You might have heard the term “whale” thrown around among the stock market or crypto communities, along with mainstream media FUD (fear, uncertainty, doubt). In this context, we’re not talking about the mammals in the ocean, but a term commonly associated with market manipulators, aka the ‘Big Money.’ Let’s take a closer look at what whales are, how they work, and ways to mimic their processes in our investment strategies.
- In the financial markets, a whale is an investor or institution with significant capital and can directly influence price action.
- Stock market whales have outsized impacts on market prices and can manipulate prices by increasing volatility or decreasing liquidity. Similarly, Bitcoin whales can influence currency valuation because of the size of their holdings.
- While most of us are not whales, we can use similar tactics to take advantage of opportunities in the stock market and make money.
The term whale gets borrowed from the gambling world in which traders with a significant amount of capital can move the markets. In the stock market, whales typically control millions of dollars (or more). The idea here is similar to David and Goliath, where large investors (whales) get pitted against smaller financial institutions or regular folks like you and me.
Whales are typically associated with market manipulators because they can come into a market and either drive up or suppress the price by buying or selling a large portion of the available positions. Usually, they are seen negatively in the media because they can push prices up, for example, and then liquidate their holdings once the prices have reached their target, leaving everyone else bagholding losses. Think of whales by their sheer size – they can easily make huge splashes in the financial markets.
How Whales Work in the Stock Market
There are two ways to think about stock prices. One is the intrinsic value, which you can determine through fundamental and technical analysis, and the other is the market price, which gets derived from supply and demand. If everything always happens as expected, prices will move based on a stock’s intrinsic value. For example, if Apple exceeds expectations in their latest earnings call and unveils several upcoming products, then that should drive its intrinsic value up, and the stock price will rise to reflect this.
When a whale is in the picture, the price generally follows this pattern. Investors and traders can see if demand for a stock rises rapidly by looking at the level 2 data and candlestick patterns as positions get bought. As the price skyrockets, other investors will take notice and jump on board.
While not directly related to whales, we can see this phenomenon happening by looking at Tesla stock. In September 2021, Tesla shares were trading around ~$700. Less than two months later, at the beginning of November 2021, the price nearly doubled and peaked at around ~$1,243. And that was all from hype related to the new contract Hertz has with Tesla.
The downside is that when the stock price moves up quickly, it will eventually plateau, and investors may begin to lose confidence. When this happens, everyone begins to pull their positions in anticipation of a crash, becoming a self-fulfilling prophecy.
As an investor, your goal is to identify these patterns as quickly and accurately as possible to profit from them. If you can time your entry according to the behavior of whales, especially sophisticated investors such as hedge funds, you stand to make a lot of money. If you can also figure out when momentum is plateauing or anticipate when whales will sell, you can protect your gains and get out at the highs. Much of stock trading comes down to understanding market sentiment and patterns.
However, a big problem with whales is the concentration of wealth, especially if it is sitting in an account unmoved and lowers liquidity. That can increase price volatility, particularly if a whale moves a large quantity of stock all at once, which can put downward pressure on the stock price as everyone else tries to sell. For example, in March 2021, Virgin Galatic Chairman, Chamath Palihapitiya, sold roughly ~$213 million of Virgin Galatic stock as the price continued its downward spiral.
Whales may attempt to avoid the spotlight by selling their positions in smaller increments over a longer timeframe, such as a few weeks. But, this process can lead to market distortions and create conditions for speculation as investors scramble to figure out what is happening.
Example of a Stock Market Whale – Archegos Capital
Archegos Capital was a little-known company under the leadership of Bill Hwang until it blew up in March 2021. According to Yahoo Finance, Hwang used margin to make a series of highly concentrated investments on tech and media stocks, with tens of billions in leverage. Because their orders were so large, they had to (secretly) go to six different brokers to get enough capital to own roughly 5%-15% stakes in several companies using swap derivatives.
When prices of their assets started falling, Archegos could not meet their margin requirements, which left banks scrambling for their money back as the positions Hwang controlled got liquidated. This collapse led to several stocks crashing while banks such as UBS, Credit Suisse, and Nomura, lost billions of dollars.
4 Ways to Leverage the Whale Strategy
As the saying goes, “If you can’t beat ’em, join ’em.” Below are five ways you can follow what the big moneys are doing to beat the S&P 500.
1. Follow the Money
For stock prices to go up, there have to be enough investors piling money into the companies to outstrip supply. Big players, such as mutual funds, endowments, hedge funds, sovereign wealth funds, and private equity firms, work together with smaller ones such as banks, family offices, and brokerages to find investments with good earnings growth.
