Bitcoin Flash Crash: What’s Going on? Whales Play The Market

Bitcoin Price Crash

This week started off with a new Euphoria in the crypto markets. Traders were soaking up those green candles as they watched Bitcoin rally past $7,000 all the way to $8,000.

However, on Friday morning they woke up to a familiar site. Bitcoin had just gapped lower by over $1,500 or about 20%. This of course had the impact of bringing down the rest of the crypto market.

Some were caught off-guard while others could have seen it coming. So, what exactly happened and where do we go from here?

Let’s take a look…

Bitstamp Sell Wall

Many crypto traders have honed in the suspicious sell wall that was raised on the Bitstamp exchange that took place at around 10pm ET on Thursday.

The trader put through a sell order on the exchange for 3,645 BTC (c. $22m). This was created at a time when Bitcoin market liquidity (especially on a singular exchange) was at their weakest.

The immediate impact of this was to drive down the price of Bitcoin on Bitstamp dramatically. You could even see the spread in price between Bitstamp and other exchanges such a Kraken and Coinbase.

Bitstamp Price Rally
Price action on Bitstamp Exchange. Image via Bitstamp

Due to crypto market arbitrage, prices on other exchanges soon followed suit and Bitcoin fell across the board. Given the correlation of other crypto assets with Bitcoin, the rest of the market fell.

Of course, there was far more on the go than a mere large block Bitcoin sale.

Spoofing 101

What happened with this Bitstamp buy wall was a clear example of some cryptocurrency spoofing. If you observed closely, you would see that the sell wall moved lower as more orders came to match it.

This kept on going as Bitcoin went through $7,500, down through $7,000 and touching below $6,000. Eventually, the sell wall was completely eaten up albeit at a much lower price.

Then, once the price had reached about the $6,000 level, another large buy well was set up on the same exchange ($11m). This could have led to the immediate recovery that we have seen in the price above $7,000.

This was a clear example of cryptocurrency spoofing in action. I have gone into this practice in much more depth in a previous post if you are interested in the mechanics.

Whoever was behind this action was clearly trying to impact the price. There really are very few other explanations as to why they would have placed an order of that size at that time.

If someone wanted to sell a large block of Bitcoin at the best price then they would try to facilitate an OTC deal that would have a limited impact on the market.

Moreover, the timing of a large buy wall right after the sell wall appeared is suspicious. Either the orders were highly coordinated or they were completed by the same party.

Of course, this can also happen on the reverse as traders place large buy wells. Something similar happened back in April as a single trader placed a large order through at a really illiquid time.

Bitcoin order illiquid
Bitcoin order chosen at illiquid time. Image via

Spoofing is an action that is outlawed in the traditional financial markets but given the unregulated nature of the crypto markets, whales seem to have free reign.

However, why would a whale have an incentive to tank the market like this?

Well, the answer could lie in a completely different market…

Bitcoin Futures

Bitcoin futures, which are derivatives on the price of Bitcoin, operate in a completely separate market than that of the underlying physical Bitcoin market.

All of the current Bitcoin future instruments are all cash settled. This means that traders do not have to hold any physical Bitcoin to get involved. You can go long or short with highly leveraged positions effortlessly.

Of course, the price of Bitcoin in the futures market will track that of the current spot price. So, those whales that have a sizable holding of Bitcoin can impact the futures market in their favour.

You can even see the impact that this had on the futures market over at the BitMEX exchange. Below are the liquidations that took place for the longs / shorts on the market.

There are two possible scenarios as to the positions of the underlying trader. Either the trader that placed the trades on Bitstamp had short positions underwater or they opened them up just prior to the dump.

Either way, this whale (or whales) could have made a killing in the futures market by merely moving some coins around the order books in the physical market.

Regulation Incoming?

Clearly the crypto markets are still quite susceptible to market manipulation. Even if you think that they are unfair, there are no laws that prohibit it.

Unlike with the regular financial markets, traders are for the most part anonymous and hence not subject to the same scrutiny that regular equity or bond traders are subjected to.

While the exchanges should discourage such activities, they usually turn a blind eye given the fees that are involved.

Despite how much crypto maximalists may hate it, perhaps more regulatory oversight is the only solution? Self regulation in anonymous markets is sometimes a futile endeavor.

Bitcoin’s Silver Lining

So, does this mean that the crypto rally was an illusion?

No, not at all.

There has been massive interest from large institutions that are investing in cryptocurrencies. OTC desks are doing a great deal of volume for large block trades coming from funds and High Net Worth individuals.

Moreover, the general public is beginning to flow back into cryptocurrency which means more adoption could be incoming. Those who got burned during the bear market are likely to be that much more discerning about good technology and projects.

Even the mainstream media and the bankers have begun to warm to Bitcoin. News coverage of Bitcoin is much more balanced and banks are either integrating blockchain technology or even developing their own cryptocurrency.

So, while the potential for manipulation is discouraging, it should not detract from the larger and longer-term fundamentals at play.

Featured Image via Fotolia

Nic is an ex Investment Banker and current crypto enthusiast. When he is not sitting behind six screens trading Bitcoin, he is maintaining his numerous mining rigs. Twitter: @nicrypto