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

A previous version of this working paper was originally published in August 2024.

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 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 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.