The Bitcoin paradox: crypto whales

The cryptocurrency movement has become plagued by the very problems it was created to solve

Man pointing at a whale                                 
Lack of regulation and anonymity give crypto whales power – Photo: Shutterstock
                                

Contents

The untethered influence of whales on the cryptocurrency market indicates that this supposedly democratising phenomenon has become plagued by the very same problems it was allegedly created to solve.

Anonymity and decentralisation are the central tenets of crypto. While purporting to help the common man find economic freedom, these principles, as evidenced by the emergence and untethered power of crypto whales in the market, appear to not only mirror but indeed exacerbate the issues of centralisation and inequality that plague traditional financial systems.

While obviously anti-establishment, crypto is not, as will be discussed, anti-capitalist. Nor is it necessarily pro-democratic. The ideological paradoxes which exist in crypto find their origins in the ideological paradoxes of big tech.

Let’s take a closer look.

Paradoxes abound

Crypto is fraught with paradoxes. On the one hand, it is an anarchic, left-wing phenomenon driven by the spirit of libertarianism and emboldened by the fantasy of economic empowerment, freed from the shackles of a corrupt central banking system. On the other it is perhaps the most acute expression of capitalism gone mad, whereby a few shady big fish, also termed whales, brazenly exploit and manipulate the markets to accumulate more wealth.

While some argue the decentralised nature of crypto is a progressive step forward to bridge inequality, others say the ideology of crypto has its very roots in right-wing capitalist thought. While some suggest blockchain technology can create new opportunities for the unbanked across the world, others say that tech solutionism in the development sector is just another form of imperialism.

Again, while it has been endlessly repeated by experts since the surge of crypto that it is a bubble with no utility aside from criminal activity, and that it will ultimately go down to nothing, valuations have continued to skyrocket. Altcoins, even ones which began as jokes, have ballooned to absurd proportions. Some institutional investors that were once scornful of crypto, such as Ray Dalio, have begun to pour money into it.

The existence of crypto whales and their seemingly unlimited power over the markets, however, perhaps trumps all the other paradoxes.

What are whales in crypto?

A whale is a cryptocurrency term that refers to individuals or entities that hold large amounts of bitcoin. Whales hold enough cryptocurrency that they have the potential to manipulate currency valuations.

Crypto whales can be individuals or institutional investors. Unlike a retail investor, whales can trade over exchanges as well as carrying out over-the-counter (OTC) trades.

Who are the whales in cryptocurrency?

The opacity surrounding the identity of crypto whales sits in direct opposition to the transparency of the technology. Articles that attempt to answer the million-dollar question “Who are the crypto whales?” are scattered all over the internet, but unfortunately, linking an address to a crypto whale is nigh-on impossible.

While the transactions are visible, the individuals behind the transactions are anonymous. Crypto billionaires do not make up the rich lists, and aside from a few names that are frequently bandied around, including the Winklevoss twins and Satoshi, there is a remarkable lack of information available to laymen about what shadowy characters are behind these vast hordes of wealth.

This anonymity of course provides crypto with its subversive edge, its mystique, but it also brings with it huge risk. While on the one hand unknown whales led by an unknown pseudonymous creator help maintain the illusion of decentralisation, this anonymity, upon closer inspection, also helps solidify the centralisation of wealth.

As a whale, anonymity renders all kinds of market manipulation relatively easy. Whales can band together to prop up or tank the market.

Who has the most cryptocurrency?

As previously mentioned, working out who owns the most cryptocurrency is not possible. Satoshi, the founder of Bitcoin, may hold as many as one million BTC, and thus is most likely the owner of the most. But given the fact it is held in different wallets and these wallets are anonymous, attempting to come to a concrete answer is futile.

However, it is possible to work out the breakdown.

According to recent data, the top four bitcoin wallets own 3.48% of total coins, worth a total value of $25,429,224,462. Similarly, a report by Glassnode from February 2021 found that 2% of “network entities” control almost three-quarters of all of bitcoin. Humpback whales, according to their categorisations, owned 13.3%, whales had a share of 18.4% and sharks had 3.3%.

