Trends in the financial markets can be affected by many different factors, such as supply and demand. These factors can help traders determine whether an asset is overbought and the market saturated. Each metric plays an important role in forming a technical analysis and price predictions, while some factors may determine the direction in which the price of an asset will head. One factor that can meddle with market trends is price manipulation. Human influence is the spinning wheel behind this external factor.
If you are following cryptocurrency markets, then you have surely heard of whales (traders with high net worths) and how these entities can influence the market trends. That leads us to the term ‘whale manipulation’. What is whale manipulation, and how can whales influence and change market trends?
What Is a Whale?
“Whale” is a new term that is commonly heard and used across cryptocurrency communities, where price manipulations are often being debated as one of the centrepieces of major unpredicted price swings. A whale is a person or entity that holds a large amount of capital—enough to make the trends switch in their favour. The ultimate goal, of course, is to make a profit by manipulating the trends in the market before analysing market trends to create a technical analysis that serves as guidance for making entries and exits.
In 2018, Amin Shams and John Griffin from the University of Texas published a study revolving around Bitcoin price manipulation and discussing the fact that Bitcoin may or may not be tethered. The study was based on the presumption that Bitcoin’s price was manipulated to reach the price of $20,000 per unit as recorded in December 2017, starting from a value of $1,000 per BTC. Reportedly, a couple of high net-worth investors—i.e. whales—used Tether (USDT), a dollar-backed crypto, to push the price of Bitcoin in a direction convenient for their gains.
The paper suggests that Bitcoin and Tether blockchains were followed in terms of activity, and it was noted that a whale was working from an exchange called Bitfinex, making large purchases of Bitcoin whenever the price dropped, matching the time Tether was issued.
Price manipulations are done in several ways. Whales can perform these manipulations by owning large amounts of BTC or other cryptocurrencies. The whale then makes a move to sell when they feel appropriate, which creates a wave that affects the price momentum of the manipulated crypto.
What is interesting in the example of Bitcoin price manipulation through Tether, all conducted through Bitfinex, is that the executives behind the exchange were also responsible for the development and issuance of Tether, which is more than a familiar in and outside of the crypto community.
How Whales Operate and How Price Manipulation Works
An important thing to note is that creating a whale wave, or orchestrating a price manipulation, is not an easy thing to do, especially in mature and vast markets. The larger the market, the more difficult it will be for a whale to make a significant wave. Perhaps that is why Bitcoin price manipulations were easier when Bitcoin was worth around $300 per BTC—when it still belonged to an immature market that is now slowly but steadily maturing.
This situation might be comparable to waves in the sea. If the market is represented as the sea, our price manipulators are the whales, and price changes are the waves in the sea. The greater the body of water, the more difficult it would be for a whale to create a wave that will touch a shore and have a substantial effect. The same goes for market whales and the effect they may or may not have on the market. Also, the larger the whale—i.e., the bigger the net worth of the whale—the greater the effect on price trends.
So, how does a whale manipulate prices in the market?
Whales will buy or sell large amounts of Bitcoin and place greater orders to try and make a change in market trends. They may do so through acting as bear whales or by performing price pumping.
If a whale wants to pump the price and make the value of Bitcoin or another digital asset significantly rise, the whale will place a buy order to create a sell order on an exchange. A massive buy order for a higher price than the present value would then make a wave and change the demand by increasing it. When the demand is increased through a massive order made by a whale wave, there is a window that lasts for several hours and in which the price rises as a consequence. This action may be conducted by a single whale or a group of price manipulators that work in an organised manner to increase the price of an asset.
When a whale wants to lower the value of Bitcoin or another cryptocurrency, they will keep the prices low by making a large sell order at a price lower than the original price, consequently lowering the value of the asset if there are enough buyers to buy out the entire order in only several hours, meaning that the bear whale would take advantage of the increased demand.
What Is a Bear Whale?
When whales decide to work in favour of lowering crypto and Bitcoin prices, a group of whales or an individual with a high net worth will place a large sell order at the low end of the current price in the market. The sell order placed by the bear whale will be soon bought out if the demand is increased, resulting in lowering the price of other sell orders on the market. The market is manipulated into following a downward trend, and the price will drop as a result.
If the demand is low, which wouldn’t be the case with Bitcoin, other traders can join forces to create the opposite effect. Other traders can use a strategy called ‘breaking the wall’. The ‘wall’ is the price of the bear whale’s sell order. If they can recognise the bait, traders can ignore the large sell order with a low price.
Bear whales rely on the fact that there are new traders and investors in the market who want to take advantage of the opportunity and get a piece of the market share for a low price. That situation makes a wave that lowers the price of Bitcoin, affecting numerous investors.
What is Price Pumping?
When whales want to increase prices, they might choose to go with price pumping strategy, which is one of the ways prices and trends can be manipulated in small and immature markets.
Around 1,000 people own approximately 40% of the Bitcoin on the market, so it’s fairly obvious how an individual with a high net worth can manipulate prices to increase them. An individual or a group of whales will create a situation of little supply and high demand—i.e., inflation—by placing a massive buy order. The large buy order increases the present price of Bitcoin, further increasing the next target price.
Once the price is increased, the whale sells some of their Bitcoin units to make a profit on the price change they manipulated.
In the case of both bear whales and price pumping, some traders lose, and others win. What needs to be noted is that manipulations, such as the ‘pump-and-dump’, price pumping, and bear whaling, is strictly illegal in the stock markets, while it is more than familiar in the still immature crypto market.