The Mechanics of Market Manipulation

The CoinDesk Bitcoin Price Index, a composite of several market feeds, recorded a 6 percent drop as a result.

Before getting into that, I'll explain briefly how novel structures and thin markets could make such manipulation possible.

It is related to market depth, measured by the worst price an order will hit at a certain size limit.

In crypto, market depth is fragmented among dozens of the largest exchanges, and hundreds more in the long tail.

Bitcoin's bid-ask spreads have widened on most of the largest exchanges in 2019, indicating decreasing market depth according to one tracker of composite data.

What happened May 17.The chart above presents a second-by-second account of what happened on the Bitstamp BTC/USD spot market in the early morning hours of May 17, UTC. Each point on the chart is the minimum, or best, ask price offered in each minute's snapshot of orderbook data, which is provided by CoinRoutes.

The action began at 3am UTC, with a sell order roughly 6 percent below the market price and hundreds of times larger than the norm on the exchange at that time.

A chronological calculation shows the sellers sold about 2,905.7 units of bitcoin, in aggregate at about $2.5 million below what they would have realized at a bitcoin market price of $7,700.

The market structure that has evolved around bitcoin has so far failed to achieve a similar equilibrium.

As long as deep pools of liquidity remain dependent on shallow pools, bitcoin's market structure will be out of balance - and manipulators will have incentives to find ways around these patches.