The manipulation of the digital currency market has been a charge that has always been true or false in every sharp rise or fall. In this article, selected from the coinDesk site, we will discuss how to manipulate the digital currency market in one of the most recent examples of bitstream and bitmap exchanges.
On May 9, this year , bitcoin prices dropped sharply within minutes. This sudden decline began with the bitstream exchange.
BitStamp is a digital currency exchange based in Luxembourg, where bitcoin’s dollar fell more than 2 percent in minutes. The Quincy Bitcoin Bitcoin price index, which is determined by its multi-currency exchange rate, recorded a 5 percent decline at that time.
Bitstream exchange at that time was one of the three moment exchanges used to determine bitcoin price index in bitmap exchange . Bitmax is a currency exchange traded in the Seychelles and is known as one of the most highly liquid currency exchanges in Bitcoin (XBT / USD).
The other two currency exchanges used to determine the bitcoin price index in bitmap exchanges were the Coinbase Pro and the Kraken. Among these three exchanges, bitcoin trading volume in bitstream exchanges was lower than the other two, namely, Quebec Base and Peru.
The price drop at bitstream exchange was not accidental. Rather, it happened because of a high volume bitcoin sales order lower than the market price.
The downward price pressure that resulted from this sales order in Bitmax led to the automatic closing of many hundreds of millions of dollars worth of Long positions that had already been placed in the order book.
Traders who traded short positions or short positions , that is to say, simple bets on bitcoin price declines, were betting futures, making huge profits during these minutes.
In this article, we get a clear and detailed picture of what happened on May 8th at the bitstream exchange and look at estimating the risk-to-return ratio.
We then estimate how much these people would have spent if this sudden price drop had been caused by market manipulation. And how much did they ultimately earn?
Finally, we conclude by examining the inconsistency and disruption of the liquidity that created it and how and under what circumstances it could be repeated.
Before entering the discussion, we will briefly explain how it is possible to manipulate emerging markets and low-liquid markets.
In digital currency markets, it is only natural for investors to interact directly with currency exchanges because it is an inherent trait of bitcoin that allows users to trade without intermediaries. In future trading, this will require revising and changing the market structure.
In traditional futures markets, brokers manage the market so that there is no risk that the price will suddenly change dramatically and cause one side to go bankrupt. All trading participants are motivated to settle their accounts so that they can trade again tomorrow. Because in traditional financial markets, settlement operations are performed daily at the end of each day.
In the largest digital currency exchange with futures trading, it is possible for the user to make a transaction today with one account and tomorrow with another. This unreasonable and semi-anonymous access is part of the story that has made these exchanges the most cash in the digital currency market.
They use the automated clearing method to offset the risk associated with petty cash, bitmax currency exchanges and other major digital currency futures transactions.
For example, if the price falls far below an open position with a long position, an exchange trader will automatically close that deal to cash in and settle with you, which is called liquidity. .
The proceeds from the automatic settlement are saved in an insurance fund. If the cash liquidation is less than the amount required for settlement, deduction of the capital raised in the insurance fund will begin. If the amount in this insurance fund also does not provide the required settlement clearance, the process of reducing the user’s debt begins with the quick sale of all his assets.
Liquidity is a term, which means that an investor can move a large volume of an asset without having to change the asset price significantly. This concept relates to the depth of the market and is measured at the worst price that can fall within a given volume limit.
In the digital currency market, the depth of the market is spread between dozens of large currency exchanges and hundreds of small exchanges that exist. Even in the case of high-volume digital assets, such as bitcoin and ether, liquidity is scattered, making them shallow. The situation may get worse.
The proposed price range for bitcoin purchases in most major currency exchanges in the year 3 has been expanded and expanded, indicating a decrease in market depth due to the data set.
Exchanges that are part of the pricing infrastructure are so shallow that placing a high-volume order drastically changes the price; and as the diagram below shows, futures markets can have significantly higher liquidity than Exchange trades have a moment that helps determine the value of assets in future currency exchanges.
What happened on May 7th
The chart above shows a second-by-second report of what happened in the Bitcoin instant dollar market (BTC / USD) in the early hours of May 7th. Each point in the chart is the lowest price or best bid offered per minute using the order information recorded on that day by CoinRoutes. The size of each item represents the quantity or volume of the order at that point.
It started at 4am UTC with a bitcoin sales order nearly 6 percent below market price, and hundreds of times larger than the volume traded at that time in other currency exchanges.
Since the intended sales order was fulfilled despite pre-registered and existing purchase orders, the purchase price fell until the market price reached $ 3.2 within minutes, and as the price reached this point, Sales stopped.
An estimated calculation shows that the sellers at that time sold about 2.5 units of bitcoin at sub-market prices, totaling $ 2.3 million less than the amount that they sold at that moment’s market price of 3.2 That was their income.
According to data from skew, more than $ 5 million in buyout or long position transactions were liquidated in Bitmax currency exchanges at the same time. If this were deliberate and aimed at market manipulation, it would have benefited more than 5 times the money they had been risking to manipulate the market, and the whole thing was done within 5 minutes.
The Bitcoin network security model is a fairly straightforward logical choice theory: Miners receive rewards for recording new transactions. To get a reward, they must prove that they have shared a valuable asset such as energy with the network.
If a miner attempts to manipulate transaction records, the other miner denies its involvement in the network and cancels his reward. The cost of manipulation and the likelihood of failure are balanced against the reward we expect.
Bitcoin deliberately maintains this balance without the need to use authentication or trusted third parties. However, the market structure that has been developed for bitcoin trading and has evolved over time has not yet been able to achieve the same equilibrium that is inherent in the bitcoin structure.
It’s not like different people have not tried to solve these problems. Bitmax currency exchange revised bitcoin price index components in November and added two momentum markets; Deribit exchange, the largest bitcoin exchange trader based in the Netherlands, took a different approach to cash flow. Provided or liquidated accounts.
As long as liquidity markets are dependent on shallow markets, the bitcoin market structure will not be balanced, and those who attempt to manipulate it will be motivated to find different ways to manipulate the market.