How Bitcoin Whales Can Manipulate the Price

Bitcoin has had one of the most monumental rallies in the past few weeks. It has also faced a great deal of adoption from retail investors.

However, despite the great amount of interest from large swathes of investors, most of the coins in open supply are controlled by a very small group of people called "whales".

These big money traders have large positions in the coins. These positions are so large in fact, that they can effectively manipulate the Bitcoin markets to their advantage.

Moreover, it is also quite likely that these investors know each other personally and are able to communicate regularly about their positions in the market.

According to Bloomberg, there are about 1,000 people who may control at least 40% of the free float in Bitcoin.

With that in mind, how much power do these "Whales" actually hold? How have they moved markets before and how do they use their network to impact the price of Bitcoin?

Taking Profit

Whenever there is a massive run up in the price of Bitcoin, which is followed by a fall immediately after that, it is most likely that the whales were taking a profit.

This is something that happened just last week. We saw Bitcoin rally to over $19,000 in the span of a few days. Yet, after it hit those levels it fell back down to under $15,000.

This was about a 15% fall in the value which, although not unusual for Bitcoin, could have alarmed new investors. The cause of this fall was most likely the large investors who were taking a profit and selling their coins at the high levels.

While this may not have being co-ordinated or nefarious, it does demonstrate how an investor with only a few thousand coins can impact on the markets with ease.

Buying the Dips

Not only do the whales like to take profit on the positions that they have, but they also try to actively buy the dips.

In this case, they could also utilise the other market participants to their advantage. Bitcoin whales know that newer traders are quite susceptible to market panic and will sell out at the first whiff of a turn.

Hence, the whales can attempt to spook the market with a large sell order. This will create a short term dip in the price of the coin that will lead to more fickle traders closing their positions.

The result will be an avalanche of sell orders that will hit the market and keep driving the price down further. Eventually, when the price has retraced back to a level that the whale finds attractive, they will enter large buy orders and scoop up coins at a big discount.

Back in August, when the Chinese government banned Bitcoin, there was a large fall in the price of Bitcoin. It went from almost $5,000 down to $2,900 before large buy orders came through for the coins.

Many were speculating that this was as the result of whales buying into the coins.

Co-Ordinated Actions

While it is hard to pin down market manipulation in the Bitcoin markets, it cannot be ignored. Given that this group of Bitcoin investors is a small community, they could be talking with each other and planning the actions as a group effort.

However, the structure of the market is likely to change in their favour over the next few weeks. This is because of the introduction of futures on the CBOE and the CME.

Now these whales have the means to short the price of the coins. For example, the whales could enter short futures positions in their coins and then try to pump-and-dump their physical coins.

Prior to the expiration of the contracts, the whales could run up the price of Bitcoin. As more retail investors buy into the hype and try to profit from the rise, they can sell out of their coins. This means that they would exit at a profit.

However, this action could also lead to a fall in the price of the coins after this. Given that the whales have short positions in the futures, they will profit from the fall as well.

Wall Street Enters

Given the launch of Bitcoin futures, there are a whole other group of investors that retail traders should keep an eye out for. These are the large hedge funds on Wall Street that have the capital to drive Bitcoin prices considerably.

They also have access to some of the most advanced trading computers and algorithms. These are likely to pick up any discrepancy or small price movement in Bitcoin that could lead to a profit.

One may wonder whether it is indeed to safe to swim in the same pool as Whales and Wall Street sharks.

Avoid Being Lunch

The Bitcoin markets can indeed be tricky, yet the large traders are able to take advantage of newbies by relying on their loss aversion and greed.

Hence, as a Bitcoin investor or trader, it is important to keep your wits about you. Do not fall for the short term price movements and don't react to irrational moves. You should also try and avoid falling victim to market manipulation tactics such as spoofing.

If Bitcoin appears to be moving considerably in one direction or the other and there is a shortage of important news, then you should view the moves with suspicion.

You should also take a look at how the Spot price of the coins is moving relative to the Future price as well as the amount of open interest in the future markets.

These indicators are likely to give you an indication of whether there are large forces that are driving the price of Bitcoin in the short term.

Keep Calm and “Hodl”

If, however, you do not have the time and knowledge to monitor price imbalances, market movements and other information, then you can do just as well to hold your coins and not react.

The investors called "hodlers" who held Bitcoin right from the beginning were able to make immense returns purely because they held their view over the long term and were not swayed by sentiment.