Bitcoin whale consolidation may mean more turbulence ahead

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A closer look at bitcoin holdings data shows a potentially troubling trend among the anonymous accounts -- increased consolidation among large owners.

Investors with 1,000 to 1 million bitcoins that are often referred to as whales hold 42.1% of all Bitcoin supply, up from 37.9% during the height of the speculative bubble two years ago, according data from researcher Coin Metrics.

While small retail holders, investing a few hundred or thousand dollars, trickled in during and after the 2017 boom, the rising ownership concentration means that the sway big holders have over prices is likely increasing. Only about 3.5% of all addresses are actively trading on any given week, according to Flipside Crypto, another researcher.

“The problem with a few large players holding crypto is that when they sell they can easily push the price down, which makes the market susceptible to rapid swings,” said John Griffin, a finance professor at the University of Texas at Austin, who has published research on market manipulation in cryptocurrencies.

Overall, the top 1,000 addresses control 34.8% of all available bitcoin, up slightly from 34.4% at the end of 2017, according to Flipside. Meanwhile, more than 27 million wallets held a balance of fewer than 10 bitcoins as of September, per researcher TokenAnalyst.

Much of the recent accumulation likely happened among investors who are not wedded to the bitcoin dream, warned Aaron Brown, an investor and a writer for Bloomberg Opinion. The top 10,000 to 100,000 addresses are likely held by family offices and high net worth individuals who may not stick around if the coin doesn’t perform, he said. Such addresses now account for 15% of Bitcoin supply, Brown said, up from 10% just 18 months ago.

“I doubt they have infinite patience, and without significant growth in actual use, I would expect them to quietly withdraw to chase other promising technologies,” Brown said. “They have no great financial or ideological commitment to either crypto or the ideals and technologies behind it.” Bitcoin’s wild price swings prevent the coin’s wide adoption in commerce.

Bitcoin is still one of the highest returning speculative assets this year, almost doubling to around $7,180 despite wild price swings. That is on the back of last year’s 74% slump and 2017’s 1,400% surge.

There is speculation that some of the whale accounts are in fact exchanges and custodians, holding coins for many clients. A unit of Fidelity Investments began offering crypto custody services this year, for example. But because Bitcoin addresses are anonymous, the exact impact is hard to gauge; Flipside believes exchanges hold about 5% of available coin supply, while Coin Metrics pegs the number at 20%.

“Bitcoin will remain volatile,” said Eric Stone, head of data science at Boston-based Flipside. “A few really big wallets own a lot of the currency. Exchange marketplaces are unregulated and not audited. So there’s just a lot of potential for someone who wants to manipulate the market to do so.”

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