Digital currency investors might lose sleep over the fact that about 40 percent of bitcoin is held by a mere 1,000 users, capable of making prices plummet.
So-called whales, holders of large amounts of bitcoins, have become the subject of concern for many investors due to their significant clout with the cryptocurrency market. According to Aaron Brown, former managing director and head of financial markets research at AQR Capital Management, they may decide to sell half of their holdings, thus artificially boosting the prices.
Moreover, the owners have known one another for years and could potentially contact each other to tank or prop up the market. The point is that sharing information on bitcoin is not prohibited as it is a digital currency and not a security, according to Gary Ross, a securities lawyer at Ross & Shulga, as cited by Bloomberg. Hence, there are no limitations on a trade in which a group agrees to purchase enough to boost the price and then cash it out immediately.
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It seems hard for regulators to catch up with digital currency trading with its blurry rules. If traders sway the market towards their preferential price and start spreading rumors about it on the web that might be considered as fraud. Bittrex, a virtual currency exchange, has already informed its users that acting in concert with other users in order to manipulate prices will lead to their accounts being suspended.
According to the U.S. Securities and Exchange Commission, digital coins should be regulated differently, depending on their structure and the way investors expect to raise money from them as some may be considered as fiat currencies.
“As in any asset class, large individual holders and large institutional holders can and do collude to manipulate prices. In cryptocurrency, such manipulation is extreme because of the youth of these markets and the speculative nature of the assets,” Bloomberg quoted Ari Paul, co-founder of BlockTower Capital, as saying.
Ordinary investors, for their part, usually remain “in the dark on the whales’ plans and motives,” as there is no transparency in this market. Bitcoin transactions are anonymous and carried out through a set of codes, which can be tracked by anyone.
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As for the future of the cryptocurrency market, some argue that the whales will sell their digital funds and tank the market:
“A good comparison is to early-stage equity. Similar to those equity deals, often the founders and a handful of investors will own the majority of the asset,” Bloomberg quotes BlockTower’s Paul.
Others believe that they will not dump their assets as they pin hopes on the long-term potential of the digital coins:
“I believe that it’s common sense that these whales that own so much bitcoin and bitcoin cash, they don’t want to destroy either one,” said virtual currency trader Sebastian Kinsman.