Merchants are increasingly reviewing on-chain data to “predict” both the short-term and long-term price trend of Bitcoin (BTC) using platforms such as CryptoQuant, Glassnode and WhaleAlert.
In particular, data points such as Bitcoin inflows, outflows and stable Bitcoin inflows are actively used by traders to foresee where BTC might go next.
499 #BTC ($ 29,979,163) were transferred from an unknown wallet to #Coinbasehttps: //t.co/zkhywRQS82
– Whale Alert (@whale_alert) March 14, 2021
However, this type of data should be received with a grain of salt as large business owners also recognize that this data is increasingly being used by many people in their trading strategies. Hence, high net worth individuals or whales can manipulate this data to tilt the market to their advantage. But how?
Bitcoin on chain data can be used for “psyops”.
When large amounts of Bitcoin are deposited into an exchange, it usually signals that a whale or a high net worth investor is planning, at least in theory, to sell BTC.
Inflow of Bitcoin twins. Source: CryptoQuant
Investors who hold a lot of Bitcoin usually leave it in unprotected or self-hosted wallets for privacy and security reasons.
Therefore, when these stocks go public, it seems like whales are putting massive pressure on the market.
However, knowing that investors can track deposits through such on-chain data tracking platforms opens the door to a counterfeit situation.
In technical analysis, a fakeout is a term used to refer to a situation where a trader takes a position that anticipates a future transaction signal or price movement, but the signal or movement never develops and the asset does moved in the opposite direction.
For example, whales could deposit large amounts of BTC on various exchanges, which makes it seem like they are selling a lot of BTC, making the market fearful of lowering BTC.
In reality, whales may not sell the BTC on exchanges at all. Instead, they can use this counterfeit situation, for example, to buy the asset at a lower price.
Well-known pseudonymous dealer Cantering Clark stated:
“Fair to say that on-chain data and shuffling bitcoin from wallets to exchanges and vice versa is now an abused ploy. Do you think a big gamer will publicize it so openly that they plan to sell it” I think everyone is still falling in love with the quarter trick? “
Ki Young Ju, the CEO of CryptoQuant, made a similar point regarding what he calls “psyops” with on-chain data.
Ki noted that whales could deposit BTC on exchanges to shift market sentiment from greed to fear.
The negative market sentiment alone could be enough to bring the price down, which can also lead to cascading liquidations when the futures market is crowded. Ki said:
“Speculative guesswork, but whales could put a large amount of BTC in the exchange to scare people as many people follow whale warnings.”
For example, Gemini reportedly saw a large BTC deposit before Bitcoin dropped to just $ 54,500 on March 15.
At the time, Ki emphasized that while they could be sell orders, they could also be psyops that could trick the market into believing that selling pressure is coming. He explained:
“Maybe it is one of the three: 1. Psyops 2. Gemini, who run a private brokerage service and execute sell orders on other exchanges. 3. Some brokerage services use Gemini Custody and execute sell orders on other exchanges.”
According to Philip Swift, analyst and co-founder of Decentrader:
“It can be dangerous for merchants to overemphasize the importance of transaction movements between wallets on the Bitcoin blockchain. As we have seen today, there is often confusion about who actually owns particular wallets.”
Swift went on to say, “There is clearly an opportunity for ‘pysops’ where big gamblers trick avid wallet watchers into believing that funds are being moved in the market before they are sold.”
Regarding these wallet transfers, Swift said:
“That is not the intention, the intention is simply to get people to believe that the Bitcoin will be sold soon. It is important to keep in mind that big players have many other ways to buy or sell BTC, like OTC, futures settlement, etc. You don’t always have to move your money in the chain before buying or selling. “
Almost exactly, but not a silver bullet
Still, Bitcoin deposits in exchanges have historically been a pretty accurate predictor of the direction BTC will go.
Bitcoin Exchange Netflow. Source: CryptoQuant
For example, in the past three weeks alone, two large spikes in the BTC exchange rate on February 22nd and March 15th marked the local spike.
As a result, many on-chain metrics, including BTC transfers to and from exchanges, have proven very useful in anticipating BTC price movements.
However, traders should also be aware that this information is available to everyone and therefore cannot be viewed as the silver bullet of metrics. As it grows in popularity, it can be played by whales, the media, and other influential entities. This can ultimately mislead traders and change sentiment to give the wrong picture of market conditions, especially in the short term.
The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading step is associated with risks. You should do your own research when making a decision.
