Whales and Retail
I’m often asked if there’s real value being created in the crypto space, or if this is just the latest venue for whales to malign the retail investor? My stance on this matter is that the struggle between different groups, companies, classes, cultures and societies is never simple or one sided. We need to think deeply about these things and understand that participation is voluntary and motivations are complex.
This may sound like I’m sidestepping the issue, but the reality is that all opportunities are the result of change or disruption. There’s always someone, or some group of people that are being disrupted in this process. The question of how to capitalize on these kinds of situations is where we must begin.
We should start with Bitcoin because that is the vehicle that has seen the most volume flowing through its network. When Bitcoin started there was no “value” in the network because Bitcoins were not exchanged for anything other than two pizzas for the first year that the project was running. Critically, there was value in the network to the participants, but there was no price due to the lack of exchange with US Dollars or other currencies. Now who were these early participants? Were they whales? From what I can tell it was nothing of the sort. Those early adopters were cypherpunks, scientists, mathematicians, coders, libertarians, and dreamers.
Looking back now, you’d be hard pressed to make the case that the majority of the returns accrued to the “whales.” To be fair, those early adopters are whales now. But the point is they didn’t start off as whales. If they were, they would have had no early advantage because no one could exchange money for Bitcoin at the outset! It was actually exclusionary to whales. This is an important point. If someone becomes a whale through their involvement with a crypto project, it’s seen as a good thing. And often the hatred towards whales seems to be directed at those who enter a project with existing wealth. So, I guess it’s assumed that well-intentioned whales should exist after they make their money and ride off into the sunset?
More recently, however; conversations about whales and retail have been more focused on new projects which are rapidly listed on exchanges and do not have this initial spin-up period that Bitcoin had. They are exchangeable for USD on day one, and therefore a much easier tool for rapid gains and of course, abuse. So let’s talk about new crypto projects and the tension between whales and retail in the current context.
Many retail participants naively think that they can compete with the whales at the whale game. This is a terrible mistake and I believe it’s the source of a lot of pain for new crypto investors. For example, how does someone with a small amount of money compete against someone with a much larger amount of money in investing? Let’s use an analogy here. If you sit at a poker table with $100 when the average stack size on the table is $10k and the blinds are $20 - you’re in trouble right out of the gate. The blind structure of a poker game will force action where it may not be prudent. The smaller stack is destined to lose because they do not have staying power. Their hand is forced.
So, as a poker player with only $100 what should you do? The answer here lies in first sitting at the right table. Sit at a table with $0.50 blinds instead of $20 so you can see more hands. Play against other players with a similar stack size so you are not starting off at a disadvantage. Translating this to crypto, a retail investor should not assume they have equal odds in crypto investing as a whale does. However, they can still succeed at the game if they play to their strengths. The next logical question is, what are their strengths?
Here is a table that summarizes the advantages of these two parties.
The sweet spot for a retail investor is to find something they’re truly passionate about - some project or technology for example - and then actually dig in and become a specialist in that area. Whales cannot swim in these waters due to their lack of liquidity and so in this environment a retail investor has a chance. Another thing to consider is that it’s quite difficult to fake having a very strong community. What I mean by that is that numbers are easy to fudge (want a bunch of Twitter followers, there’s a service in Russia you can pay), but the time and energy the people spend in a space is hard to fake. Conversations that have depth of thought, ideas, energy, it all has a certain essence that humans can sniff out if they spend the time. Humans are experts in adapting to their cultural surroundings, especially in small groups. But a whale simply doesn’t have the time or the inclination to be messing around with projects so tiny that they can’t place a large allocation. They will do a cursory overview and then move on. Therein lies the opportunity for the retail investor! They can succeed if they play the game to their own advantage.
And what about the whales? Well, it’s sure nice to be able to move markets on a whim. And it never hurts to golf or text with the leaders or financiers of other projects. Although whales may seek to outmaneuver retail investors, they also have other motivations; such as maintaining and growing their own positions and edging out their own competition. Certainly some whales care more about the little guy than some others - but it should come as no great shock that moral fiber and character exist on a multidimensional spectrum.
At the end of the day, whales and retail are actually a somewhat vague categorization. Every day, you could argue that everyone is out to get everyone else. It’s not necessarily a good or a bad thing, it just is. Without cruel competitive forces and the grinding wheel of the market we can scarcely imagine what the world would look like. The best advice I can give anyone, despite their position or inclination is to simply understand your surroundings and get to know yourself. Everything else stems from this understanding and the consistency with which we act. The rest, I’m afraid - is up to the fates.
Cheers,