Bitcoin Whales: Should You Be Worried?

A recent Bloomberg article claims that around 1,000 people control 40 percent of all Bitcoins. This figure is based on remarks made by Aaron Brown, head of financial markets research at AQR Capital Management.

These 1,000 big players, referred to as “Bitcoin Whales”, can have a disproportionate effect on the market. When whales buy or sell, they can shift the entire market. Having this enormous sway naturally makes whales of significant interest to anyone holding BTC.

Further concerns are highlighted by the fact that these people (or groups of people) could all decide to move in concert, an action that would certainly have consequences for individual investors.

Could the whales feasibly collude? According to Kyle Samani, managing partner at Multicoin Capital, the answer is yes:

I think there are a few hundred guys, they all probably can call each other, and they probably have.

If you go back a few months, you’ll find sources claiming that the wealth distribution in Bitcoin is even more unbalanced, with 4% of addresses owning close to 97% of the coins.

Publications such as Slate, Vanity Fair, and the Financial Times have echoed the Bloomberg article, so we thought it warrants a closer look.

What can be made of all this? Who are these whales? What have they done in the past? Are new whales entering the market? And should investors be worried?

A Short History of Bitcoin Whales

If such large (and potentially dangerous) whales exist in the BTC market, it’s worth taking a look back to see what they tend to do and what they have done historically. Here are some common whale tactics you should be aware of:

• Rinse and repeat – In this scenario, the large holder strategically starts selling below market price. They sell enough for people to take notice and then when (if) the panic selling starts, the whale scoops up another large portion of coins at a discounted rate.
• Spoofing – This happens when a trader places a large buy order just below other buy orders, or a large sell order just above other sell orders. The goal is to make others think that somebody with deep pockets is getting ready to make a move, in hopes of shifting the market. This is essentially bluffing without actually trading, and it allows the whale to provide false market signals that work in their favor. This also happens to be illegal (Dodd-Frank Wall Street Reform and Consumer Protection Act).
• OTC Markets and Dark Pools – In many cases, whales don’t purchase or sell on “mainstream” exchanges because their holdings or orders would cause ripples in the market. Instead, they use OTC markets or dark pools where vast amounts of BTC can be exchanged without the glare of public attention.

One of the most notable pieces of Bitcoin whale history is what’s come to be known as the battle of the “Bearwhale”. In October 2014, a bitcoin holder placed a massive order liquidating 30,000 bitcoins for $300 a piece. This was below the current value at the time, and it was believed by many to be a spoke tactic.

Experts at the time thought this could tank the market. Instead, the order was gobbled up by buyers and Bitcoin’s price subsequently rose to $375. Many celebrated this victory over perceived bearishness and the inability of the whale to shift the market.

Since that time, the Bearwhale has been mythologized in BTC folklore.

(Image: The Slaying of BearWhale by Christopher Edwin Steininger)

Another memorable instance of whale behavior was the “Spoofy” incident from the summer of 2017. In this story, a single trader or group of colluding traders manipulated prices with a huge bankroll. This infamous trader received the nickname “Spoofy” for repeated false buy and sell orders deployed to manipulate prices.

Spoofing is not uncommon in unregulated crypto markets but what made “Spoofy” unique is the scale of the trading, and that “Spoofy” carried out all the shenanigans on one exchange, Bitfinex (who drew a lot of fire for this; they continue to have serious issues).

Known Bitcoin Whales

While there is a degree of anonymity in cryptocurrency, some of the biggest BTC holders have publicly discussed their involvement with Bitcoin. Some of these are institutions, some are hedge funds and some are individuals.

Here are some known Bitcoin whales:

• The US government. It might surprise some people to learn that one of the biggest owners of this pioneering decentralized digital currency is none other than Uncle Sam. In 2013, the FBI shut down the Silk Road marketplace and in doing so, they seized around 144,000 Bitcoins. Some have been auctioned off in the intervening years but the government retains enough to be a very serious player in the BTC market.
• The Winklevoss twins. You probably know Tyler and Cameron Winklevoss from Facebook fame, but as it turns out the twins are more than a one-trick pony. In 2013, they invested around 11 million dollars in BTC which, needless to say, makes them substantial holders today. Their investment was touted on a cameo in Silicon Valley and they’ve gone on to found their own exchange.
• Roger Ver. One of the most famous faces in crypto, Roger Ver, is an early investor in BTC and related startups. Sometimes referred to as “Bitcoin Jesus”, Ver is estimated to have tens (perhaps hundreds) of thousands of coins. He also owns a few extremely valuable crypto domains. Despite being involved in contentious disagreements (some speculate he sold his BTC), he remains one of the most prominent whales out there.
• Satoshi Nakamoto (the Bitcoin mastermind). Besides leaving the world with a now-famous whitepaper, the mysterious figure of Nakamoto is also the owner of a huge reserve of coins. A Bitcoin developer estimated in 2013 that Nakamoto had around 1 million Bitcoins. It’s hard to know if this is accurate or if he/she/them has/have sold some since then. However, it’s safe to say Satoshi Nakamoto still qualifies as a whale, perhaps one of the biggest.
• Tim Draper (billionaire venture capitalist). Tim Draper is a VC and an early believer in the potential of
  cryptocurrency. He made headlines for his purchase of 30,000 Bitcoins back in 2014 and he also became known for his extremely accurate Bitcoin predictions. He remains bullish on the future of crypto, recently backing blockchain startup Tezo in 2017.

