Traders and analysts in digital asset markets are getting better all the time at learning how to monitor activity on the Bitcoin blockchain, scouring the network for clues on where the largest cryptocurrency’s price might head next.
But a recent alert sent by the South Korean blockchain analysis firm CryptoQuant involving an apparent transfer of $1.1 billion in bitcoin on the Winklevoss twins’ New York-based Gemini exchange stirred up much confusion – and backlash on Twitter. That's why the company’s chief said today he is changing procedures to avoid future snafus.
It's a reminder of just how powerful a role these blockchain data alerts play in cryptocurrency markets, and what can happen when they are what can happen when they’re mislabeled or interpreted incorrectly. It also highlights the power struggle between the retail-investing masses and a smaller number of deep-pocketed institutional players.
Bitcoin prices tumbled after the CryptoQuant alert on March 14, and some traders accused the firm of sending a false alarm filled with panic-inducing “FUD,” or fear, uncertainty and doubt.
“I think it’s dumb, but we had to” change the labeling on the alerts, CryptoQuant CEO Ki Young Ju told CoinDesk in a Telegram message. “Some people think we manipulate the market by making FUD.”
'Whale' harpoon boomerangs
The latest kerfuffle started on Sunday, March 14, when CryptoQuant’s free Telegram-based service “CryptoQuant Alerts [Beta]” blasted out a message about the big bitcoin transfer:
“18,961 #BTC ($1,145,210,023) aggregated inflow to #Gemini: be careful downside risk from whale dumping,” the message read. A “whale,” in the jargon of crypto markets as well as on Wall Street, refers to a large investor whose buying or in this case selling might make big waves in the market.
As a result of this message, bitcoin prices dropped like an anchor as traders tried to get out of the leviathan’s way.
“Inflows up, price down,” as the digital-asset exchange firm EQUOS summarized the episode Tuesday in a note to clients.
Some angry traders and rival blockchain analysis firms called CryptoQuant’s alert off-base and especially galling after a similar episode that took place in late February.
The German analysis firm Glassnode tweeted March 15 that the inflow was an “internal” transfer on Gemini, meaning the funds were moved between wallets on the exchange, as opposed to moving onto the exchange from a wallet somewhere else. An internal transfer might represent a harmless administrative maneuver, not a lurking whale.
“Markets selling off due to ‘bogus’ data saying $1 billion of BTC flowing into Gemini,” bitcoin analyst Willy Woo tweeted March 15. “It's the second time it's happened in the last 30 days.”
Woo posted a chart showing how prices started falling after CryptoQuant’s alerts on March 14 and Feb. 21.
Two red dots on the chart signaled when CryptoQuant’s alerts were fired off, and they do appear to coincide with market tops. Leverage positions started getting liquidated as traders sold off.
During February’s sell-off, more than $2 billion worth of long traders were liquidated, while another about $1.6 billion long liquidation were triggered by this week’s correction.
CryptoQuant “was very careless in their quality assurance over their data and alert service,” Woo told CoinDesk in a direct message on Twitter. “I wasn't even on their service and it was forwarded everywhere beyond the 28,300 traders who that group viewed.”
As of March 16, CryptoQuant’s March 14 alert on Telegram had been viewed more than 48,000 times.
Ju later acknowledged in a public post on Twitter the transfer probably wasn’t a bitcoin dump by a large holder. Instead, he wrote, the inflow appeared to come from a wallet belonging to the crypto lending platform BlockFi, which uses Gemini’s crypto custody service. Several other blockchain data analysts from companies including Chainalysis and Coin Metrics agreed with that conclusion.
“The wallet activity is part of our day-to-day operations for clients,” BlockFi’s director of business development, Rishi Ramchandani, told CoinDesk. “BlockFi is actively buying bitcoin, not selling.”
Gemini is BlockFi’s primary custodian, Ramchandani said, adding, “Seems like some people on Twitter are confused about this.”
On Wednesday, CryptoQuant Alerts Telegram group put out an update: “We removed words talking about possibilities in our public alert. It will only deliver facts. For the 'dumping' and 'pumping' possibilities based on our analysis, we'll include those in our preset alerts for paid users. It will launch shortly.”
Ju insists that implications weren’t so clear-cut: Though some of the messaging got twisted, the bitcoin transfer still might have provided an early warning of potential selling.
“It's a fact that BlockFi uses Gemini Custody, but Gemini provides instant trading services for institutions [that] use Gemini Custody,” Ju said in a Telegram message with CoinDesk. “Whales using Gemini Custody can dump bitcoin instantly without making any on-chain transactions.”
“Most whales are using Custody services, so it's hard to figure out dumping risks for retail investors if we don't alert this kind of data,” he added.
In other words, the blockchain data alert was spot-on, even if the interpretation might have been off.
Ju sent CoinDesk a screenshot of an email exchange with a Gemini customer support representative, confirming the addresses responsible for the bitcoin inflows didn’t belong to Gemini.
Retail vs. institutions
While the episode highlights the crucial of role of blockchain data in cryptocurrency price predictions, it also points to a theme that keeps coming up throughout markets from digital assets to Wall Street: the never-ending power struggle between the retail-investing masses and a smaller number of deep-pocketed institutional players who often seem to have an unfair advantage.
Retail investors, who might be more susceptible to rash emotional decisions during market downturns, often view themselves as having less power and information while institutions appear to possess more sophisticated trading strategies, with better market access and privileged knowledge.
That’s partly why blockchain data is so valuable. Ideally, the extra information and the alerts enhance market transparency, ostensibly leveling the playing field.
While many may find it hard to read or analyze the blockchain data, the theory is that messaging services like CryptoQuant's should help retail traders avoid outsize losses.
“When the people miss the boat they just miss it,” Twitter user @AncientMedicin3 wrote in a response to Glassnode’s statement. “When institutions miss the boat they bring it back! Read: intentional manipulation for the big boys to buy back in at a lower price.”
Other commenters had a more cynical take.
“All this data now just is abused anyway,” Twitter user @Dynamic_One_ wrote. “No need to even sell yourself, just move a few things around and people panic and sell. Bogus data or not, all it now takes is moving from people wanting to manipulate and all the people watching things like Glassnode suddenly sell. Or am I wrong?”
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