Exchanges that trade with margins and futures contracts can have the upside when BTC pumps, and also when it dumps. When it pumps, ALT-BTC shorts can get liquidated, as well as BTC shorts. And when it dumps ALT-BTC shorts can get liquidated (if it dumps slowly or ALT-BTC longs can get liquidated if it falls off a cliff) and BTC longs can also get liquidated. Since cryptocurrency transactions are pseudonymous, and there is no equivalent of a Volcker rule for exchanges, what is to stop exchanges from trading in the same assets they have in their order book? And how would it be confirmed or proven if they are?
We Need An Equivalent of the Volcker Rule for CryptoCurrency Exchanges That Exists for Banks
It was already discovered a long time ago in the banking industry that some sort of rule was likely needed to prevent banks from trading with the same deposits they were supposed to be in custody of. For cryptocurrency exchanges, this need might be even more poignant to prevent the kind of self exchange trading that can keep causing extreme swings in cryptocurrency asset values. In fact, for exchanges that deal with margin trades this is more akin to requiring that a casino dealer can also not be a player in the same game they are dealing. Extreme swings can directly profit exchanges that deal with leveraged trades if they also have positions in the same asset. When directed, the effect can be even more enriching, but not good for customers, or cryptocurrencies in general.
BitMex Order Book as Bitcoin Price Pumped Up to 13,800 and then Dumped with a Sell Order of 10 million XBTUSD
Looking at the various exchanges around the time BTC was pumping up to its recent peak, and then the dump shows the dump apparently being initiated by a sudden large order of about 10,000,000 XBTUSD.
Source: captured screen of a BitMex Session while the dump was occurring
Some possible premium in the lead up to a pump was also being reported by others:
Bitcoin is Over $9,000 at BitMex with a $300 Premium
There have been Similar Observations in the Past
Let's recall that the last time there was a drop of nearly this magnitude, percentage-wise, was from a 20 million sell order, and that was not assisted by a prior pump of the magnitude seen on June 26th: Bitstamp Starts Investigation After Large BTC Sell Leads to $250 Mln Liquidated on BitMEX. That one was on May 17th.
And before that was a pump with what appeared to be a set of coordinated buy orders on several exchanges at the beginning of April: Bitcoin jumps 20 percent, mystery order seen as catalyst
Previously, others have also reported the possibility of some manipulative trading seemingly occurring, according to a report on TrustNodes last year:
https://www.trustnodes.com/2018/09/14/bitmex-seemingly-trading-against-its-own-customers-price-manipulation-in-plain-sight
BitMex also had record volumes in the lead up to the pump, and then the dump; as did likely most exchanges.
Source: Twitter Feed of BitMEXdotcom on 06/26/2019.
Other exchanges are also seeking to expand into margin trading, given its potential profitability, Binance Adds Margin Trading in Beta.
Specifically, it was an auspicious time to rekt ALTs, as ALT contracts were due on 6/28/2019 (ALTS have contracts that terminate while Bitcoin and ETH have perpetual options.)
Source: captured screen from BitMex showing the ALT contracts that expired a couple of days ago, right after Bitcoin's awesome rise and sudden drop.
Analysis of a Potential Pump and Dump on a Leveraged Exchange
First to explain how a pump and dump can be potentially rewarding for a whale: Say, Bitcoin price is at 4,000, and a whale starts buying to push the price up to say, 6,000. They would potentially make some buys at 3,000, 4,000, and 5,000 with a resulting average buy of about 4,000; potentially less than the end pump price; without any other factor in play. Now if they dump it at 6,000 they would be selling at an average value above the buy price. Of course, the risk to doing this is if some other whale starts a dump at the same time leading to buying at an average price that would be less than the price at the end of the dump. The other risk is market events that could cause an actual dump in values at the time the buying begins. A careful whale simply needs to make sure they coordinate with other whales, and watch to move the market up in line with favorable market events, (such as announcement of a new cryptocurrency by a large corporate entity), and down with unfavorable ones to reduce the risk-reward scenario.
Now for an exchange, the risk-reward calculus could improve significantly when the whale is potentially a leveraged exchange and is looking at several cumulative orders that would be liquidated in their order books with the movement. As one would expect, the flash drops experienced by Bitcoin would seem to auspiciously occur when longs are dominant, and the surprise pumps like the 4/1/2019 one would be at the height of pessimism when the order book is dominated by shorts.
How Bad is this for CryptoCrurrencies?
For cryptocurrencies to mature as an investment vehicle, some of the artificial manipulations designed to part users of their funds will need to be reduced. This is also the case, if the industry would like to see some of the futures products approved by regulatory bodies. A key rationale for the non-approval of such products by the SEC was the potential manipulations, and inexplicable volatility - some of which can not simply be explained away as due to Bitcoin's deflationary constitution. SEC Chairman: Other Market Protections Needed Before Bitcoin ETF Approvall
Likely due to the low level of liquidity overall currently in the market, a few entities with a lot of assets can move Bitcoin prices, and ultimately all cryptocurrency prices significantly. BitMex would almost certainly qualify as having enough assets to accomplish such swings. To those who read TA leaves (pun intended), this also means the market is not really amenable to much technical analysis, and its more like a fish bowl analysis where the major movements are really up to the whims of few whales and possibly exchanges. It is not inconceivable that the current Bitcoin prices could be driven back down to $3,000 almost as surely as they could be driven up to $20,000 depending on what computes to the most rewards, and how brazen such entities that can accomplish such swings choose to be. And why would they not, if there's no rule preventing that.
About the Author Ken has a doctorate in Engineering, and a master’s in Computer Aided Engineering, An IT professional, programmer and published researcher with over thirty publications in various fields of technology, including several peer reviewed journals and publications.
Legal Disclaimer: I am not a financial adviser and this is not financial advice. The information provided in this post and any other posts that I make and any accompanying material is for informational purposes only. These are simply the opinion of the author..