Nov 30, 2019 at 09:10 UTCUpdated Nov 30, 2019 at 09:10 UTC
Marionette makers in the Federal Theatre Project’s workshop in Washington, D.C., 1930s. Image via Library of Congress/Wikimedia Commons
Galen Moore is Senior Research Analyst at CoinDesk. The following article originally appeared in Institutional Crypto by CoinDesk, a weekly newsletter focused on institutional investment in crypto assets. Sign up for free here.
The levers are there to move hundreds of millions in crypto markets, and they’re clearly labeled
On May 17 of this year, bitcoin’s price dropped suddenly. The action started on a single exchange: Bitstamp, domiciled in Luxembourg, where the dollar price of bitcoin suddenly dropped more than 18 percent in a matter of minutes. The CoinDesk Bitcoin Price Index, a composite of several market feeds, recorded a 6 percent drop as a result.
Bitstamp was, at the time, one of three spot markets used as equal components in the bitcoin price index for BitMEX, a crypto derivatives exchange domiciled in the Seychelles that operates one of the most liquid bitcoin derivatives markets, the XBT/USD perpetual swap. BitMEX’s other two bitcoin index components are Coinbase Pro and Kraken. Of the three, BitStamp’s reported volumes are lowest.
The BitStamp price drop wasn’t random. It was caused by a large bitcoin sell order, placed well below the market. The resulting downward pressure triggered auto-liquidations of long positions in the hundreds of millions of dollars on BitMEX. Traders with short positions on the exchange stood to benefit.
In this column, I’ll provide a visual blow-by-blow of what happened May 17 on BitStamp, and a risk/return estimate: if it was manipulation, how much it cost, and how much the manipulators earned. I’ll conclude with thoughts on the liquidity imbalance that caused it,