If you are not already doing this, pay attention to what is happening with the companies on your watchlist. Are they meeting earnings expectations? Do they have steady cash flows? Do you trust their leadership teams? What products or services do they offer? The goal of investing is to find companies that you see as a growth or value opportunity before everyone else does.
2. Pay Attention to the Markets
When whales want to buy or sell their positions, they try to do it under the radar to avoid attracting unwanted attention. After all, they usually pour a lot of resources into finding companies with high growth or earnings prospects.
So, if they decide to put a meaningful stake in a company, they want to do so before other investors notice the opportunity. And that is particularly true for small or mid-cap companies with significant growth potential. As you do your own research, pay attention to what whales such as BlackRock, Fidelity, and TPG Capitals are doing, as that can give you insights into what’s happening behind the scenes.
For example, Keith Patrick Gill, or Roaring Kitty, found that GameStop was undervalued in 2019 and getting heavily shorted, so he started piling his money into the company. Over the next year, as he began live-streaming his investment ideas, other Redditors followed suit and flooded all their capital into GameStop, driving the price up over 4,000% at its peak in early 2021.
3. Deep Dive into the Stock Market and Hodl (Hold on for Dear Life)
Since most whales conduct their own research, they become very familiar with the companies they are investing in. Because of the sheer amount of capital available to them, they get perks that most retail investors do not have access to when they buy enough ownership of various companies, such as meeting with the executive teams, talking to suppliers and customers, and touring facilities.
But, the good news is that when they own more than 5% of a company, they have to file a special SEC document that will then be publicly available. Pay close attention to these SEC filings, particularly early-stage companies, as these could be opportunities for the next 2x or 3x stock.
4. Use Automated Screens
The downside of paying attention to SEC institutional filings is that there are way too many of them. It is practically impossible to sort through the thousands of 13F, 13D, and 13G filings that get published every month.
Instead, use an automated stock screen, such as Trading View, ZACKS, or TC2000, to do the work for you. All you need to do is filter and sort the data by the most relevant info, such as the companies, date the filing got completed, who is involved, the size of the sale, etc.
The Alternative: Bitcoin Whales
Bitcoin whales are individuals or institutions holding significant amounts of Bitcoin (BTC). Similar to stock market whales, Bitcoin whales have enough crypto to manipulate currency valuations.
Understanding the Bitcoin Whale
According to BitInfoCharts, the top 3 Bitcoin addresses own ~3% of all BTC, while the top 2,064 addresses own ~28% of all BTC in circulation as of November 2021, valuing their holdings around $134 billion. Because of how much Bitcoin the top accounts own, any single trade made by these whales can cause the price to fluctuate dramatically.
When the price of BTC tumbled from its high of ~$64,000 in April 2021 to ~$30,000 in July 2021, there was speculation of whale manipulation to shake off retail investors’ holdings. Around the same time, big institutions, such as JP Morgan, BlackRock, and Goldman Sachs, were setting up infrastructure to accommodate the demand from high net worth clients for crypto investments.
While Bitcoin wallets are pseudonymous, the addresses and transactions are all publicly available on the ledger, which allows us to speculate who some of the top whales are:
- Craig Wright: Although the founder of BTC, Satoshi Nakamoto, remains anonymous, a likely candidate is Craig Wright, an Australian businessman who claims to have invented Bitcoin with Dave Kleiman. In 2019, Kleiman’s estate sued Wright for half of his reported 1.1 million Bitcoins, which makes him one of the top three whales if he does indeed own that much.
- Cameron and Tyler Winklevoss: The Winklevoss Twins are early adopters of Bitcoin, having bought $10 million of the crypto back in 2012 when it was worth $8 per unit. They reportedly have more than 100,000 BTC in their wallets, which would put their net worth in the billions.
- Tim Draper: American venture capitalist, Tim Draper, is another early investor of Bitcoin who first started purchasing the crypto back in 2011. At a U.S. Marshals Service auction in 2014, Tim Draper purchased roughly 30,000 Bitcoins at $632 each, which would now be worth about $2 billion and put him in the top 15% of Bitcoin investors.
- Michael Saylor: Microstrategy CEO, Michael Saylor, reportedly owns 17,732 BTC, which he bought for around $9,882 each, totaling over $400 million of BTC. Meanwhile, his company has over $7 billion of BTC on its balance sheet.
Although the odds may seem stacked against retail investors like you and me, one advantage we have is speed and flexibility. Moving large amounts of money is not as easy as it may seem. Warren Buffett has commented before that because of how much capital he is dealing with, he is disadvantaged by a lack of flexibility and inability to move quickly.
As a smaller investor, you can start developing trading strategies that allow you to react quickly to changes in the market and jump at opportunities with ease.