Cryptocurrencies remain extremely volatile. Bitcoin is consistently on track to beat its biggest monthly rise and fall. It saw one of its all-time highs of 37.5% decline in May 2021 and frequently sees declines such as a 37% decline in November 2018 and a 40% decline in September 2011. Bitcoin price last climbed on Monday June 28th , to $ 34,805.19 in 2021, 8% up on Friday at 5 p.m. ET after Mexican billionaire Ricardo Salinas Pliego encouraged his purchase. This volatility serves as a double-edged sword, both as an exciting investment decision for some investors and a concern for others that prevents widespread adoption.
One factor that adds to volatility is that the crypto markets have an abundance of whales – a term given to someone who holds a significant amount of a particular asset; someone who owns at least 1,000 Bitcoin is considered a whale. The sheer size of their holdings means that if they decide to sell, the market will suddenly be flooded with this asset, causing big price movements.
These powerful investors come across all asset classes, but cryptocurrencies are particularly vulnerable as there are more whales but much smaller volumes and less liquidity in a fragmented sea of exchanges. Without sufficient liquidity, these whales are trapped in a proverbial swimming pool that is designed to send huge waves through the market as soon as they move. Since each exchange is divided into their small pools of liquidity, they are incredibly vulnerable to whale movement.
Because of this, we need to solve the liquidity problem by putting all these separate little swimming pools together into one big ocean. The trading technology of the crypto market has not yet caught up with the maturity and stability of forex, which employs OTC trading, thereby minimizing the impact of large buy and sell orders that can move the market drastically. When the crypto market integrates this, it can dramatically improve the liquidity of the crypto exchange and thereby stabilize pricing. It’s time to deepen the liquidity pool.
The influence of the whales
Basically, cryptocurrency assets are still very concentrated. Bitcoin’s sudden growth means that a large chunk of the market belongs to a small majority of traders who were lucky enough to buy lots of bitcoins when the price was low. Currently around 40% of Bitcoin is held in around 2,500 accounts.
The same goes for altcoins. For example, in February of this year, it was revealed that a person holds 28% of Dogecoin, which is up nearly 1,400% since the start of the year. A person who has such a large share of the market has a huge impact on the price.
And the effects of these whales are visible. When whales sell, cryptocurrency prices are in a downward spiral. April, for example, a trader has 58,814 BTC – worth more than 3.3 billion at the time.
While whales clearly influence the price of Bitcoin, their influence is greater with altcoins, which have a lower market cap and are less liquid. Not so long ago, the price of Ethereum on the Kraken Exchange plunged more than 50%, falling from $ 1,628 to $ 700 in minutes.
The Kraken CEO attributed this to retail sales, saying, “It could be that a single whale has just decided to dispose of its savings.” That Ethereum is dropping $ 1000 in three minutes is extraordinary and proves that even the largest, large-volume exchanges can be shaken by large whale movements.
Given that price fluctuations are amplified by fragmented liquidity, the market must be careful that liquidity does not get better, but worse. The amount of Bitcoin on the exchanges has dropped 20% in the past 12 months. Slowly but surely, liquidity is drying up and the pool is getting smaller.
The bullish cryptocurrency market means people hold the asset and just watch the price go up. There is evidence that there are growing numbers of whales, with the number of single owners of over 1,000 Bitcoin at an all-time high of 2,334. So, despite growing popularity, there is still a very limited and diminishing number of cryptos changing hands.
As a contribution to these problems, large investors are swathing into the crypto market. Institutional investors, hedge funds, high net worth individuals and companies – above all Tesla – want to hold and trade crypto assets. And with more purchasing power, it will likely increase order quantities and increase the influence of the whales.
We can’t stop these big players from affecting crypto trading, but there are solutions to the underlying lack of liquidity that makes price volatility worse.
Unify the pool
To counter whale-induced price fluctuations, the market is slowly adopting tactics from other asset classes. For example, many OTC brokers target crypto whales to trade digital currencies over the counter as they can access more liquidity than exchanges.
However, for a permanent solution that can cushion large orders and prevent sudden and drastic price changes, exchanges should resort to trading technologies that are dominated in other markets. For example, the foreign exchange markets have long provided straight-through processing capabilities in a global liquidity network where orders are aggregated and processed using smart order routing. This infrastructure enables global price determination, in which all market participants are presented with the best bid and ask prices regardless of the trading route.
In fact, it allows exchanges to leverage the liquidity of other exchanges, including the largest in the industry. This model allows exchanges to consistently offer traders the best prices and cushion the effects of big whale splashes by taking advantage of liquidity from the broader market. The many individual pools combine to form an ocean.
Only when these issues are addressed will cryptocurrencies become free of the volatility that comes with so many big fish in a market with no depth.