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A few days ago, the secret deals and hidden assets of some of the world’s richest and most powerful people were revealed in the biggest trove of leaked offshore data in history, dubbed “The Pandora Papers.”

While still appalling, most of us were not completely shocked with the revelations. The Pandora Papers reminded us what many of us already knew – that power corrupts and that people at the top of the pyramid have many opportunities to abuse our trust, manipulate the system and put personal gain over anything else.

In addition to the widespread corruption of the world’s most elite, the Pandora Papers also taught us something about Bitcoin.

As far as financial assets go, Bitcoin and other cryptocurrencies are still very new with relatively little history, so we’re slowly trying to learn their behavior as an asset. Every major market event, including the Pandora Papers, is a learning opportunity to discover what correlations matter and how digital currencies react to both micro and macro events.

One of Bitcoin’s (and other cryptocurrencies) key purpose and principle was originally to anchor an alternative financial system that is decentralized and anti-establishment. Crypto’s power is in its ability to exist and thrive without centralized authority. This vision comes from the underlying belief of founders and early crypto adopters that power corrupts, and people can’t trust those who are in positions of power. Many investors believed that events like the Pandora Papers, proving one of the key drivers for the creation of Bitcoin, would result in a significant price appreciation – with investors flocking to the digital currency after such a validating moment. However, that did not happen. The crypto market pretty much shrugged off Pandora Papers, just like the market has shrugged off other critical macro events over the course of the last few months (i.e. China’s ban on crypto transactions, etc.).

What does the reaction to the Pandora Papers tell us about Bitcoin?

Why is Bitcoin and its price movements to both the upside and downside still so difficult to predict? Is it because a significant part of Bitcoin ownership still resides with “Whales,” which are driven by a different agenda and strategy than the rest of the market? Or, is it because Bitcoin has matured and has a more complex set of drivers than originally thought? Maybe it’s because Bitcoin is different than all other traditional financial assets – an uncorrelated asset that is moved not by events, but rather by people and their demand.

Let’s attempt to try to get to the bottom of the “Crypto Question:”

Whales’ impact on Bitcoin's price movement

Large Bitcoin holders are called Whales. The 20/80 rule applies in “Bitcoinland:” the top 20% of Bitcoin holders have more than 80% of Bitcoin value in U.S. dollars. According to BitInfoCharts, as of Q2 2021, the top 100 Bitcoin wallets held around 18% of all Bitcoin. Whales tend to be long-term holders, and according to Chainalysis, Whales tend to retain at least 75% of the Bitcoin they buy.

This market domination greatly impacts Bitcoin price movement in multiple ways. First of all, when the concentration of wealth sits unmoved in an account, liquidity decreases, which in turn, increases price volatility. Volatility is further increased if a Whale sells a large quantity of Bitcoin all at once. This lack of liquidity, combined with a large transaction size, puts downward pressure on the price of Bitcoin. Additionally, as other market participants watch the Whales’ actions (courtesy of the crypto full transparency principle), they may be inclined to try to sell – creating fire sales and more volatility.

Finally, Whales may try to sell their assets in smaller amounts over a longer period of time to avoid drawing attention, thus producing market distortions and sending the price up or down unexpectedly. Whales drive speculation among the “little fish,” which can result in a vicious cycle where prices become untethered to underlying fundamentals.

Is Bitcoin truly an ‘uncorrelated asset’?

A 2020 report from Fidelity Digital Assets claimed that Bitcoin has a very low correlation with mainstream assets such as stocks or gold. Starting in 2020, however, we have seen a growing correlation to gold and stocks.

September 2021 analysis showed that Bitcoin and stocks were moving in the same direction (downward) when that correlation quickly reversed in October. One could argue that the correlation seems to be mostly during a crisis. However, Bitcoin recovers at a different rate than other assets – recovering faster post-crisis and returning to its uncorrelated nature.

The decoupling of Bitcoin and stocks could revive one of the historic promises of cryptocurrencies - that they can serve as hedge portfolios against equity market sell offs. This function is currently in high demand, with many worrying that treasuries can’t be relied upon to perform that role during a period of ultra-low yields and accelerating inflation. More importantly, Bitcoin’s correlation with inflation expectations may signify its adoption as an inflation hedge over gold.

Is Bitcoin maturing as an asset?

The number of Bitcoin holders is growing dramatically and so is institutional holding of Bitcoin. Corporate holding of Bitcoin (e.g. MicroStrategy, Tesla) is increasing as well. With larger players participating in the crypto market, distribution of Bitcoin may shift from its current structure, with institutional and corporate behavior likely to differ from “small fish” behavior. Time and experience will also guide the market, especially as investors become more aware of crypto behavior and develop strategies to handle the volatility.

What to watch for now

As time progresses and Bitcoin investors experience more meaningful financial events, the understanding of Bitcoin behavior as a financial asset will continue to evolve. Three obvious drivers are of particular interest to watch:

1. The increase in institutional and corporate investment in Bitcoin.

2. The potential approval of Bitcoin ETFs by the SEC (there are already 20 in review).

3. Potential regulatory actions to create clarity and guardrails in the crypto market.

All three of these drivers are imminent and have a potential impact on Bitcoin/crypto behavior. Let’s also remember to keep our eye on the “inflation” ball. How will Bitcoin and the crypto market as a whole react to a predicted and expected period of inflation? Could the market consider Bitcoin as an inflation hedge? Only time will tell.