Beneath the crypto currents: the hidden effect of crypto “whales”

Alan Chernoff and Julapa Jagtiani

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 Ether (ETH), the second-largest 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, prior to a price increase, large ETH holders tend to increase their ETH holdings while small ETH holders tend to reduce them. In other words, ETH returns tend to move in the direction that benefits crypto “whales” while reducing returns (or increasing loss) to “minnows”. In addition, we find that the volatility of ETH returns seems to be driven by small retail investors rather than the crypto whales. Despite the advantages that decentralized finance trading networks offer, our findings provide evidence that many of the challenges and vulnerabilities of traditional finance seem to apply within the ETH ecosystem, where larger, more sophisticated investors reap the benefits of ETH’s comparative advantages.