This is just to name a few, and there are a number of other large entities swimming around in Bitcoin waters. The following are all investment or hedge funds thought to control hundreds of thousands of BTC: Pantera Capital, Bitcoins Reserve, Binary Financial, Coin Capital Partners, Falcon Global Capital, and Fortress.

As alluded to above, these players often strategically and covertly make moves via special arrangement – out of sight and obscured from regular retail traders. Which leads us to the crux of things…

Should Investors be Worried about Bitcoin Whales?

To date, conventional wisdom says that the big holders are unlikely to sell large portions of their accounts in some orchestrated manner because this would damage the value of their own investment(s).

But this thinking held more water in the earlier days of BTC. At the time of writing, the price per BTC sits around USD$18,090. Given the recent price spike, it’s not hard to see how now could be a great opportunity for these users to profit on a good percentage of their coins. Doing so would lock in the nearly 1,700% price increase YTD.

As prices go through the roof, this conventional wisdom could change.

If whales did start some type of organized mass dump, what would that mean? Precise predictions are hard to make, but the price would certainly plummet.

This could simply mean a nice discount for hodlers. It could also mean a crash that is so severe that it damages the confidence most people have in cryptocurrencies. It could also mean a setback for the technology and short-term blood loss for investors, but it might not ultimately affect the long-term prospects of BTC.

It should be noted that there is no evidence of any sort of active conspiracy between big players to move the market. The more fundamental problem here is that if such a movement was organized, it wouldn’t necessarily be illegal. Right now, things are legally murky. Regulators are only in the first stages of treating BTC as a security and providing some oversight over it.

We do, however, know that this form of collusion takes place on a smaller scale. Peruse Reddit and you’ll see some openly advocating individual investors to take on whale-like behavior by joining pools or telegram groups that buy and sell in blocs. This tends to happen mostly with less established currencies, where less weight is needed to move the needle.

Another potential scenario is that whales have already cashed in or are in the process of doing so. This theory reasons that they are doing so in a carefully calibrated way, gradually selling over the course of days or weeks, which the general public simply experiences as several days of little or no upward price movement.

And finally, others have theorized that the 1,000/40 figure is a FUD-infused buzzline created to shake out the weaker hands. Those who prescribe to this theory point to the fact that many of these large accumulations are simply exchanges or other custodial services. In other words, they hold BTC for people; instead of being a truly singular entity, they really represent hundreds or thousands of people.

Killer Whales

While the existing whales have not shown any intention of a coordinated selloff, they are perhaps no longer the only potential big predator in the sea.  

With the arrival of futures trading through the CME and CBOE, a new species of whale is introduced to the Bitcoin ecosystem. The killer whale is a Wall-Street type investor that has enough capital to dwarf existing whales and may not have the financial incentive to keep the Bitcoin price high (like traditional whales have).

With futures trading, there is protection for a big price drop and also an opportunity to profit just as much from a drop as from a rise. The new wrinkle means there are more variables in play and that, for the retail investor, the water is perhaps even less friendly than it was before.

Despite this, there seems to be a general optimism about the value of Bitcoin with the advent of a futures market. This is seen as a positive for the long-term prospects of Bitcoin and a legitimizing force. There is a chance, however, that this is based on the relative calm we’ve seen so far and a misunderstanding of the implied pessimism in a futures market. Only time will truly tell.

Final Thoughts

Dig deeper and you’ll find that Bitcoin is dominated by a concentrated group of power players, making it similar to many other markets. In fact, at previous times in its history, the strength of whales to exert pressure on the price of Bitcoin was even higher.

There are two pieces of good news here. One, a lot of bitcoiners are known to be ideologically motivated. Two, a lot of people think the rise of Bitcoin is only just getting started. Both of these facts make coordinated exits or other drastic moves less likely but the introduction of institutional investors leaves some definite uncertainty in the air.

Bitcoin is experimental and unregulated, and (coordinated whale action or not) there are surely more bumps coming. The best way to face an uncertain future is to rely on fundamentals. Don’t invest what you can’t afford to lose, question everything and educate yourself on how futures markets work.