Cryptocurrencies remain highly volatile. Bitcoin is consistently on track to surpass their biggest monthly gains and losses. It is facing one of the record highs of a 37.5% drop just this May 2021, and has often seen declines such as the 37% drop seen in November 2018 and the 40% drop in September 2011. Recently, the bitcoin price rose to $34,805.19 Monday. June 28, 2021, up 8% from its position at 5 p.m. ET Friday, after Mexican billionaire Ricardo Salinas Pliego pushed his buyout. This volatility serves as a double-edged sword, both as an attractive asset choice for some investors and a concern for others, preventing widespread adoption.
One factor that contributes to volatility is that the crypto market has multiple whales – a term given to someone who holds a large amount of a particular asset; someone who holds a minimum of 1,000 Bitcoins is considered a whale. The size of their holdings means that, when they decide to sell, the market is suddenly flooded with this asset, causing a large price movement.
These powerful investors exist across all asset classes, but cryptocurrencies are particularly vulnerable because there are more whales, but much smaller volume and less liquidity in a sea of fragmented exchanges. Without sufficient liquidity, these whales are trapped in the notorious pool, destined to send huge waves through the market as soon as they make their move. Because each exchange is separated into their small pool of liquidity, they are very vulnerable to whale movement.
For that reason, we need to solve the liquidity problem by combining all these small separate swimming pools into one big ocean. Crypto market trading technology has not yet reached the maturity and stability of forex, which uses OTC trading, i.e. how to minimize the effect of large buy and sell orders that can move the market drastically. If the crypto market integrates it, it can dramatically increase the liquidity of crypto exchanges and stabilize prices as a result. It’s time to deepen the liquidity pool.
The influence of the pope
Cryptocurrency assets are still very concentrated by nature. The sudden growth of Bitcoin means that most of the market is owned by a small percentage of traders who are lucky enough to buy a lot of Bitcoin when the price is low. Currently, about 40% of Bitcoins are stored in about 2,500 accounts.
The same goes for altcoins. For example, it was revealed in February this year that one person holds 28% of Dogecoin, which has jumped nearly 1,400% since the start of the year. A person who owns a large portion of the market has a large influence on prices.
And the effect of this whale is visible. When the whale is sold, the price of the cryptocurrency is in a downward spiral. On April 18th, for example, one trader moved 58,814 BTC – worth more than $3.3 billion at the time – from Binance to a personal wallet at the same time the price dropped to a low of $51,541 per unit.
While whales clearly influence the price of Bitcoin, their influence is greater among altcoins, which have a lower market cap and are less liquid. Not long ago, the price of Ethereum fell by more than 50% on the Kraken Exchange, falling from $1,628 to $700 in minutes.
Kraken’s CEO attributed this to the single sale, saying “it could be that a whale has just decided to throw away its life savings.” For Ethereum to drop $1000 dollars in three minutes is incredible and it proves that even the largest exchanges with large volumes can be rocked by the movement of a big whale.
Given that price swings are exacerbated by fragmented liquidity, markets should pay attention to the fact that liquidity is getting worse, not better. The amount of Bitcoin on the exchange is down 20% over the last 12 months. Slowly but surely, liquidity is drying up and the pool is getting smaller.
A bullish cryptocurrency market means people are holding onto assets, just watching the price go up. Evidence suggests that there are a growing number of whales, with the number of individual holders of over 1,000 Bitcoins at an all-time high of 2,334. So, despite its increasing popularity, there is only a very limited and dwindling amount of crypto changing hands.
Contributing to this issue, big investors are entering the crypto market in swaths. Institutional investors, hedge funds, high net worth individuals, and companies – Tesla most famously – all want to hold and trade crypto assets. And with greater purchasing power, it is likely to increase the size of the order and increase the influence of the pope.
We can’t prevent these big players from influencing crypto trading, but solutions to liquidity shortages that exacerbate price swings exist.
Uniting the pool
To combat the price swings caused by the whales, the market is slowly adopting tactics from other asset classes. For example, many OTC brokers target crypto whales to trade digital currencies off the counter because they can access more liquidity than exchanges.
However, for a long-term solution that can protect large orders and prevent sudden and drastic price swings, exchanges must turn to trading technologies that have been mastered in other markets. For example, the FX market has long provided Live Processing capabilities on a global liquidity network, where orders are collected and processed using Smart Order Routing. This infrastructure enables global price discovery, where the best bid and ask prices are presented to all market participants, regardless of trade route.
Effectively, this allows the exchange to increase the liquidity of other exchanges, including those of the largest in the industry. Using this model, exchanges can consistently provide traders with the best prices and absorb the impact of big whale splashes by leveraging liquidity from the wider market. Several individual pools merge into an ocean.
Only after these issues are addressed will cryptocurrencies be free from the volatility that comes with so many big fish in a less-deep market.