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The Cryptocurrency Whale Phenomenon – How do Investors Thread Volatility Splashes

Intense volatility is an inherent aspect of cryptocurrencies. Bitcoin remains on track for topping their biggest monthly increase and decline. It encountered one of their record highs of 37.5% decline just six months back, in May 2021, and consistently witnesses drops as low as the 37% drop observed in November 2018 and 40% slide in September 2011. Most lately, the price of bitcoin appreciated to $34,805.19 on Monday the 28th of June 2021, up 8% from where it was 1700 PM. ET Friday, after Mexican Billionaire Ricardo Salinas Pliego encouraged its purchase. The volatility functions as a double-edged sword, both as a thrilling asset choice for some investors and apprehension for others, averting broad adoption. 

One contributory factor to volatility is that the crypto markets have an abundant amount of whales – a term assigned to somebody who holds a noteworthy amount or quantity of a specific asset; somebody who owns a minimum of 1,000 Bitcoin is viewed at as a Whale. The massive size and value of their holdings implies that, when they make the decision to sell, the market is immediately flooded with this asset, creating large price fluctuations. 

These potent investors are existent across all asset classes, however cryptocurrencies are specifically susceptible as there are more whales, but a lot lesser volumes and lesser liquidity across a fragmented sea of exchanges. Without adequate liquidity, these whales are trapped in a swimming pool of sorts, destined to deliver huge waves through the market as soon as they shift. As each exchange is segregated into their small swimming pools of liquidity, they are very vulnerable to whale movements. 

For that purpose, we require to solve the liquidity issue by combining all these segregated small swimming pools into one large ocean. The trading tech of the crypto market has not yet caught on to the maturity and stability of forex, which deploys OTC trading, which is how it minimizes the impacts of large buy and sell orders that can radically alter the market. If the crypto market manages its integration, this can radically enhance crypto exchange liquidity and stabilize pricing as an outcome. It’s time to make the liquidity pool deeper. 

The impact of whales 

Cryptocurrency assets are still basically really concentrated. The sudden growth of Bitcoin implies that a major portion of the market is owned by a minor majority of traders who were lucky enough to purchase tons of Bitcoin when the rates were low. Presently, approximately 40% of Bitcoin is held in around 2.5k accounts. 

The reality is similar for altcoins. For instance, it was unveiled in February this year that a single person has ownership of 28% of Dogecoin, which has appreciated by nearly 1400% since the beginning of the year. One person with ownership of that large a ratio of the market has a major impact on the prices. 

And the impacts of these whales are tangible and visible. When whales decided to sell, the pricing of cryptocurrency goes on a downward spiral. On April 18th, for instance, a single trader moved 58,814 BTC – valued at more than US$ 3.3 billion at the time – from Binance to a private wallet simultaneously as the prices slid to a low of $51,541 for each unit. 

While whales are obviously impacting the pricing of Bitcoin, their impact is larger amongst altcoins, which have reduced market caps and are less liquid. Not long ago, the pricing of Ethereum tanked by more than half on the Kraken Exchange, depreciating from $1,628 to $700 within the span of minutes. 

The Chief Executive Officer of Kraken attributed to this singular cell, stating “it could be that a single whale just decided to dump his life savings.” For Ethereum to depreciate $1K in three minutes is something massive, and it is proof that even the biggest exchanges with large volumes can be rocked by major whale movements. 

Shrinking liquidity 

Taking into account price swings are compounded by fragmented liquidity, the market must focus on the fact that liquidity is getting worse, not improving. The amount of Bitcoin on exchanges is down 20% over the course of the previous 1 year. Gradually, but surely, liquidity is drying up and the pool is becoming smaller. 

The bullish cryptocurrency market implies persons are owning the asset, merely observing the price appreciate. Evidence indicates that there is an escalating number of whales, with the number of individual holders of more than 1k bitcoins at a record-high of 2,334. Therefore, regardless of increasing popularity, there is still a really restricted amount and diminishing amount of cryptos that are being transacted from one person to another. 

As a contributor to these issues, major investors are entering the crypto market swathes. Institutional investors, hedge funds, high net-worth individuals, and enterprises – most significantly Tesla – are all seeking to own and engage in trading of crypto assets. And with additional purchasing power, it is probable to increase order sizes and add to the influence held by whales. 

We are not in a position to avert these major players from impacting crypto trading, however, solutions for the fundamental lack of liquidity that exacerbates price swings is existent. 

Unification of the pool 

To battle whale-induced price swings, the market is gradually taking up tactics from other asset categories. For instance, several OTC brokers are targeting crypto whales to trade electronic currencies over the counter as they can access increased liquidity than exchanges. 

But, for a lasting solution that can cushion major orders and avert sudden and drastic pricing fluctuations, exchanges should resort to trading technology that has been mastered in other markets. For instance, the FX markets have for long furnished Straight-Through-Processing capabilities on a global liquidity network, where orders are aggregated and undergo process leveraging smart order routing. This infrastructure facilitates global price discovery, where the best bid and ask prices and put forth to all market participants, notwithstanding trading avenue. 

Essentially, it enables exchanges to harness the liquidity of other exchanges, including from the largest in the industry. Leveraging this model, exchanges can consistently furnish traders the ideal prices and absorb the influence of major whale splashes by drawing on liquidity from the broader market. The several individual pools join to become an ocean. 

Only after these issues are tackled, will cryptocurrencies be free of the volatility that comes with so many big fish in a market lacking depth. 

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