Lessons Learned From Bitcoin “BearWhale”

by Dan Clarke, CMO of MAX Digital Asset Exchange

On this day 4 years ago (Oct 6th 2014), when the price of Bitcoin was near US$330~, an anonymous Bitcoin trader placed an order on Bitstamp to sell 30,000 Bitcoins at $300 (US$9mn). The chart from that day can be seen below. To explain why this event continues to have such iconic status, can only be realised by putting it into perspective of todays market. Bitcoin was trading about US$29mn/day on average at the time (Using October 2014 data), so the BearWhales sell order was 31% of an average days volume. The equivalent percentage volume today would be like selling 189,000~ Bitcoins based on the current US$4bn~ daily average volume!!

For those wanting to relive the days around this event;
checkout the Youtube link from @flibbr that lets you re-live the move from $385 down to $285 tick by tick:
https://youtu.be/X0hpNAUTK3c
and reddit users shock & confusion as the event unfolded:
https://www.reddit.com/r/Bitcoin/comments/2ieoit/introducing_the_legendary_bitcoin_whale/
and a good summary of the whole event from bravenewcoin: https://bravenewcoin.com/insights/the-legacy-of-bitcoins-bearwhale

Whilst the seller was initially unknown, he later discussed the episode anonymously on Reddit posting a Bitcoin address and signed message as cryptographic proof that he was in control of at least 36,000 bitcoins in 2013 and 2014. The seller had apparently bought into Bitcoin “after a series of bad experiences with the banking system”, and as a result invested “most of life savings” into Bitcoin, at a price “around $8”. “I could have gotten a better price if I spent more time working the order I guess”, he told Reddit. “I put up the wall because I didn’t want to just sit in front of the computer all day”.

Lessons Learned From BearWhale

  1. Tendency to overestimate the knowledge &/or skills of others.

The first lesson for me is regarding our tendency to overstate the knowledge & skills of those operating in areas that we ourselves do not today necessarily understand. I spent 20Yrs of my career working in finance. I saw some of the greatest traders & hedge funds ride waves of perceived infallibility creating a god like status around their performance & operations in the public eye. The reality is that many of these are not around today. Of course there are individuals & firms that seem to consistently, over a long enough time frame outperform, but these are the few not the many.

We naturally assume that someone who decides to sell 30%+ of a days volume in Bitcoin at single time through a single exchange must be in possession of some information we are not. The reality in this case was that “I put up the wall because I didn’t want to just sit in front of the computer all day”.

I think we can draw strong parallels here with some of the ICO related selling pressure we have seen during the 2018 bear market. Many people naturally assume that an ICO team should have a strong sense of how to manage their Treasury holdings, when in reality the team whilst engineering heavy, may have nobody who has traded or managed a portfolio before. It should therefore come as no surprise that we have seen some truly incompetent risk management trading practices over the last few months.

2. Perception is everything.

If you were told that someone bought an asset at $8 and sold at $300 you would naturally perceive that as one of the greatest trades in history. However if you were told that someone sold Bitcoin at $300 after buying at $8~, having watched Bitcoin trade above $1000~ in the interim period, your opinion would change immediately. If you were then told that this same trader bought Bitcoin at $8, went through the 2013 bull market which saw Bitcoin trade to the mid $200’s, then watched it collapse 70%~ to near $60, before watching it rebound to near $1200~, you’re perception would change again.

The reality is that as spectators of markets, we are rarely in possession of all the information with regards to other individuals trading. Our perception changes based off our usually incomplete knowledge. The undeniable fact is that very few investors living today can claim to have invested $200k+ in an asset which they sold at a life changing $9mn! Reports that this same trader then went back into Bitcoin again at $1000~ only to ride out the next bull market is another huge testament to this trader. In summary this BearWhale was a lot smarter & maybe a little bit luckier than the initial story suggests with its narrative focused on panic selling the lows.

3. Timing matters but not as much as you would think.

For those that started to invest in Bitcoin in January of this year they may be sitting on 50–60% losses. If they invested 3mths earlier they may be sitting on 50%~ gains! Time is everything. So our perception of the person who is sitting on 50%~ gains is very different to the person who bought just 3mths later and is down 50–60% on this short time scale!.

Since 2010 there have been 4 major bull & bear markets. The first saw a peak in June of 2011. This was followed by a 90%~ crash. Buying near the $29~peak of that year in June and watching it collapse to near $2~ just 4mths later must have been horrible. Imagine the perception of that trader at the time. However if they had managed to hold for just 2Yrs from the time they bought, they would have been sitting on a 7x~ return to the next peak (Chart below). Buying the November lows of that 2011 bear market would have given them 110x return over 17mths!

For those that invested at the peak of the next bubble in April 2013 at $230, they would be sitting on a 70%~ loss less than 1mth later! That wasn’t very smart? However holding Bitcoin for just another 6mths~ to the next bubble peak would have given this investor a 4x~ return from that purchase at the April 2013 high. Had the investor managed to buy the trough during that brief 70%~ pullback in April 2013 they would have a 17x~ return from trough to peak.

For anyone buying the peak of the 3rd bubble in Dec 2013 at $1150~, they would need to wait almost another 3.5yrs to break even BUT by holding into Jan 2018 they would have captured a 17x~ return. Had they bought the trough of that period in Jan of 2015, some 80%~ off the previous peak, they would have achieved a maximum return of 110x~

SUMMARY

We are currently down 65%~ from the most recent bubble peak. Whilst psychologically draining, the current bear market looks very similar to the many that came before it. Whilst historical price action gives no guarantee of future performance, neither should we put this pullback out of context.

There will always be cries of Bitcoin is dead (313 obituaries for Bitcoin & counting https://99bitcoins.com/bitcoinobituaries/ ). These are great headline grabbers but have historically been horrible investment advice.

David Wills, COO from Kenetic Capital recently wrote a good post that encapsulates much of what I see happening behind the scenes. David describes what could be the most bullish bear market of Bitcoin’s history (https://medium.com/fintech-weekly-magazine/the-year-institutions-took-notice-of-crypto-e0c631947db ).

One of the first articles that I read about Bitcoin was from Wences Casares, CEO of XAPO. His key message was only invest what you can lose. Its the best advice I ever got. Many other people have since followed his mantra which often sees people recommending an investment in crypto/Bitcoin of no more than 1–1.5% of a persons net worth. If the Bitcoin perpetual naysayers are right you lose 1–1.5%~. If the technologists & crypto evangelists are right, and history bears some guide for the future, you have the potential to make a meaningful difference to your net worth with a small initial outlay.

DISCLAIMER; This post and its contents should in no way be considered investment advice. We may individually hold positions in some of the assets we discuss. Any projections, conclusions, analysis, views are to be considered hypothetical & for informational purposes only & not meant as recommendations for investment. Anyone considering an investment in crypto should only invest what they can afford to lose. You alone are responsible for evaluating the risks & merits of our content.

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