Sunday 2nd August The price of Bitcoin (BTC) fell 12% in just 5 minutes. Over the same period, ether (ETH) fell 21% and similar losses were seen in many other altcoins.
In retrospect, The general consensus on the cause was an unknown company that launched around $ 1 billion in times of low volume and low liquidity.
At first glance, one might assume that selling such a large amount in an illiquid market would be to the detriment of the seller. However, given the scale of the move, we don’t think the seller doesn’t know what would happen.
Actually, It’s entirely possible that the movement orchestrated was 100% intentional. In this way, the cryptocurrency market suffered a sharp correction with a big sell-off.
As the lightning crash or sudden collapse could have been intended
This was a well thought out move The buyer began buying coins on the spot market when the price neared obvious technical resistance.
Once the investor had established a position, he placed a large market order to eliminate all offers in the order book and push the price well below an important resistance level.
This maneuver triggered a significant number of buy orders from other investors who had buy stops above the resistance level. At the same time, there has been a bearish decline due to traders depending on this resistance level.
The investor who submitted the wholesale order is now enjoying the appreciation of the price of the currencies it has bought before the breakout after the momentum has ignited.
After a while, that trader decides it’s time to tag the record. So feel free to build a short futures position on different exchanges with different accounts to be as stealthy as possible.
With a leverage effect of 30 to 50 times, the investor can hold the position even if the price of the underlying asset increases by 2% or 3%.
Once you’ve built a sufficiently large short futures position, sell the previously purchased BTC supply at market price when the market is back to low liquidity.
This will remove all of the bids on the order book, causing a price drop that ignites at the time you previously built a short futures position. The result is that a good profit is made from the short position.
Some examples of how it is done:
Let’s say BTC is trading at $ 9.9 thousand and the key resistance is trading at $ 10 thousand.
A trader builds a stealth position of 100 BTC with approximately $ 1 million in cash at an average price of $ 9.9 thousand. Then you place a market order to buy 100 BTC at a time when market liquidity is low and this immediately pushed the price down to $ 10.4,000.
This means that your average position is 200 BTC at USD 10,150. Movement above the apparent price resistance causes other traders to buy above $ 10,000 and also catalyzes a bearish contraction that forces short sellers to hedge their position by buying the underlying again. This puts even greater pressure on the price of the underlying asset and phase 1 of the trader plan is complete.
Now BTC is at USD 11.8 thousand and the trader who manipulates the market starts short position in futures with leverage from 30x to 50x. For simplicity, let’s consider 50x leverage, which means that for one US dollar invested, you get $ 50 of the underlying asset.
The trader re-establishes a secret short position in the futures markets on various exchanges using multiple accounts. Since you have 50x leverage, to hedge your 200 BTC long position worth $ 2.36 million you need to short sell for only 200 BTC / 50 = 4 BTC.
You would then use a portion of the proceeds from your first purchase to cover the margin on futures contracts worth 4 BTC.
Of course, you can also sell more futures to further increase the pull and your next illicit profits.
The last step
ANDThe trader completes his ingenious strategy by selling the 200 BTC he originally bought in the market immediately when the market liquidity is low.
This leads to a BTC price drop from 11.8 thousand USD to 10.1 thousand USD. The price of your long position was $ 10,150. So while you suffer a small loss of $ 10,000 on your starting position, you will benefit significantly from short term futures sold. The result is a net profit of $ 330,000, or 16.5% of the $ 2 million originally invested, all with minimal risk.
This is obviously a oversimplified example of how big players manipulate the market and take advantage of weekends when liquidity and trading volume are lower.
This type of setup requires a significant amount of start-up capital and adequate business infrastructure to run smoothly.. However, given the liquidity and volatility of the cryptocurrency market compared to traditional markets, only $ 10M in equity could generate reasonable returns with minimal risk.
At least this is possible until regulators intervene.
There are ways to perform this maneuver with even greater influence. By using futures to take the initial long position, which requires a fraction of their face value to trade, and buying put options instead of selling futures to further benefit from the downward movement created by the convexity of the Options.
However, Such a practice requires specific market conditions (ie a reputable instrument the price of which is close to an important technical point) and an instrument that is easy to manipulate (ie an instrument for which derivatives exist). Therefore, this work cannot always be carried out.
Basically The whole maneuver is market manipulation and completely illegal in traditional markets. In the wild west of the land of crypto, however, unscrupulous traders can still act with little concern for the time being.
The hope is that these kind of price manipulation games will go away as the crypto markets mature.
As the market grows, the increased amount of money required to continue these types of actions and the increased risk of an even bigger player countering whoever started the move can deter tampering.
The views and opinions expressed here are those of the author only and do not necessarily reflect the views of Cointelegraph. Every investment and trade movement involves risk. You should do your own research when making a decision.