Due to the fact crypto whales tend to keep coins in a multitude of different wallets, understanding the precise wealth or accumulated wealth of these individuals is almost impossible. Data also shows how, between the beginning of 2020 and the beginning of 2021, the supply held by large entities (be they whales or humpbacks) surged by 13.4% while the number of such entities entering the space increased by 27% to 2,160.

As crypto has entered the mainstream, high net worth individuals and institutional investors have entered the space. These investors include MassMutual, Ruffer Investments and Microstrategy.

Whales in cryptocurrency – moving markets

Movements in the market are invariably due to liquidity. Whales, with their vast supplies, can drain the market of liquidity, thus increasing volatility. If a whale sold lots of coins, they could then instigate a market-wide sell-off. After the price has dipped, the whale could then anonymously buy their holdings back at lower prices.

Similarly, a whale could trigger a short squeeze leading to an increase in price, which in turn would attract more retail investors. As more retail investors buy in, the price increases even more, thus increasing the value of the whale’s stock.

In April 2019, for example, the value of bitcoin increased by nearly $1,000 over the course of just two hours. Reports found that the reason for this sudden spike was due to the fact a single order of 20,000 BTC had been executed across three exchanges. This purchase had the power to change investor sentiment, leading to a rally that climaxed by the end of June.

Towards the end of 2021, after bitcoin hit the $60,000 mark in early November 2021, on-chain data suggests whales began selling up at the high again as they constitute nearly 90% of transactions to exchanges.

However, it is not just selling and buying on the part of crypto whales that can impact markets. A wallet-to-exchange transaction, for example, is when coins are deposited from a wallet into an exchange wallet. This generally means the owner intends to trade them in the short-term. A large deposit of a stablecoin, however, could indicate the whale intends to purchase BTC. A deposit of bitcoin could put pressure on the markets downwards as investors prepare for a sell-off. A large deposit of stablecoin would do the reverse.

If whales withdraw bitcoin from exchange wallets into cold wallets, this generally signals they are not about to trade them. By reducing liquidity on exchanges, price can increase. Furthermore, by withdrawing to cold wallets, crypto whales are sending signals to the market that they believe bitcoin is worth holding onto.

It is important to remember that these actions do not necessarily lead to a specific outcome. Whales in cryptocurrency can move money around different wallets to trick the market into thinking they are going to enact a major sell or purchase of BTC. It is precisely this odd interaction between anonymity and transparency, combined with a lack of regulatory oversight, that makes market manipulation incredibly easy.

Speaking to Bloomberg, Kyle Samani, managing partner at Multicoin Capital,  said of market manipulation by crypto whales: “I think there are a few hundred guys… they all probably can call each other, and they probably have”.

Similarly, Ari Paul, co-founder of BlockTower Capital, said: “As in any asset class, large individual holders and large institutional holders can and do collude to manipulate price… In cryptocurrency, such manipulation is extreme because of the youth of these markets and the speculative nature of the assets.

Are retail investors also afforded anonymity? 

Anonymity is something of a myth when it comes to retail investors and crypto. In order to buy and sell crypto, retail investors on exchanges must undergo Know Your Customer (KYC) processes. This means that if retail investors are caught up in any nefarious business, authorities can track them down.

Furthermore, as a small fry, if you are not dealing in any criminal activities and not attempting to conceal crypto wealth during a divorce, there appear to be limited advantages to being anonymous.

A double-edged sword

The transparency and accessibility of the system is similarly a double-edged sword. Unlike traditional financial markets, where only experienced investors can play, in crypto anyone can. Again, for the retail investor, this is a curse as well as a blessing.

The blessing of accessibility, and the chance to ‘get rich quick’ for a few fortunate individuals gives crypto a democratising air. Armed with pseudo financial knowledge from slightly dubious Twitter-based “crypto experts”, individuals are ‘free’ and ‘empowered’ to roll the dice and play the game that traditional markets have historically shut them out of.

With each bull market, as more “crypto experts” with skin in the game encourage more naïve hopefuls to get involved, the bigger crypto becomes – because every “expert”, whether they are a whale, a humpback or a shark, has some investment in recruiting plankton. As one notable expert, Pompliano, recently tweeted to his significant amount of followers: “Every bull market has to indoctrinate the new class of crypto enthusiasts”.

