Crypto Academy / Season 3 / Week 1 - Homework Post for professor @wahyunahrul
I also wish to Congratulate you professor @wahyunahrul on your new appointment. In this post, I will be responding to the assignment given.
Introduction
In the finance ecosystem, Big players or Market makers can influence the price movement of assets they own or trade in their portfolio, this is attributed to how big they are invested in those assets either through cash investment or percentage ownership stakes.
Conventionally, owning huge shares in an asset gives the investor leverage to indicate the direction of price under certain conditions in favor of them, most times against the general perspective of where the price is headed, and trapping other smaller investors. This action also accounts for the balance between demand and supply in the market.
Across different financial markets, this class of investors has different names but mostly does the same thing. In Money markets (Foreign exchange) and stock markets, they're called Institutional investors/traders mostly employees of top-performing banks and hedge fund corporations.
In the cryptocurrency world, they're often referred to as Whales. By definition, Whales are investors that have a large amount of a particular crypto asset. This offers them the power to influence the value of the crypto asset, and generate liquidity in that asset.
Image Source
Why they should be feared?
Small investors are usually cautious of the actions of the whales in the crypto markets because they can either increase or decrease the value of an asset they own. They contribute to the creation of different market phases.
Elaborating on this, when a whale performs a large buy transaction in a particular crypto asset market, the whale creates scarcity of that crypto (buying a large amount) in circulation. So doing forces the price of the asset to increase. This increase in demand.
Likewise, when a whale performs a large sell transaction in a particular crypto asset market, creates an excess of that crypto in circulation more than needed, thus forcing the price to drop. This increases supply.
Investors with small accounts fear being on the wrong side of things when a whale performs transactions because it incurs losses.
An example of this was the case of Elon Musk who announced that he invested $1.5Billion in Bitcoin through his company Tesla earlier this year (2021). After the announcement of the transaction and how you can buy Tesla products with Bitcoin, this caused an up rally in the price of Bitcoin (first time crossing $40,000). This created Demand, any investor on the wrong side (shorting Bitcoin at that moment) would be slipped.
Reference Article
Few months after the announcement, Elon Musk announced that Tesla will stop accepting Bitcoin for its products, hinting at the harmful side of Bitcoin mining to the planet. This caused mixed sentiment in the market and also a catalyst to the plunge down of Bitcoin price. This caused an excess supply of Bitcoin forcing a price drop.
Reference Article
Note that external factors can also influence the value of a crypto asset. Factors like government policies (bans, sanctions), like in the case of China.
Taking advantage of whale activities
Small account investors can only flow with the direction of the market, this means when whales determine the direction of price movement, small account investors can take advantage of this by executing orders in that same direction, conveying the notion "The trend is your friend"
Taking advantage of this opportunity required a grounded knowledge about the market cycle, Whale buys assets at low prices to push the price up, this is represented in technical analysis generally as consolidation before or after a push in price. Some traders refer to them as Accumulation and Distribution phases.
Accumulation occurs before a rally up in price, as the name implies, whales stack their orders within those prices in preparation for the up rally of price.
Distribution occurs before a rally down in price, whales take profits by closing buy orders and preparing to push price download causing the excess supply of the crypto asset.
Whale cycle analysis
For the sake of this demonstration, I will use the Litcecoin/US Dollar (LTC/USD) chart to demonstrate the phases in which whales operate.
Accumulation phase:
The accumulation phase indicates a sideways move in price start of a bullish move, where price direction is to the upside. It forms as a result of low volume(buyers and sellers maintaining a defined price range) no allowing whales to stack their buy orders in these areas. On the chart below, price consolidated (accumulation) for 25 days before pushing to the upside, a lot of whale orders were stacked in that area that allowed for the swift move of price up.
Push phase (Uptrend)
The uptrend push phase starts after the whale orders have been stacked and fully absorbed by market sentiment. A hike in price is seen and this confirms the direction of the market for small account traders, by doing so, they flow with the market trend and escape being trapped. The price of the crypto asset trends to increase throughout this phase.
Distribution phase
The distribution phase indicates slow price movement (sideways) after profit-taking by the whales, the close their buy others and prepare to push the price down as the market moves in a waveform. Here, sell orders are stacked by whales causing the excess supply of the crypto asset, and this technically causes a reduction in the price of the crypto asset.
Push phase (downtrend)
The downtrend phase starts after whales' orders have been absorbed by the market sentiment. A decline in the price of the crypto asset is seen as there is excess supply in the market. Likewise, this hints the small account investors in the new direction of the market, allowing them to take advantage of it.
If you are a “Whale”, what cryptocurrency would you choose to invest or trade?
Source
Investing a large amount of money in a crypto asset requires a thorough assessment of the crypto asset and a proper understanding of how it works.
If I were a whale, I will choose to invest in Litecoin.
Reason
- Litecoin is slightly popular but it is offered on many exchanges.
- Litecoin has a market cap of $9.06B, a circulating supply of 66Million LTC, and Max supply of 84Million LTC. This means about 18Million LTC can still be created.
- LTC is listed #13 in top 20 coins in coinmarketcap website
- Currently, almost all crypto asset is in a downtrend, investing in LTC when the indication align will be a good investment because I will be investing at a cheaper price. LTC has an all-time high price of $413.20 and currently at $135.90, so when the market transition to an uptrend, you can make a profit percentage depending on price and how far the uptrend will go( Might or might not reach or break all-time high price).
My Whale Analysis
Whales need to have a grounded knowledge of the technical chart and also the interpretation of fundamentals.
I will use previous market data of Litecoin/US dollar (LTC/USD) for this demonstration:
Accumulation and Uptrend
As explained earlier, whales stake their others during the accumulation phase in preparation for a rally to the upside, so I can buy when the technical analysis aligns in the accumulation phase for better pricing and also, add positions when the move has begun (buy signal).
It is best when the technical and fundamental analysis align, which gives a firm grasp on the certainty of the move.
Distribution and Downtrend
Similarly, whales take profit during the distribution phase and add sell positions in preparation for the down push of price. Consequently, I can close my buy order when the price enters the distribution phase, analyze the chart for the technical indication(better price) and add my sell orders in areas marked sell Signal.
Conclusion
Whales are an integral part of the crypto ecosystem as they invest large amounts of cash into the system, their participation creates volume for smaller investors, by so doing allows them to take advantage of it.
It is considered safe practice for small investors to align with the whales in other to protect them from loss of trading capital and bankruptcy.
Thank you professor @wahyunahrul.