//How and why exchanges are manipulating the price in order to capitalize on the new market dynamics

How and why exchanges are manipulating the price in order to capitalize on the new market dynamics

The current market seems to be largely driven not by organic buying and selling, but by exchange driven manipulation of the spot market to exploit the current dynamics of leverage trading. We just saw it again now as they liquidated 3K longs but you can see this pattern of clear manipulation over and over in the last few weeks .We have seen several forces set an incentive for exchanges to do this:Consistently declining volume – this leads to lower total fee revenue for exchanges, and an incentive to manipulate the price in order to earn revenue through liquidations rather than trading fees.Move towards more leveraged positions – both leveraged shorts and leveraged longs are at or near record levels. Shorts especially have gone from 8K outstanding in January to 33K right now, a whole tripling in outstanding positions.Move away from the spot market and towards derivatives – Anybody who has been checking the combined orderbook over the last few months has seen Bitmex completely take over the market, while GDAX, Bitfinex, Gemini and others see consistent declines. I’ve noticed myself an increased interest across the Internet on how derivatives work and anecdotely I have seen more people move away from the HODL meme and towards trading taking high margin bets with a portion of their stack.Some exchanges like Gemini have reacted to all of this by increasing their trading fees by 400%. Meanwhile Bitfinex specifically seems to be using its hefty weight to manipulate the price in order to capitalize on the record number of people using margin to bet.Both longs and shorts are bets on the price moving up or down and they have a “liquidation price” at which they get liquidated by the exchange, essentially the exchange gets the entire stack they bet with and extracts a high market fee multiplied by the leverage. Since the exchanges know the characteristics of the outstanding shorts/longs, and since volume is low after these pumps or dumps leading to sideways drift, they can essentially engineer movements in price that create income in terms of liquidations. When there are lots of overleveraged shorts, an exchange can pump the price with bots briefly and collect the short position. Same with longs but in reverse, a quick burst of selling pressure.You can see this in the most recent pumps too on Bitfinex, where 1K buy orders appear out of nowhere after long sideways movement only to be followed by either sideway movement or slow bleed on pathetic volume:https://ift.tt/2JtVwxA a look at the most recent pump up to 7K, it instantanously liquidated about 700 short positions:https://ift.tt/2qgZeCR this last dump was a laddered 12.5K sell order on Bitfinex that liquidated around 3K long contractshttps://i.imgur.com/znYyUT8.pngBitfinex tends to be where the big money traders move (their minimum deposit is 10K) so even if each long position was only 0.5 BTC on average they exchange would make a ton of money. If you look at the BitmexRekt twitter feed that shows a running list of Bitmex liquidations with humorous commetary, you will see many >$1 million dollar positions being liquidated during these moves.This is what all the “Bart” formations we have seen stem from. Its not George Soros pumping Bitcoin for shits and giggles, nor is it whales. They have no incentive to try and pull off PnDs now that it only leads to either sideways movement or decline after the pump, as it seems that most people have learned not to bite by now. Those who do want to bet on further upward movements seem to be doing it off the spot market, using margin with futures and perpetuity swaps on Bitmex.In December and January there were days where your holdings would increase by at least 20% no matter what you bought. It’s almost inevitable that this would have happened, that traders would try to replicate the gains they saw by buying and selling on the spot market a few months ago by using increased leverage and derivatives. Once you experience those 20% daily gains you don’t want to go back to a market where it slowly bleed down a few percent every week, so people jumped in on high leverage shorts to multiply their earnings on each move down. Same with the moves up, once we hit a bottom and start moving sideways we’re seeing long contracts drastically increase as people are taking on leverage to multiply their profit on an expected move up. This makes the low volume spot market ripe for manipulation, exchanges like Bitfinex and Bitmex have every incentive right now to manipulate the price.For the small time investor there really isn’t much you can do to stop this. This is what being part of an unregulated market means, it means that things like wash trading and long/short liquidation hunting is allowed.All you can really do if you’re a trader is look at the current ratio of longs vs shorts on Bitfinex and be aware that once short contracts become too high its possible that an exchange may pump the price to profit on it, while if the longs become too dominant we may see a dump.Edit: Bitfinex, not Bitfenix.

