What Is a Crypto Whale?
A crypto whale is a person who owns a large amount of cryptocurrency. The word “whale” is a transplant from the gambling industry, where whales are wealthy gamblers who bet large amounts of money in the casino.
The term “whale” could describe someone who holds a large number of cryptocurrencies — the specific cryptocurrency doesn’t matter. It could be BTC, ETH, altcoins, or even NFTs.
Usually, the term describes the person’s status in a specific community. I.e., “He’s been an Ethereum whale since the ICO in 2014.” Or “They’re a Bored Ape whale because they hold 25 Ape NFTs.”
An important concept to understand about crypto whales is their status relative to the market. You might earn a reputation as a crypto whale if you own $50,000 worth of a cryptocurrency if the token’s market cap is just $5 million. But to be considered a Bitcoin whale, you’d have to hold hundreds or thousands of Bitcoins.
How Do Whales Impact Trading?
1. Crypto Price
As we mentioned, a crypto whale’s status is relative to the market or community. Traders that own a large percentage of the token’s supply can have an outsized impact on price. How crypto is traded can compound this effect.
Say there are 100,000 “Xeno tokens” created to represent voting rights for a new blockchain company.
Because cryptocurrencies can be self-custody, you can trade a small number of liquid tokens. These tokens are deployed to decentralized exchanges (DEX) like Uniswap (DEX) or centralized exchanges (CEX) like Binance or FTX and used as trading liquidity.
So let’s say 40,000 Xeno tokens are available for trading on exchanges. The remaining Xeno tokens reside in trader or team wallets.
One whale who bought in early holds 10,000 Xeno tokens. They decide to sell the tokens all at once on a decentralized crypto exchange.
If Xeno tokens were trading at $1 per token before the selloff, adding 10,000 tokens to the supply would attribute a new value of 80 cents per token, a 20% decrease! Dramatic short-term price movements could cause traders to panic and sell even more tickets cascading the price further.
2. Create Liquidity Problems
As we mentioned in the above example, crypto whales can have an outsized impact on a currency’s trading price.
But aside from price, they could cause massive liquidity problems. If a whale owns a large percentage of a token and there aren’t many to trade, this could inflate the price.
Why is this a problem? Doesn’t a high price mean the project is successful? Not necessarily. If a token is inflated, traders may be priced out of buying the token.
Cryptocurrencies live and die by one metric: the circulating token market cap. This is calculated by taking the number of circulating tokens and multiplying it by the price. If the circulating market cap is in the tens or hundreds of millions, there’s not an excellent upside for speculative buyers.
Trading volume will slow down for that token. There will be fewer holders to advocate for the token online and participate in community governance.
3. Creating “Sell Walls”
Crypto whales are notorious for creating “sell walls” by placing large limit orders set at a specific price. As a result, a giant wall of sell orders is formed on the order book.
If crypto whales sell all their tokens at once, they will lose money on “slippage.” When you sell, slippage is when the trade executes at a lower price than expected.
This effect is exacerbated by volatility or low liquidity. Both are extremely common in trading altcoins or crypto in general.
To combat this, crypto whales set limit orders that only execute above a specific price. Anyone can use limit orders; the only difference is whales hold many tokens, so sell walls can sit on the order books for a long time.
It can be frustrating for retail traders to see token prices that appear to be hindered by crypto whales. Markets are complex so sell walls aren’t always caused by whales, and sell walls aren’t always the reason for poor price performance.
Knowing the order book before executing a trade is always essential for a trader.
4. Capitalizing on FOMO
Consider the earlier example where the crypto whale dumped 10,000 markets and tanked the price by 20%. What would happen if a whale submitted a buy order for 10,000 tokens instead?
The price would increase by 20%. Crypto whales can use inefficient and illiquid crypto markets and pump the price. When traders see a sharp price increase, they get FOMO (Fear of Missing Out) and think the whale knows something they don’t.
New buyers pile in and buy the token. Then the whale can cash out an easy profit. Whales can also “spoof” order books by placing significant buy orders. This creates artificial perceived demand for an altcoin.
Crypto whales often have sizable social media followings. They can deceive followers into pumping the price even more by showing off the sharp price increase on their account.
Often they don’t disclose the size of their positions to followers and end up creating a zero-sum situation where they become even bigger whales.
But it’s not all bad. Some crypto whales are honest and disclose their holdings to followers.
And because they know their reputation is vital to their success as a whale, they may only sell small amounts of tokens at a time or even lock up tokens to demonstrate their dedication to a token’s success.
Who Are the Crypto Whales?
Blockchains are permissionless, meaning crypto whales can be anyone, young or old, of any nationality.
Even the FBI has been known to amass crypto and is included in many lists of “crypto whales.” Due to the private nature of the crypto industry, a whale may publicly present themself as a single person. These can be individuals such as Satoshi Nakamoto (the pseudonym for Bitcoin’s founder), Michael Saylor (of MicroStrategy), and Elon Musk (CEO of Tesla and Twitter and a known Dogecoin enjoyer).
Behind the scenes, a crypto whale could be a team of people that pool their capital and other resources to make investments.
Successful crypto whales have a good understanding of how markets work. They might have a background in stock or forex trading. Many use complex programmatic trading strategies based on trading indicators.
But crypto whales might just be people who were early to crypto and have a lot of capital at their disposal.
Many whales may have gotten lucky on one investment by being early and can use the capital to be whales in many projects. You shouldn’t trust someone’s judgment simply because of their status as a whale.
Can You Become a Whale?
Disclaimer: This is not financial advice.
Because of the permissionless nature of cryptocurrency markets, anyone can become a whale. Many have become whales by buying an ample supply of tokens early on.
Being a large holder of a particular cryptocurrency means you can have an outsized impact on the community by participating in a project's formal or informal governance.
You can help guide the project’s team members by voicing your opinion on technical or business decisions. It could even lead to you getting a job at that protocol!
But it’s vital to understand cryptocurrencies are speculative investments. Even if you are a whale, it’s not guaranteed or likely that the project will succeed financially. An excellent way to practice trading like whales is with paper trading.
Should You Whale Watch in Crypto?
Disclaimer: This is not financial advice.
Many whales are talented traders that have an edge on the market. Because of the public nature of blockchain data, you can create an advantage for yourself by watching whale wallets and setting up whale alerts.
Some even copy-trade whales by watching their on-chain activity. You can even automate these strategies. You can browse popular whale copy trading strategies or create your own with Pluto.
However, many whales know their wallet addresses are being watched and trick retail investors into spending their hard-earned money on speculative tokens.
Even worse, some whales create “honey pot” tokens programmed so that only the whale can place sell orders. Whales can bait retail investors by submitting a large buy order of hundreds of thousands of dollars into a honey pot token.
Even if you’re not a trader, you can learn much about financial markets and economics by watching whale activity.
The Bottom Line
Crypto whales are powerful players in the cryptocurrency market. They have an outsized impact on the trajectory of the projects they are invested in.
You can learn a lot by watching their moves. Anyone can become a whale, but it takes a lot of research and the right tools.
Ready to become a crypto whale? Learn more about whale investing strategies at Pluto.