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On Ethereum, for better or worse, there is almost no privacy to be had and people (especially traders) love to take advantage of this fact. This thread from Nick Chong perfectly encapsulates this as he was able to easily follow the movements of big funds such as 3 Arrows Capital and Polychain as well as large trading firms like Jump Trading to see what they’ve been up to over the last couple of days.
Let’s check in with our fund friends: 3 Arrows Capital, Polychain, and Jump Trading. How did they react to the strong dip in BTC and ETH? Did they buy anything? Sell anything? Let’s take a look 👇
November 27th 2020
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Now, a really fun thing to think about is that these firms are obviously very aware that people are watching their addresses so they could easily decide to play into that in a number of ways (commonly referred to as conducting “psyops”). For example, they could send a large amount of a token to a centralized exchange and bet that people would assume that this is because they are going to sell causing the price to crash. In reality, there’s no way to know what they’re doing with their tokens on a centralized exchange but the price may fall if enough people believe that those tokens are going to be sold. The “psyop” here is to trick people into thinking this while also having an active short position open in order to capitalize on this (though this is of course a risky thing to do).
We also saw recently on-chain that Polychain withdrew a large amount of YFI from Binance to their own wallet at around $13,000 (YFI is now worth around $23,000). At the time, people were saying that this is an “alpha leak” and that Polychain buying up a lot of YFI meant that they knew something that us mortals didn’t. In reality, this could’ve just been a neat little trick from Polychain to signal to the market that it was time to buy YFI again (and thus, increasing the value of their own position). I think that this theory holds even more water when you consider that Polychain could’ve easily just withdrawn this YFI to a new address that wasn’t tied to them.
Watching these known addresses for token movements isn’t the only thing you can do with on-chain data – it’s also commonly used by many people to gauge market conditions and overall health of a network. Is a lot of ETH being sent to exchanges? If yes, this typically means that we could expect ETH’s price to fall. Are gas prices really high for sustained periods of time? Well, this could mean a number of things and some further analysis is needed to determine what’s causing it and if it is bullish or bearish. There are also various on-chain DeFi metrics that people look at such as total value locked, liquidity, volume, fees paid etc in order to perform valuations on the protocols respective token.
Over the coming months and years I expect most users will end up moving to layer 2 solutions where privacy is the default. This would mean that the main Ethereum chain basically becomes a “settlement chain” for these various layer 2’s and we’ll lose most of our whale watching abilities. Though, this is obviously a positive and would allow for greater adoption of Ethereum from those entities who have critical privacy needs (such as enterprises) and it’d also greatly help individuals to stop leaking their financial activity all over the place!
Have a great weekend everyone,
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All information presented above is for educational purposes only and should not be taken as investment advice.