Can bitcoin early adopters bring the market down easily?

Can bitcoin early adopters bring the market down easily?

There’s an opinion in the crypto community, that bitcoin transactions worth tens of millions of dollars can significantly affect the volatility and sentiment in the market. At the end of October, an unidentified person or organization moved 10,000 BTC from one unknown wallet to another.

This is an illustration of the actions of the so-called bitcoin whale, who able to transfer $100 million from one place to another in a few clicks. It is not surprising that such large transactions attract the attention of many traders and analysts.

In recent years, various services that track the movement of large volumes of digital assets have appeared on the market. For example, there is a Whale Alert, founded by brothers Frank and Mark in 2018. It tracks large transactions on 11 blockchains, reporting them on a Twitter account with more than 150,000 followers.

On October 22–23, the BTC price plummeted but rose above $10,000 over the next three days. During this “roller coaster” Whale Alert recorded a lot of large transactions, including the aforementioned 10,000 BTC. Such movements make traders wonder whether whales are the cause of intense market movements. Or, perhaps, their actions are already a reaction to changes in the market situation? Finally, are the big players able to manipulate the market?

We made brief research about the impact of whales and Tether stablecoin on the price of BTC, how the EOS project collapsed Ethereum through the Bitfinex exchange, and what tools for analyzing large transactions will appear in the future.

Whale Alert calls whales anyone who can cause price fluctuations by operating their assets. It can be either a secured individual trader or a company like Xapo, storing crypto assets for huge amounts. Also, certain trading platforms can be whales, periodically transferring large sums to different wallets.

“Of course, exchanges are the richest holders of bitcoins. Their wallets are the largest, “ Whale Alert said in a conversation with San Francisco-based SFOX.

The question arises: What should be the minimum transaction amount to be considered “whale”? Whale Alert emphasizes that this value changes according to the price of the first cryptocurrency:

“When 1 BTC was worth $3000, the threshold value of the transfer from address to address was $5 million. Now, this threshold is $50 million.”

The peculiarity of the cryptocurrency market is that information about transactions in many blockchains is completely open. Thus, traders and crypto enthusiasts have access to information that in other markets can be considered insider.

The main difficulty lies in the organization and the correct interpretation of such information. Also, some whales can algorithmically break large trades into smaller ones (for example, using the “iceberg” orders available on the Bitfinex and BitMEX exchanges).

Referring to the young age of the crypto market, Whale Alert considers the presence of whales on it an inevitable phenomenon:

“There were only a few people at the origins of bitcoin. Therefore, the largest part of the coins maybe those who were engaged in its creation».

However, over time the number of whales may decrease as the market Matures.

“Eventually they will have to sell their coins. After all, more and more people are interested, more and more buy — shares thoughts Whale Alert. — Thus, eventually there will be a distribution of BTC and, I hope, there will be fewer whales”

However, the potential impact of bitcoin’s early adopters on the market could be very large. Whale Alert cites as an example one of the addresses with 80,000 BTC (>$735 million at the time of writing), inactive since 2011:

“If this whale, who has held his coins for so long without doing anything with them, decides to sell them, it will completely collapse the market. However, it is really difficult to say anything with certainty about the fate of this address. Are the keys lost? Was the man still alive? It remains only to wait and monitor the activity of these addresses.”

From August 29 to September 6, 2018, a major player transferred bitcoins worth about $1 billion from one address to several exchanges for subsequent sale. On September 6, when most of China’s assets were already sold, the price of BTC fell by almost 15%, and its 30-day volatility rose by 25%.

And while correlation doesn’t mean causation, Whale Alert is convinced that whales ‘ actions can have a huge impact on market asset prices. “Knowing where the flow of currency is moving, perfectly helps to predict possible fluctuations,” — said the researcher.

Not only bitcoin exchanges and early adopters but also large projects like EOS can influence prices. In early 2018, Whale Alert recalls, Ethereum reached $1,400 at one point. However, EOS began to sell its ether, putting extremely strong pressure on the price of ETH.

The fall in the price of Ethereum in the first half of 2018. At this time the EOS project was bringing the ETH coins attracted during the token sale to the Bitfinex exchange for subsequent sale. The following chart illustrates the dynamics of the volume of funds flowing to the Ethereum addresses of the Bitfinex exchange associated with EOS:

The main difficulty of analyzing the impact of large transactions comes from the fact that whales do not necessarily immediately sell cryptocurrency transferred from wallet to wallet. For example, the movement of funds by the EOS project to Bitfinex does not mean that this ETH was immediately put up for sale.

This argument is supported by the lack of an explicit correlation between large coin movements on Bitfinex and Ethereum price spikes. On the other hand, periodic jumps in ETH trading volumes during this period led some market participants to believe in the existence of such a connection. For example, on May 28, 2018, 180,000 ETH was sold on Bitfinex in just an hour, causing a sharp drop in the second most capitalized cryptocurrency.

Some analysts have suggested that the EOS project is behind the deal.

A close correlation between large transactions and price is observed today. For example, on October 18, the service tracked a large movement of bitcoins shortly after the closure of a large darknet marketplace of child pornography accepting bitcoin by American and Korean law enforcement authorities.

“The Korean police confiscated a lot of bitcoins. The coins were sold at auction; one of the transactions we intercepted was for 10,000 BTC and it is highly likely that these funds went to Binance” says Frank from Whale Alert.

According to him, almost immediately after that, the price of BTC fell. Indeed, the chart shows a strong surge in bearish volumes just a few hours after this unusually large transaction:

Whale Alert also notes that the market expectations of many participants can theoretically influence the price of BTC more than the actions of individual whales.

Besides, in his opinion, the impact of new issues of stablecoin Tether on the price of the first cryptocurrency has not been studied enough. For example, the extent of the impact of the increase in the supply of USDT on the price of bitcoin at the beginning of 2019 has not been fully clarified:

“When the price of BTC was somewhere in the range of $3500–4000, a huge mass of USDT was released to the market. Many people see this issue as a positive signal for the market. They assume that these stablecoins are used to buy bitcoin. Now I do not know if this assumption is true, however, many reacted to the increase in the supply of Tether in this way»

Thus, multimillion-dollar transactions have a significant impact on the market, if only because they react to many participants in the ecosystem.

The next important step is to create more effective tools that would analyze whale behavior deeper, more transparent, less dependent on hypotheses and speculation. It is on such a system that Whale Alert is currently working hard. The developers want to open the possibility to track transaction data from the very first block in a convenient and easily analyzed format.

The other important tool is one that can track liquidity. This week, The Capital announced the CoinMarketCap’s inaugural conference in Singapore on Nov. 12 about the launch of its new metric to compare exchanges and token pairs based on liquidity. And the tool is now live on the company’s site. The new metric will reportedly incorporate data from 3000 crypto assets.

“We believe our adaptive methodology will make our metric very difficult to ‘game’ as orders would need to be placed close to the mid-price, or risk being counter-productive to the Liquidity metric scoring.”

Published at Thu, 14 Nov 2019 08:36:49 +0000


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