{"id":13361,"date":"2019-05-18T23:03:12","date_gmt":"2019-05-18T23:03:12","guid":{"rendered":"https:\/\/davidgerard.co.uk\/blockchain\/?p=13361"},"modified":"2019-11-28T18:47:24","modified_gmt":"2019-11-28T18:47:24","slug":"number-go-down-the-single-trade-that-crashed-bitcoin","status":"publish","type":"post","link":"https:\/\/davidgerard.co.uk\/blockchain\/2019\/05\/18\/number-go-down-the-single-trade-that-crashed-bitcoin\/","title":{"rendered":"Number go down \u2014 the single trade that crashed Bitcoin"},"content":{"rendered":"

The price of Bitcoin went from $4000 in early April, to $6000 on 9 May, to $8000 one week later on 16 May \u2014 and Bitcoin fans treated this as only its right and natural due. Number go up!<\/p>\n

The crypto blogs put forward all sorts of bad reasons \u2014 it’s capital flight from China!<\/a> It’s Bakkt<\/a> offering Bitcoin futures! It’s Flexa<\/a> offering retail payments in crypto! It’s Microsoft<\/a> experimenting with the blockchain! \u2014 even though this was really obviously<\/i> a manipulated push like so many before.<\/p>\n

The Bitcoin price is a game for “whales” \u2014 the largest traders \u2014 to wreck the smaller players. The prize is whatever small amounts of actual-money dollars<\/a> come into the crypto market.<\/p>\n

The Bitcoin price goes up and down with weird jumps in the graph \u2014 nicknamed “Barts,”<\/a> after the shape of Bart Simpson’s haircut \u2014 the telltale signs of market manipulation.<\/p>\n

And then the price dropped again \u2014 from a single transaction,<\/i> around 02:50 UTC on Friday 17 May \u2014 in the biggest single-day dip since January 2018.<\/a><\/p>\n

I told you so.<\/a><\/p>\n

 <\/p>\n

\"\"<\/a><\/p>\n

 <\/p>\n

Margin trading on cryptocurrencies<\/h3>\n

Margin trading<\/a> is borrowing from the exchange to multiply the effect of your trading \u2014 so rather than just having $100, you can borrow and trade with $200, using the $100 as collateral. If your trade pays off, you\u2019ve done really well!<\/p>\n

A “short” is a bet that the price will go down. A “long” is a bet that the price will go up.<\/p>\n

If your trade doesn\u2019t<\/i> pay off \u2014 or even if the price dips enough that it looks like it won\u2019t \u2014 the lender forces you to liquidate the whole position and pay them back immediately, and you lose your collateral.<\/p>\n

In crypto, margin traders like to borrow a lot<\/i> on margin. 5\u00d7 or 10\u00d7 is not uncommon. BitMEX offers up to 100\u00d7 margin trading. BitMEX and OKEx both offer “perpetual futures” <\/a>contracts where you bet against other traders.<\/p>\n

Burning the margin traders, for fun and profit<\/h3>\n

The whole Bitcoin market is a series of margin squeezes \u2014 sell $40 million, liquidate $250 million.<\/p>\n

The way it works is:<\/p>\n

    \n
  1. Margin traders place bets on the Bitcoin price.<\/li>\n
  2. Those bets depend on the price at other exchanges.<\/li>\n
  3. You can win more on the bet than it would cost to fiddle the price to win the bet.<\/li>\n<\/ol>\n

    I don’t know what the margin bets were that were being targeted by the rise \u2014 but the sudden drop was a single sale, of 5,000 BTC on Bitstamp, around 02:50 UTC on the morning of Friday 17 May. The price bottomed out at 03:10 UTC at $6,178.<\/p>\n

     <\/p>\n

    \"bitstamp<\/a><\/p>\n

    The fatal twenty minutes on Bitstamp.<\/a>
    \n(Times in UTC+1.)<\/small><\/p>\n

     <\/p>\n

    This was a huge dump. Trading in all cryptos is very thin \u2014 clearing 5,000 BTC out of the Bitstamp order book at that time meant going from orders to buy Bitcoin at $7,800, all the way down to orders to buy at $6,178. And so, that was the bottom price.<\/p>\n

    (For an explanation of the order book \u2014 the set of all the buy and sell orders on an exchange \u2014 see “How to read a crypto market depth chart.”<\/a>)<\/p>\n

    Bitstamp announced<\/a> an investigation six hours later: “We closely examine every event that causes large-scale movement in our order book and have started an immediate case investigation.”<\/p>\n

    This caused about $250 million of long positions on BitMEX to be liquidated, as the price used by BitMEX<\/a> bottomed at $6469.15.<\/p>\n

    BitMEX doesn’t exchange bitcoins for US dollars itself \u2014 it takes its BTC\/USD prices from Coinbase and … Bitstamp.<\/a><\/p>\n

     <\/p>\n

    \"\"<\/a><\/p>\n

     <\/p>\n

    This is a huge and obvious incentive to manipulate the price on those two exchanges \u2014 whichever order book is thinner, so costs less to pump or dump \u2014 to win margin bets on BitMEX.<\/p>\n

    We don’t know<\/i> that the trader who dumped $40 million was specifically targeting larger long positions on BitMEX. But this keeps happening, and has done for the past few years \u2014 a pile of short or long positions on the price will be blown by someone manipulating the price.<\/p>\n

    We do know that the Bitcoin whales know each other and have colluded for years. From 2017: 1,000 People Who Own 40 Percent of the Market.<\/a> “When he sees activity, Samani immediately calls the likely sellers and can often get information on motivations behind their sales and their trading plans, he says.”<\/p>\n

    We also know that crypto is rife with insider trading \u2014 both the exchanges’ very dear friends, the whales<\/a> … and the exchange officers themselves,<\/a> with access to the database, trading against their own customers.<\/p>\n

     <\/p>\n

    \n

    Exchanges Are the Whales. How do people not get this.<\/p>\n

    — Ulf Hethnahr (@hethnahr) May 18, 2019<\/a><\/p><\/blockquote>\n