaper claimed, based on industry data, 13% of all Bitcoin, or around $80 billion sits in just over 100 individual accounts. The top 40% of all bitcoin (approximately $240 billion) is held by just under 2,500 known accounts. The number of accounts holding more than 1,000 bitcoins is at 2,334, a new all-time high, reports CoinDesk.
How do whales impact bitcoin’s price?
There is an old saying that big fish eat the small ones in a pond. Does it really make sense in cryptocurrency trading? True or False. Yes, there is no definite answer to this question but one thing that is definite is the action of whales has an impact on the trade and on the bitcoin’s price.
The so-called whales, lead to huge changes to the price of bitcoin – swamping any movements by smaller investors, The Sun claimed. Their involvement in the trade (buying or selling) instills noticeable changes in the value of the cryptocurrency as we have discussed in the beginning as well.
Let’s see how it happens
Suppose an investor citing the growing bitcoin value on Feb 9, 2021, decided to buy some bitcoins but after a few days, the price fell to USD44k as we have seen. The buying incident of the whales triggers the price. It goes up, thereby attracting smaller investors.
While the price was high, the whales can sell out their bitcoins and smaller investors might fall into their trap and incur a loss due to the depreciation. This technique, when done intentionally to influence the price of an asset, is known popularly as spoofing.
Last November, a group of experts studying the data of OKEx noticed a similar pattern of price fluctuation caused by big whales. There are several more studies that prove it right.
How do small investors hedge their investment?
This volatility could be a bliss! There are several hedging techniques, when applied thoughtfully, not only help you reduce the risk but also make the most of the price change. Short straddle and long straddle are popular hedging tools. In a short straddle, an investor breaks the position size to sell assets in installments before the termination of the futures contract. To know about position size and its calculation, consider reading one of the previous blog posts. The loss incurred at one position is offset by a gain in the other. It minimizes risks and profits both but provides protection to your investment against any drastic change in the asset’s price.
A long straddle is a direction-neutral hedging tool, where you can benefit irrespective of the drop and rise in the bitcoin’s price. You buy a call and put on the same stock with the same exercise price (strike price) and expiry date. You can exercise either of the options depending upon the situation to benefit from the price change.