The term “smart money” refers to a relatively broad group of investors and traders who have an advantage in their trading activities, typically due to the fact that they have more funds.
It is said that those with greater capital have more resources and hence have more to lose. Because of this, other smaller investors are interested in how they utilize their funds.
Long Term Capital and its team of PhDs needed a $3.6 billion bailout in 1998 due to excessive leverage and poor trading performance. Ten years later, during the 2008 financial crisis, the sharpest people in the room once again required federal support to offset trading losses.
The recent collapses of FTX, Alameda Research, Three Arrows Capital, and others in crypto demonstrated that the smartest individuals in the room made fatal errors.
Despite this, is it still prudent to observe others’ activities? The response is affirmative. Although one should establish their fundamental beliefs, keeping track of the movement of capital can offer valuable insights. Following the “smart money,” or significant capital flows, is always advisable unless it involves blatant deception.
Even if poor results are possible with a strong thesis (maybe an unanticipated occurrence alters conditions), what counts is the extent to which individuals or organizations can influence markets merely by their presence.
Large financial flows, like a vast ocean vessel, frequently take other things with them, even if they are approaching an iceberg. Knowing the vessel’s heading beforehand will help you determine how close you want to get to disaster and how many life jackets to bring.
Many online tools can provide real-time insight into the movement of capital in crypto. These tools are an outstanding quality exclusive to blockchain-based assets. Several of the instruments differ based on the asset. One option for bitcoin (BTC) is “whale activity.” Whales are unique wallet addresses containing at least 1,000 coins.
While the exact number of 1,000 might seem arbitrary, the suggested minimum value of a Bitcoin portfolio of $28 million at present, and almost $70 million at its peak, provides sufficient guidance for larger investments.
The fall in the number of whales during the past two years is an important measure.
The number of whales has decreased by 22% from peaking at 2,157 in February 2021. Comparatively, the price of BTC decreased by 41% within the same timeframe.
It is also important to consider where whales send their coins. Are whales sending or receiving cryptocurrencies at exchanges? Historically, the former has indicated pessimism, whereas the latter typically denotes optimism. It is also important to consider where whales send their coins. Are whales sending or receiving cryptocurrencies at exchanges? Historically, the former has indicated pessimism, whereas the latter typically denotes optimism.
Recently, there has been an influx of coins to exchanges. Since October 2022, the net exchange volume for whales has been positive.
These two indicators indicate that larger investors have been prudent. Fewer whales exist, and those that remain have their coins ready for sale. They could be wrong, but it is worthwhile to understand what they are doing.
More information can be gathered via ether (ETH) and alternative crypto-specific tools. Platforms such as Nansen and Arkham Intelligence apply “smart money” labels to wallets based on capital and investing behavior and can provide real-time views of their activities.
As an illustration, in the past 30 days, it has been observed that three coins that have experienced notable increases in their smart money wallet holdings: liquid staked ether, Aave interest-bearing USDT, and Binance USD (BUSD).
When examining individual funds, the highest identified holding was UNI, an outlier among larger funds. Further filtering reveals that the fund acquired UNI more than a year ago, with minimal on-chain action since then. The price of UNI was $32 two years ago, compared to $6 today.
A fund holding an asset during a significant downturn could suggest a few things. Firstly, it may indicate that the fund has a strong long-term belief in the coin and its potential for growth. Secondly, it could reflect a desire to participate in governance activities related to the asset, such as voting on proposals for Uniswap in the case of UNI. Alternatively, the fund may cut its losses and exit its position if the asset’s value increases in the future.
While analyzing smart money moves can be time-consuming and complex, investors who put in the effort will improve their digital research skills and gain valuable insights into market trends and potential investment opportunities.