Can Bitcoin whale deposits to exchanges actually predict BTC price?

Bitcoin deposits into exchanges have become a popular on-chain data point, but some say this metric can be misleading.

Traders are increasingly checking on-chain data to "predict" both the short-term and long-term price trend of Bitcoin (BTC) using such platforms as CryptoQuant, Glassnode and WhaleAlert. 

Particularly, data points such as Bitcoin exchange inflows and outflows and stablecoin inflows are actively used by traders to anticipate where BTC may go next.

499 #BTC (29,979,163 USD) transferred from unknown wallet to #Coinbasehttps://t.co/zkhywRQS82

— Whale Alert (@whale_alert) March 14, 2021

However, this type of data should be taken with a grain of salt, as large holders also realize that this data is being increasingly used by many individuals in their trading strategies. Hence, high-net-worth individuals or whales can manipulate this data to tilt the market to their advantage — but how? 

Bitcoin on-chain data can be used for "psyops" 

When large amounts of Bitcoin are deposited into an exchange, it typically signals that a whale or a high-net-worth investor is planning to sell BTC, at least in theory.

Bitcoin Gemini inflow. Source: CryptoQuant

Investors who hold a lot of Bitcoin usually leave them in noncustodial, or self-hosted, wallets for privacy and security reasons.

Hence, when these holdings hit exchanges, it makes it seem like whales are about to put massive selling pressure on the market.

However, since whales know that investors can track deposits through such on-chain data tracking platforms, this opens the door to a fakeout situation.

In technical analysis, a "fakeout" is a term used to refer to a situation in which a trader enters a position anticipating a future transaction signal or price movement, but the signal or movement never develops, and the asset moves in the opposite direction.

For example, whales could deposit large amounts of BTC into various exchanges, making it seem like they are selling a lot of BTC, causing fear in the market to drive BTC down.

In reality, whales might not be selling the BTC deposited into exchanges at all. Instead, they may use this fakeout situation to buy the asset at a lower price, for example.

Well-known pseudonymous trader Cantering Clark explained:

"Fair to say that on-chain data and shuffling of Bitcoin from wallets to exchanges and the other way around is an abused ploy now. Do you think a huge player is going to make it known in such an open way that they plan to sell? I guess everyone still falls for the quarter trick?"

Ki Young Ju, CEO of CryptoQuant, raised a similar point regarding what he calls "psyops" — psychological operations — with on-chain data.

Ju noted that whales may deposit BTC to exchanges in order to shift market sentiment from greed to fear. 

The negative market sentiment alone could be sufficient to drive the price down, which may also lead to cascading liquidations if the futures market is overcrowded. Ju said:

"Speculative guess, but whales might deposit a large amount of BTC into exchanges to make people scared as a lot of people follow whale alerts."

For instance, Gemini reportedly saw large BTC deposits before Bitcoin dropped on March 15 to as low as $54,500. 

At the time, Ju emphasized that while it could be sell orders, it also could be psyops to lead the market into thinking that selling pressure is coming. He explained:

"Maybe it's one of the three: 1. Psyops 2. Gemini running a private brokerage service, executing sell orders to other exchanges. 3. Some brokerage service uses Gemini Custody, executing sell orders to other exchanges."

According to Philip Swift, an analyst and co-founder of Decentrader:

"It can be dangerous for traders to put too much weight on the importance of transaction movements between wallets on the Bitcoin blockchain. As we have seen today, there is often confusion around who actually owns specific wallets."

Swift further explained that "there is clearly an opportunity for 'pysops', where large players trick avid wallet watchers into thinking that funds are being moved ahead of being sold on the market."

Regarding these wallet transfers, Swift said:

"That is not the intention, the intention is simply to trick people into thinking the Bitcoin are about to be sold. It is important to remember that large players have many other ways to buy or sell $BTC such as OTC, unwinding futures positions, etc. They don't have to always move their funds on-chain before buying or selling."

Pretty accurate, but no silver bullet

Nevertheless, Bitcoin deposits into exchanges have historically been a fairly accurate predictor of the direction BTC will go.

Bitcoin exchange netflow. Source: CryptoQuant

For example, in the past three weeks alone, two major spikes in BTC exchange inflow marked the local top on Feb. 22 and March 15.

Therefore, many on-chain metrics, including BTC transfers to and from exchanges, have shown to be very useful in anticipating BTC price action.

But traders should also be aware that this information is open to everyone and thus cannot be considered the silver bullet of metrics. As its popularity rises, it can be gamed by whales, the media, and other influential entities. This can ultimately mislead traders and shift sentiment to give a false picture of market conditions, particularly in the short term.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.