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The Whale Index and the Price of Bitcoin

September 2, 2020 By Mircea Vasiu

Bitcoin has lagged gold on recent moves in 2020 and it has also consolidated more than usual. To some traders, this is a sign of a maturing market. To some other ones, it is a sign of “fatigue” – a bearish concept before a drop happens.

Nevertheless, a close look at the Whale Index explains pretty much what happened in 2017 when Bitcoin surged to almost $20,000 and also what happened in 2020 so far.

What is the Whale Index and What Does It Show?

This is an index that counts the number of unique Bitcoin addresses that own more than a thousand Bitcoins. This is important because if we use the July 2020 average price on Bitcoin, we see that each address owns about $11 million worth of Bitcoin. Hence, the metric, or index, shows the interest of investors in Bitcoin, investors with a higher net worth than the regular retail trader.

On the chart above, the two lines show the Bitcoin price in USD (the black line) and the number of addresses with more than a thousand Bitcoins. We can say, without a shadow of doubt, that the second one leads the first one. From left to right, every time the green line moved above the black one, the price of Bitcoin eventually surged.

Judging by this metric, it is more important for traders to keep tracking the number of whales to monitor the interest on the digital coin. Due to the number of addresses worth more than a thousand Bitcoins is above the price line, the implications are that Bitcoin price will follow and move higher as it did so in the past.

However there is a catch – the scale. A chart like this is easily manipulated by converting the scale in such a way to create the conclusion you want to deliver. Hence, it should be taken with a grain of salt.

There seems to be a clear, renewed interest in the digital space. As the USD declines, many search for shelter in alternative investments – traditional ones, like gold, or alternative ones, like Bitcoin.

Yet as more and more transactions occur off-chain, metrics like the Whale Index become less effective. A trader or investor must understand the dynamics of the market before going in, and the digital market is one of the most opaque in the world for a single reason – it is unregulated.