A quick look at the social media history of Tesla CEO Elon Musk clearly shows how easily markets can be manipulated. If Musk pans crypto, it drops; if he praises it, it rises. Given the fact no one knows which addresses are linked to him, he and other big players could be buying at the dip – we have no way of knowing for certain

In response to the phenomenon, Martin Walker, director of banking and finance at the Centre for Evidence-Based Management, told the Financial Times: “The brilliance of the whole crypto scam is that you don’t actually have to generate any income to pay anyone, so you don’t run out of money because you’re making people believe in ‘number go up’.”

Retail investors follow the rally

Problematically, retail investors tend to behave in the opposite way from crypto whales. In November 2020, for example, when Bitcoin soared to record highs, individual investors bought BTC as prices rose and sold when they dipped. Similarly, between December 2020 and February 2021, whales increased their holdings dramatically, a trend which retail investors followed.

However, between March and May, crypto whales reduced their holdings while retail investors kept ploughing in. In mid-May the price crashed, hurting retail investors who had invested when BTC was already at peak price.

Retail investors, caught up in the emotional frenzy of watching their savings plummet to horrendous lows, are much more likely to sell up rather than sit on their hands and ride the wave. This means that as each low hits the larger, more experienced investors can buy up and accumulate more.

Furthermore, while institutional investors can rely on a team of analysts, experts, modelling equipment and experience, retail investors largely get their information through social media, rendering them more vulnerable to fake news, distributed through social media channels by “experts” who are free to say whatever will incite others to invest.

Even trusted news outlets, by dint of ignorance, unknowingly prop up and give light to crypto, thus encouraging more retail investors to get involved. The BBC, for example, recently ran an article about the new Squid Game crypto and how it was surging to new heights. But anyone spurred to get involved after reading such an article would have lost all their money a couple of days later, as the unknown creators walked away with millions of dollars.

An examination of crypto whales, the concentration of wealth and the potential exploitation of the little guy to make the wealthy already wealthier, at first appears to be at odds with the anarchic, democratising promise of crypto.

Rooted in right-wing economics

However, under closer scrutiny, crypto and big tech alike express sentiments that are anti-establishment but far from anti-capital. In fact, crypto is in some respects the quintessential expression of free market sentiment.

In Stable Dematerialisations: The Dialectics of Bitcoin, Benjamin Noys, a professor of critical theory at the University of Chichester, discusses the odd ideological paradox of crypto, writing: “The libertarian politics of ‘freedom’ associated with cryptocurrency is not so much consonant with a left-wing resistance to the state, but with the right-wing embrace of the market as the only determinant of human worth (and nature, of course).

“The ongoing emergence of the Alt-Right, Neo-reactionary thought (NRx), and the various right populisms of the present moment, have all seemed to confirm the naiveté of seeing the Internet as a site of ‘liberation’ and the hacker as the figure of subversion (or at least left subversion),” Noys continued.

Such ideas are echoed by David Golumbia in his paper The Politics of Bitcoin. He argues that the emergence of crypto and cyber-libertarianism is a logical continuation of the ideas established by right-wing economists like the John Birch Society and Milton Friedman.

While decentralisation is invariably promoted by crypto advocates as the way to free society from pesky central banks printing money and devaluing currency, it is interesting to examine the criticality of these structures in the maintenance of a stable economy.

In a globalised world, a finite currency such as bitcoin results in volatility due to the mechanisms of supply and demand, which drive the price up and down. Fiat currency, by altering the levels of currency circulating in the system, ensures the value of the currency remains relatively stable.

Paradoxes in big tech

The paradoxes which plague crypto are mirrored in the dichotomous nature of big tech. On the one hand, hoodie-clad CEOs provide everyone with a ‘voice’ to express their identity, a ‘platform’ to set up their own business, while on the other they undermine the human right to privacy, increase wealth disparity and endlessly prioritise profit over ethical considerations.

Disruption and innovation are buzzwords associated with ideas of progression and leading the world towards a more equal, socially just place. But according to Prof Robert Herrian, they signal only a desire to push forward commerce and service the “self-regarding needs and desires of the capital class”.

