HOW DO YOU IDENTIFY A BITCOIN WHALE?

With an extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interests include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech).

For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency ecosystems. 

Bitcoin (BTC) is without doubt the most recognized cryptocurrency. It is also the number one currency based on market cap. Bitcoin is a cryptocurrency network that runs on a protocol commonly referred to as the “blockchain.” 

In order to describe what a Bitcoin “whale” is and how to differentiate a Bitcoin whale from other Bitcoin “non-whales,” it is important to have a general understanding of certain blockchain technology. Based on this understanding, one can then understand what types of information that can be extracted from this blockchain technology.

The underlying operating principles of blockchain technology are relatively straight-forward. Any given blockchain consists of a single chain of discrete blocks of data or information. These discrete, separate blocks are arranged in order, chronologically one after one. In principle, this information can be any string of 1s and 0s, meaning it could include emails, contracts, land titles, marriage certificates, or bond trades. In theory, any type of contract between two parties can be established on a blockchain as long as both parties agree to the terms of the contract. This takes away any need for a third party to be involved in the negotiation or execution of a contract. In other words: Why would one need a Visa or Mastercard credit card any more?

In Bitcoin's case, though, the information on the blockchain is primarily data that represents a transaction between two parties. So, let’s just focus on those transactions for now. 

In its most simple terms, Bitcoin is really just a linked list of transactions. For example, Person A sent X bitcoin to person B. Person B sent Y bitcoin to person C, and further down the chain. By recording each and every single one these transactions in the blockchain, each transaction that transpired can be identified. However, the actual individual (or entity such as a corporation) that is involved in the transaction is not known. 

Interconnected nodes for public ledger verification

In this way, the Bitcoin blockchain functions much like a public ledger. That is, this public ledger provides anyone who is interested in an accurate and complete accounting for economic transactions can extract this information from the blockchain. The blockchain also provides a mechanism that allows for the verification that all Bitcoin users have been equipped with the same information. Importantly, everyone can download a copy of the blockchain and use it to trace the path of Bitcoins from one Bitcoin transaction to another. As such, the blockchain can be inspected to trace the path of bitcoins from one bitcoin transaction to another. It should be noted that while there is a record of every single bitcoin transaction ever made, these transactions are not inherently linked to real life identities. For this reason, Bitcoin is considered pseudonymous.

Therefore, blockchains contain and generate in real time a range of financial data that allows one to access precise, trustworthy measures of relevant economic activity in crypto networks. There are a number of data providers that collect and categorize this blockchain data and complex metrics. For example, Glassnode is a blockchain data and intelligence provider that generates innovative on-chain metrics and tools for digital asset stakeholders. 

We can use this data provided by blockchain data providers, such as Glassnode, to identify the largest bitcoin holders, when they purchased their bitcoin, and when the last time they sold any of their bitcoin, for example. This provides an excellent source of information as to how much the largest bitcoin holders possess, when they purchased these coins, and provide clues as to “whale” trends: are they buying, are they holding, or are they selling? 

Large bitcoin holders are called whales because their movements disturb the waters that smaller fish swim in. For example, one method of monitoring whales is to look at wallet addresses that contain a minimum of bitcoin. One common metric is to define a whale to possess a minimum of 1,000 BTC. For example, the top 20% of bitcoin holders have more than 80% of bitcoin value in U.S. dollars. According to BitInfoCharts, just three bitcoin wallets owned 3.07% of all the bitcoin in circulation as of Q2 2021 with a value of just around $27.8 billion, and the top 100 wallets held around 18% of all bitcoin valued at around $150 billion. 

Whales can be a problem for bitcoin because the concentration of wealth, particularly if this concentration of wealth sits unmoved in an account. Again, this is just one metric that can be tracked based on the blockchain. Unmoved bitcoin can lower liquidity, which, in turn, can increase price volatility. Volatility can be further increased if a whale moves a sells a large quantity of bitcoin at once. If the whale is trying to sell bitcoin, the lack of liquidity and large transaction size could put downward pressure on the price of bitcoin, as other market participants see the transaction and also try to sell. Again, these are all metrics that can be tracked by way of the blockchain. 

All the views expressed on this site are those of Thomas Wettermann and do not represent the opinions of any entity whatsoever with which Thomas Wettermann has been, is currently, or will be affiliated.

Trading digital financial assets such as cryptocurrencies can carry a high level of risk, and may not be suitable for all investors. Before deciding to invest, purchase, and/or trade cryptocurrency you should carefully consider your investment objectives, level of experience, adversity to risk and volatilities. The possibility exists that you may sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with cryptocurrency trading, and seek advice from a qualified and independent financial advisor. Thomas Wettermann is not an independent financial advisor. 

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