‘Smart Money’ Tools Reveal Where Crypto Capital Is Moving

Who are the smartest people in the crypto room, and what are they doing with their capital?

“Smart money” is the moniker assigned to a loosely defined group of investors and traders who have an edge in their trading activities, often simply because they have more capital at their disposal.

The argument is that those with more capital have more resources and more to lose. Because of this, other, smaller investors want to know how they are spending their money.

You’re reading Crypto Long & Short, our weekly newsletter featuring insights, news and analysis for the professional investor. Sign up here to get it in your inbox every Wednesday.

To be sure, “smart money” has seemed anything but.

In 1998, Long Term Capital and its team of PhDs required a $3.6 billion bailout, spurred by excessive leverage and poor trading results.

Ten years later, the 2008 financial crisis served as another example when the smartest people in the room required federal assistance to offset trading losses.

Most recently in crypto, the failures of FTX, Alameda Research, Three Arrows Capital and others showed the smartest people in the room making catastrophic mistakes.

So does watching what others are doing make sense at all?

I say, definitely yes. While you should determine your overall thesis, seeing how capital is flowing can provide helpful insights. With the exception of outright fraud, checking the smart money – or so-called large capital flows – always makes sense.

Even if poor results can happen with a sound thesis (maybe an unexpected event changes conditions), what matters is the extent to which those individuals or institutions can sway markets by their mere presence. Like a large ocean vessel, large capital flows often take other things with it, even if they are moving toward an iceberg. Gauging the vessel’s direction ahead of time can offer clues into how closely you want to court disaster and how many life jackets you bring along.

In crypto, a number of online tools can provide real-time insight into how capital is moving. These tools are a uniquely admirable characteristic of blockchain based assets.

Some of the tools vary, depending on the asset. For bitcoin (BTC), one option is “whale activity.” Whales are unique wallet addresses with 1,000 or more coins.

The 1,000 number feels arbitrary, but the implied minimum BTC portfolio value of $28 million today, and nearly $70 million at its peak, feels adequately large to offer some larger investing guideposts.

One metric of note is simply the decline in the number of whales over the last two years.

Since peaking at 2,157 in February 2021, the number of whales has fallen by 22%. BTC’s price, by comparison, has fallen by 41% over the same time period.

Looking at where whales are sending coins is also worth considering. Are whales sending coins to or from exchanges? The former has historically implied bearishness, while the latter usually indicates bullish sentiment.

Recently, coins have been flowing to exchanges. The net exchange volume for whales has been positive since October 2022.

These two factors suggest that larger investors have been cautious. Fewer whales exist, and the ones still around have their coins poised to sell. They could be incorrect, but knowing what they’re doing is worth knowing.

Tools specific to ether (ETH) and altcoins can provide additional layers of information. Platforms such as Nansen and Arkham Intelligence assign “smart money” labels to wallets based on both capital and investing behavior, and can provide real-time looks into their activity.

For example, I’ve recently found that three coins with significant movement into “smart money” wallets over the last 30 days are liquid staked ether, Aave interest-bearing USDT and Binance USD (BUSD).

Looking at individual funds, I found one whose largest identified holding was UNI, an outlier from other larger funds.

Filtering further shows the fund’s acquisition of UNI occurred more than a year ago, with little on-chain activity since that time.

Two years ago, UNI’s price was $32 compared to $6 today.

A fund holding an asset throughout a downturn of that extent could indicate significant long-term belief in the coin itself, a desire to participate in Uniswap governance, or that the fund may cut losses if and when UNI moves higher.

A clear answer may not be readily available, but investors can at least see the possibilities, helping them make informed decisions.

Other recent “smart money” moves that stood out include:

Identifying and analyzing smart money moves can consume hours, and can’t be completely covered in one column. But investors who take the time will enhance their digital research.

A traditional finance (TradFi) analogy would be a real-time live stream of 13F filings disclosing hedge fund positions in equities – hard to sustain, but also hard to look away from.

And whether an investment decision results in profit or not, considering it from its inception is helpful.

To hear more analysis, click here for CoinDesk’s “Markets Daily Crypto Roundup” podcast.