A few days ago, the price of the world’s largest cryptocurrency, Bitcoin, fell below the crucial $9,500-mark after a wallet, possibly Satoshi-owned and dormant since 2009, transferred 40 BTC to an unknown wallet. Since then, Bitcoin has fallen even lower, with its press time price recorded to be $8,866.
Think about it – One single transaction may be responsible for Bitcoin losing 8% of its value in a week. While the market movement that followed was largely owing to it possibly being Satoshi Nakamoto’s wallet (The amount being largely inconsequential), the case raises a very interesting question. How does the market react to large transfers on the Bitcoin blockchain?
This was the question addressed by a recent paper, with the study in question examining “the short-term price effects of 2,132 transactions involving at least 500 Bitcoins over the period September 2018 to November 2019.” The paper is based on the assumption that while any transaction can be interpreted as a signal, it is reasonable to assume that the strength of the signal is proportional to the size of a transaction and by extension, the market reaction.
In fact, the paper is essentially an extension of a previous study that had found that cumulated blockchain transaction volume is an important part of Bitcoin’s microstructure.
The study in question found that while larger transfers are generally perceived as a signal of uncertainty and are expected to yield negative price effects, it’s not so black and white. In fact, the price effects of such transfers depend on what kind of transfers they are; whether they are cold wallet deposits, cold wallet withdrawals, hot wallet deposits, hot wallet withdrawals, or non-exchange transfers.
Across these types, the report found that while huge Bitcoin transfers do entail price effects, there is no real linear relationship between transaction size and market reaction.
Further, the study also postulated that the motive behind the Bitcoin transfer could also possibly have price implications for the market. For instance, it deduced that while “Non-exchange transfers and cold wallet deposits appear to result in negative price developments after the transaction, cold wallet withdrawals and especially hot wallet deposits seem to entail price increases,” with the paper adding that such changes in price are dependent on how traders interpret buying and selling pressure in the market.
However, the paper in question did have a word of advice for many who might seek to switch on notifications for Whale Alert to build a trading strategy, adding that such a strategy will not be able to overcome trading costs. The paper concluded by arguing,
“Such a strategy may, however, be viable for high-frequency traders and market makers, who buy or sell anyway and may use this information to optimize their market timing.”