The current market seems to be largely driven not by organic buying and selling, but by exchange driven manipulation of the spot market to exploit the current dynamics of leverage trading. We just saw it again now as they liquidated 3K longs but you can see this pattern of clear manipulation over and over in the last few weeks .

We have seen several forces set an incentive for exchanges to do this:

  • Consistently declining volume – this leads to lower total fee revenue for exchanges, and an incentive to manipulate the price in order to earn revenue through liquidations rather than trading fees.

  • Move towards more leveraged positions – both leveraged shorts and leveraged longs are at or near record levels. Shorts especially have gone from 8K outstanding in January to 33K right now, a whole tripling in outstanding positions.

  • Move away from the spot market and towards derivatives – Anybody who has been checking the combined orderbook over the last few months has seen Bitmex completely take over the market, while GDAX, Bitfinex, Gemini and others see consistent declines. I've noticed myself an increased interest across the Internet on how derivatives work and anecdotely I have seen more people move away from the HODL meme and towards trading taking high margin bets with a portion of their stack.

Some exchanges like Gemini have reacted to all of this by increasing their trading fees by 400%. Meanwhile Bitfinex specifically seems to be using its hefty weight to manipulate the price in order to capitalize on the record number of people using margin to bet.

Both longs and shorts are bets on the price moving up or down and they have a "liquidation price" at which they get liquidated by the exchange, essentially the exchange gets the entire stack they bet with and extracts a high market fee multiplied by the leverage. Since the exchanges know the characteristics of the outstanding shorts/longs, and since volume is low after these pumps or dumps leading to sideways drift, they can essentially engineer movements in price that create income in terms of liquidations. When there are lots of overleveraged shorts, an exchange can pump the price with bots briefly and collect the short position. Same with longs but in reverse, a quick burst of selling pressure.

You can see this in the most recent pumps too on Bitfinex, where 1K buy orders appear out of nowhere after long sideways movement only to be followed by either sideway movement or slow bleed on pathetic volume:

https://i.imgur.com/3YaWVBI.png

https://i.imgur.com/pvpcd7Z.png

Take a look at the most recent pump up to 7K, it instantanously liquidated about 700 short positions:

https://i.imgur.com/3sCLEB8.png

Now this last dump was a laddered 12.5K sell order on Bitfinex that liquidated around 3K long contracts

https://i.imgur.com/znYyUT8.png

Bitfinex tends to be where the big money traders move (their minimum deposit is 10K) so even if each long position was only 0.5 BTC on average they exchange would make a ton of money. If you look at the BitmexRekt twitter feed that shows a running list of Bitmex liquidations with humorous commetary, you will see many >$1 million dollar positions being liquidated during these moves.

This is what all the "Bart" formations we have seen stem from. Its not George Soros pumping Bitcoin for shits and giggles, nor is it whales. They have no incentive to try and pull off PnDs now that it only leads to either sideways movement or decline after the pump, as it seems that most people have learned not to bite by now. Those who do want to bet on further upward movements seem to be doing it off the spot market, using margin with futures and perpetuity swaps on Bitmex.

In December and January there were days where your holdings would increase by at least 20% no matter what you bought. It's almost inevitable that this would have happened, that traders would try to replicate the gains they saw by buying and selling on the spot market a few months ago by using increased leverage and derivatives. Once you experience those 20% daily gains you don't want to go back to a market where it slowly bleed down a few percent every week, so people jumped in on high leverage shorts to multiply their earnings on each move down. Same with the moves up, once we hit a bottom and start moving sideways we're seeing long contracts drastically increase as people are taking on leverage to multiply their profit on an expected move up. This makes the low volume spot market ripe for manipulation, exchanges like Bitfinex and Bitmex have every incentive right now to manipulate the price.

For the small time investor there really isn't much you can do to stop this. This is what being part of an unregulated market means, it means that things like wash trading and long/short liquidation hunting is allowed.

All you can really do if you're a trader is look at the current ratio of longs vs shorts on Bitfinex and be aware that once short contracts become too high its possible that an exchange may pump the price to profit on it, while if the longs become too dominant we may see a dump.

Edit: Bitfinex, not Bitfenix.