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Bitcoin prices plunge under $7,000, on suspected price manipulation

Posted: 10 April 2018 3:10 pm
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Bitcoin's erratic movements have some suspecting price manipulation by exchanges.

Bitcoin prices have been more tumultuous than usual, and the last week in particular has seen some very unusual movements, with prices abruptly jerking back and forth in distinct steps, culminating in an immense and abrupt downshift from about US$7,170 to US$6,770 on 9 April.



What might be happening?

These erratic movements have typically been shrugged off as whales doing whale things, but recent market conditions have led some to speculate that the exchanges have the means and the motive to cause these price movements.

"The current market seems to be largely driven not by organic buying and selling, but by exchange driven manipulation of the spot market to exploit the current dynamics of leverage trading," suggests a Reddit user.

Leverage trading is essentially a way of betting on future price movements, where both gains and losses are multiplied by the leverage. This can let users pick up substantial gains or losses off small price movements. These bets typically have a liquidation price, and if the prices reach that point then the user's position is liquefied and they might lose it all. Over-leveraged trading can lead to sizable gains when it goes well or very sudden complete losses when they go poorly.

Bitfinex offers up to 3.3x leverage, while Kraken offers up to 5x leverage. BitMEX offers up to 100x leverage on bitcoin pairs while multiplying fees with leverage.

"Both longs and shorts are bets on the price moving up or down [respectively] and they have a "liquidation price" at which they get liquidated by the exchange," the user explains. "Essentially the exchange gets the entire stack they bet with and extracts a high market fee multiplied by the leverage.

"Since the exchanges know the characteristics of the outstanding shorts/longs, and since volume is low after these pumps or dumps leading to sideways drift, they can essentially engineer movements in price... When there are lots of overleveraged shorts, an exchange can pump the price with bots briefly and collect the short position. Same with longs but in reverse, a quick burst of selling pressure."

Essentially, the user is accusing exchanges of looking at the positions currently open on their exchange, and then deliberately shoving the prices up or down, depending on which is more profitable at the time, to suddenly liquidate a bunch of them and rake in all the user funds. These engineered price movements are done by placing a lot of orders on their own exchange, and result in those abrupt price steps, they say. The process is broadly similar to stop hunting.

The stark drop down from $7,000, they say, was a laddered sell order on Bitfinex that liquefied about 3,000 positions. With a US$10,000 minimum deposit on Bitfinex, it's safe to say that the sudden liquidation of thousands of open positions is abruptly making an enormous amount of money for Bitfinex.

Why now?

The Reddit user suggests several different circumstances which might motivate exchanges to suddenly do this, including users over-leveraging themselves in an attempt to keep the cryptocurrency gravy train rolling, even as the markets move sideways.

"In December and January there were days where your holdings would increase by at least 20% no matter what you bought. Once you experience those 20% daily gains you don't want to go back to a market where it slowly bleeds down a few percent every week, so people jumped in on high leverage short positions to multiply their profit on those single percent moves down," the user said.

Accordingly, the number of leveraged positions has kept rising from the start of the year, with shorts in particular becoming much more popular.

The Reddit user also pointed at several factors which might incentivise exchanges to do this. The first is steadily declining trade volume following the shrinking of interest after the enormous December gains. For most exchanges, December was an extraordinarily lucrative time that they have yet to replicate, and their revenue has fallen considerably since then. Exchanges being simultaneously buffeted by a loss of customers, a loss of trade volume and plummeting cryptocurrency prices might have to get creative. Liquidations might present a lucrative new revenue stream, especially with so many people moving towards leveraged cryptocurrency trading.

At the same time, the relatively low volume on spot markets, which is caused by the shift to derivatives, has made it much easier to move prices.

"Those who do want to bet on further upward movements seem to be doing it off the spot market, using margin with futures and perpetuity swaps on Bitmex. This makes the low volume spot market ripe for manipulation, exchanges like Bitfinex and Bitmex have every incentive right now to manipulate the price," the user said.

"For the small time investor there really isn't much you can do to stop this. This is what being part of an unregulated market means, it means that things like wash trading and long/short liquidation hunting is allowed."

Note that this is just one user's opinion. One can safely conclude that positions get liquidated during these sudden price movements and that exchanges are profiting from these liquidations, but there's no actual evidence, other than circumstantial evidence, to conclude that the exchanges themselves are causing these price movements.

It may also be worth noting that some exchanges are thought to have been wash trading to fake volume, and that it might be easier for someone to deliberately move cryptocurrency prices than one would expect.


Disclosure: At the time of writing, the author holds ETH, IOTA, ICX, VEN, XLM, BTC and XRB.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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