The volatile nature of cryptocurrencies is at it again. This time cryptocurrency markets experienced a sudden and dramatic collapse without obvious reasons.
After experiencing steady gains in the past few weeks, Bitcoin plunged by more than $300 within an hour then by $1,000 in 24 hours.
Overall, Bitcoin plunged by around 12 percent while its rivals Ethereum, Ripple and Bitcoin Cash were hardest hit, with all having dropped by around 20 percent.
With no clear suspect(s) for the sudden drop, speculations have been making rounds in the digital currency world.
One popular factor some analysts believe to be responsible is reports that the investment firm Goldman Sachs is abandoning its plans of setting up a cryptocurrency trading desk.
This may have led to the crash as a result of the market trying to correct itself.
Another possible explanation for the price crash is a Bitcoin cold wallet dormant for close to five years and worth around $1 billion goes active and starts transferring funds to various exchanges.
Some believe it belongs to the creator of the now-defunct darknet market Silk Road, while others speculate that the wallet belongs to Mt. Gox, a former cryptocurrency exchange that filed for bankruptcy back in 2014.
Nonetheless, the Wealth Chain Capital CEO Phillip Nunn told The Independent that he believes the main factor for the free fall is the introduction of Bitcoin Futures, which has resulted to manipulation and unnatural moves in the cryptocurrency markets.
Such manipulations and suppressions may be attributed to the so-called “crypto whales” due to the lack of regulations and oversight in markets.
A whale, as the name would suggest, is an individual or entity who possesses large amounts of capital and is capable of investing in the cryptocurrency markets, with the intention of accumulating as much as possible at the cheapest possible price.
How Crypto Whales Operate and Their Impact on Cryptocurrency Markets
Depending on who they are, whales are able to manipulate the price of a specific cryptocurrency say, by placing a sell order in tens, or even hundreds of millions of dollars at a price called a “sell wall,” which is slightly above the current market price.
By doing so, it sends an illusion that the asset is being unloaded. This keeps the price artificially low since the sell order has to be completed before the price goes beyond the sell wall price. Furthermore, if the market’s total volume of capital is relatively small, the multi-million dollar sell order won’t be filled, thus the price will remain below the wall price.
On one hand, if the whale(s) makes an extremely large buy order, this may cause the price of a specific cryptocurrency to surge because it’s sending an illusion that the market is “bullish” and that the asset is in higher demand.
All in all, when a whale makes a significant transaction, they can manipulate the markets—causing a slippery slope of buy or sell orders, and in turn leading to sudden and significant price changes.
Examples of Known Crypto Whales
Individuals and entities can be referred to as a whale depending on their objectives and the nature of the business they’re in with respect to the crypto markets.
Below are a few categories of whales in the crypto world:
- Investors with almost unlimited financial sources capable of radically influencing the markets to suit their agenda. Examples of entities are Goldman Sachs or Fortress Investment Group. Individuals can also be put under this category. Some of the best known are the likes of Satoshi Nakamoto, Roger Ver or even Cameron and Tyler Winklevoss.
- Cryptocurrency exchanges are at times referred to as the main market makers, with unlimited information enabling them to push the market some points higher, in order to collect traders’ stop-losses, or at times slow the market down when the price of an asset is so close to the take-profit level.
- Traders capable of making massive orders such as a sell, which drops the price of a certain asset dramatically. They then buy back at the reduced price from people who only hold a small number of cryptocurrencies.
- Crypto holders who stock up on coins at cheap prices. Reports claim that 40 percent of all Bitcoins are held by just around 1,000 individuals. The Winklevoss twins are a good example of crypto holders who possess an enormous amount of funds and have never sold a single coin since they poured $11 million into Bitcoin investments.
In the end, analysts have predicted that the big selloff that is happening will continue to negatively impact the prices of various cryptocurrencies until the markets stabilize and become more established.
Until then, cryptocurrency markets will continue having their intense boom and bust cycles, making them one of the most volatile assets in the world.