Beneath the Crypto Currents: The Hidden Effect of Crypto “Whales”

Abstract

Cryptocurrency markets are often characterized by market manipulation or, at the very least, by a sharp distinction between large and sophisticated investors and small retail investors.While traditional assets often see a divergence in the success of institutional traders and retail traders, we find an even more pronounced difference regarding the holders of Ethereum (ETH), the secondlargest cryptocurrency by volume.We see a significant difference in how large holders of ETH behave compared with smaller holders of ETH relative to price movements and the volatility of the cryptocurrency.We find that large ETH holders tend to increase their ETH holdings prior to a price increase, while small ETH holders tend to reduce their ETH holdings prior to a price increase.In other words, ETH returns tend to move in the direction that benefits crypto "whales" while reducing returns (or increasing loss) to "minnows."Additionally, we find that the volatility of ETH returns seems to be driven by small retail investors rather than by the crypto whales.Despite the advantages that DeFi (decentralized finance) trading networks offer, our findings provide evidence that many of the same challenges and vulnerabilities of TradFi (traditional finance) seem to remain within the ETH ecosystem, where larger, more sophisticated investors reap the benefits of their comparative advantages.