The term “whale” is frequently used to describe the big money Bitcoin players that show their hand in the Bitcoin market. The ocean as a metaphor for the market is apt, since one can then extend it to include the big fish and the small fish; sharks; rallies as feeding frenzies; waves as market moves; and so forth. It may be, however, that the term “whale” has been applied to the wrong class of investor because the players described below are truly the biggest creatures in the ocean.
They show themselves in the exchanges with orders of 1000 BTC, every now and again, and the common perception seems to be that the orderbook “whales” are the heavyweight players who move the market and can manipulate price if they so desire. However, this view is inaccurate.
The fact is that there are even bigger players than the so-called whales, who do not engage in the Bitcoin market via the dinky web interfaces the exchanges offer us, the “retail market” (small fish).
The large players being referred to are institutions such as Hedge Funds and Bitcoin Investment Funds. Some of these funds have announced their presence in the water:
- Pantera Capital
- Bitcoins Reserve
- Binary Financial
- Coin Capital Partners
- Falcon Global Capital
- Bitcoin Investment Trust
- Global Advisors Bitcoin Investment Fund
Others have yet to put oar to water…
- Bitcoin Index Fund
… and others may or may not exist, depending on your sources and the reach of your sonar.
These funds typically manage hundreds of thousands of bitcoins, which they strategically and covertly put through the exchanges via special arrangement – out of sight and obscured from regular retail traders.
With their large capital mass, institutions can move the market at will. It is here where the metaphor of a Bitcoin Whale comes into its own because any other inhabitant of the ocean must simply get out of the way, or be moved forcefully. Additionally, no current is strong enough to deflect the whale from its course, so its intention becomes the way.
By injecting, say, 50,000 BTC, over the course of a week, a massive price change can be effected. Yet, doing so, for its own sake is pointless because the institution’s objective, just like smaller players, is to buy low and sell high – in other words, to turn a profit after each investment.
Here is an interaction with the Bitstamp API via IRC channel #bitcoin-otc:
[14:01] | ;;market buy 50000 [14:01] | Bitstamp | This order would exceed the size of the order book. You would buy 19,434.758 bitcoins, for a total of 19,191,083.3531 USD and take the price to 99,999.9900.
Buying 1 BTC now and selling a split-second later results in a trading loss due to the spread between the buy and sell prices. Let’s increase the amount of BTC in this example: buying, say, 10,000 BTC all in one go, and assuming the exchange could absorb that amount, would not only move the market price, it would also trigger ask orders on the way up, as well as see many participants take profit at higher levels.
[14:07] | ;;market buy 10000 [14:07] | Bitstamp | A market order to buy 10,000 bitcoins right now would take 6,213,164.9471 USD and would take the last price up to 660.8200 USD, resulting in an average price of 621.3165 USD/BTC.
Hence, large market transactions are appropriate for exiting trades, but not for initiating them, since the effect of spread and of triggering “obstacle” limit orders reduces the net effect of large orders in the market. Instead, the largest players have to stagger and obscure their market entries by splitting large trades into hundreds or thousands of small orders and then drip these into the market over hours, days or weeks.
This Way, Please
Given the institution’s desire to maximize the profitability of a large trade it initiates, it would increase the distance that this trade travels if the institution can have retailers (the small fish) join them in the move. Hence, the largest players have no choice, but to “prime” the market: to read wider market conditions, assess the retail sector’s “mood” and the willingness of market participants to go in a particular direction.
Once an opportunity is identified, the task is then to “massage” the market and steer participants in the desired direction. The institutional player, therefore, achieves a greater return on investment – the investment having been the expenditure of setting up and “massaging” a particular move – and the outcome of the move being that small retailers and new public participants had taken the bait and herded into the rally, thereby increasing its market impact and slingshot effect.
If any reader thinks that this sounds incredible, be assured that this is not my proposal of how I think it works, it’s standard hedge fund practice. Large banks, the market makers for most of the Forex market, have teams of traders dedicated to doing just this via trade plans that last anywhere from a day to a few weeks.
The Bitcoin market has several characteristics that make it ideal for high risk institutional investors like hedge funds:
- Small market capitalization
- Relatively naive participants
- No bank competitors
- No regulation
The institutions listed at the top of the article have apparently become active in the Bitcoin market during the course of the past two years. While there is no sense in speaking of collusion, it seems only rational that large players should (at least, sometimes) coordinate their actions. Given that there are community members who are known to hold sizable amounts of Bitcoin, one could imagine that they would reasonably discuss and align their interests with other potential market movers.
So, it’s not about that 1000 BTC order you see in the exchange orderbook, or the 50 BTC that went through Dell’s online retail store today. The BTC market, although high-risk and based on an innovation that’s difficult to fathom, is a speculator’s wildest dream come true. All the time while it is adjusting downwards, it’s because the largest players are herding the bait-ball.
As for the small Bitcoin fish it’s most beneficial to just swim with the Bitcoin whale and swim away when the mood starts getting frenzied near the surface. Knowing what time it is, is the challenge.
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