Dressed as something “good”, Herian continues, so-called disruption amounts to little more than “rearranging the furniture in a room but then trying to convince people it’s a different room”. He cites a Stanford computer science graduate telling Stanford University magazine that entrepreneurs “like to put that spin on it, that we’re going to change the world … A lot of times, for lack of a better word, that’s just bullshit. The bottom line is that people want to make money”.

Interestingly, the democratising potential of blockchain technology is often held up as the excusing factor when crypto is tied up in some new scandal. While crypto might be risky, dodgy or the remit of criminals, the argument goes, blockchain technology will save the world and bridge inequality.

While this may not be entirely a fantasy, it is worth remembering the birth of the internet brought similar lofty promises – until we all realised that, as the market has matured, its existence has in fact made inequality worse.

Impotence of Western governments

The desire for decentralisation has no doubt in part emerged from a disillusionment with, and to some extent justified distrust of, the current financial system. 

From inequality to quantative easing to outdated processes, Western governments have garnered extensive criticism. 

Sheri Berman, a professor of political science at Columbia University, argues that “liberal democracies’ problems over the past years haven’t come merely or even primarily from the challenges they have faced, but rather from a diminished capacity to recognise and respond to them. It is not just rapid economic and social changes that matter but the inability or unwillingness of national political actors and institutions to respond to those changes that has caused rising support for populists.”

Berman goes on to suggest that “the real cause of Western democracies’ current travails is that many core political institutions have decayed dramatically over the past years — or ceded responsibility to unelected supranational bodies — hindering their ability to translate the demands of a broad range of their citizens into concrete action at home”.

Western governments have indeed shown a lack of ability to control and regulate either big tech or crypto. While the archaic or elitist aspects of institutions are frequently bandied around, the ways in which institutions serve to maintain democratic values is all too often forgotten.

Decentralisation, or the belief in it, is essentially a statement of faith in a system where morality or ethics are no longer a factor. The core governmental institutions were created with democratic principles in mind. These principles, however, and the liberal governments designed to maintain and protect them, are increasingly impotent in the face of change.

The disillusionment with traditional structures has added weight to arguments for decentralisation, a concept which has been around for a while but which blockchain brought into the realm of possibility.

Back in the 1990s, for example, the late US political economist Elinor Ostrom wrote in Governing the Commons: The Evolution of Institutions for Collective Action that “as long as a single centre has a monopoly on the use of coercion, one has a state rather than a self-governed society”.

But until a theoretical explanation — based on human choice — for self-organised and self-governed enterprises is fully developed and accepted, major policy decisions will continue to be undertaken with a presumption that individuals cannot organise themselves and always need to be organised by external authorities,” Ostrom said.

Final thoughts

The existence of whales in crypto and the droves of institutional investors ploughing into the crypto Wild West to hunt for yields clearly demonstrates how inequalities within the traditional financial system are not only mirrored by crypto, but in fact greatly worsened by it.

Examining the possibility that crypto has become (or indeed was always) rooted in right-wing economics, and that its emergence and surge is far from a subversion but simply a logical extension of the next phase of capitalism, helps to frame and understand the apparent paradox of crypto whales. The lack of ability on the part of governments to regulate crypto markets signals the extent to which capitalism, aided by technological developments, has potentially begun to sow the seeds of the overthrow of liberal democracy.

Such an argument, however, bodes well for the staying power of crypto. No longer a subversive, marginalised, anarchic idea, crypto, if part of the ever-accelerating forward march of late-stage capitalism, is here to stay.

FAQs

Different cryptocurrencies serve different functions. The creation of blockchain technology has become a disruptive force. Entrepreneurs can harness blockchain technology in a host of different ways. A whole industry has been built upon this new technology. 

Different cryptocurrencies are valued in different ways. Some emerging cryptos are valued highly due to the potential they can bring to the space. Other more established cryptocurrencies, such as bitcoin, haved gained their value due to factors such as supply and demand, market sentiment and potential regulatory changes.

Some cryptos, like dogecoin, even began life as jokes but have since become highly valued due to celebrity endorsements. 

While crypto is undoubtedly a fertile space, it is important to understand your investments could go up or down. It is important to do your own research, and to make sure you never invest more than you can afford to lose. 

Further reading

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