On Sunday, August 2nd, the price of Bitcoin (BTC) fell 12% in just 5 minutes. In the same period of time, Ether (ETH) fell 21% and similar losses were seen with many other alternative currencies.
In hindsight, the general consensus on the cause was an unknown entity that unloaded approximately $1 billion into the open market during a time of low volume and liquidity.
At first glance, one might assume that selling such a large amount in an illiquid market would be detrimental to the seller, but given the magnitude of the movement, we do not believe that the seller would be unaware of what would happen.
In fact, it is quite possible that the orchestrated movement was 100% intentional. This is how the crypt currency market suffered a strong correction with a big sale.
Cointelegraph Consulting: a storm is brewing for Ethereum
How the flash crash could have been intentional
This was a well thought out move that involved the buyer who was starting to buy currencies in the cash market when the price was approaching an obvious key technical resistance.
Once the investor built a position, he placed a large market order to eliminate all bids in the order book and push the price sharply below a key resistance level.
This maneuver triggered a significant amount of buy orders from other investors who had stops to buy above the resistance level. At the same time, a bearish contraction occurred as traders who had short positions from this resistance level.
The investor who placed the big market order now enjoys the price appreciation of the currencies bought before the break, after the momentum is on.
After a while, this trader decides that it is time to mark the record. Therefore, he quietly builds a short futures position on several exchanges using different accounts to be as stealthy as possible.
With a leverage of 30x to 50x, the trader can maintain the position even if the price of the underlying asset rises by 2% or 3%.
Once he has built up a large enough short futures position, he then sells the previously bought BTC stash at the market rate when the market shows low liquidity again.
By doing this, all bids in the order book are eliminated, resulting in a price drop that ignites the time you had built up before a short futures position. The result is that a good profit is assured from the short position.
The „Warren Buffett“ index predicts the fall in stocks – how will Bitcoin react?
Some examples of how it’s done:
Let’s say that BTC is trading at USD 9.9 thousand and the key resistance is at USD 10 thousand.
A trader builds a stealth position of 100 BTC with approximately $1 million in cash at an average price of $9.9K. He then places a market order to buy 100 BTC at the moment when market liquidity is low and this instantly pushes the price to USD 10.4 thousand.
This means that your average position is 200 Immediate Bitcoin at USD 10,150. The move above the obvious resistance price causes other traders to buy above USD 10K and also catalyzes a bearish contraction which forces short traders to cover their position by buying back the underlying. This results in even greater pressure on the price of the underlying and phase 1 of the trader’s plan is complete.
Now BTC stands at USD 11.8 thousand and the trader manipulating the market begins to build a short position in futures with a leverage of 30x to 50x. To simplify, let’s consider a 50x leverage, which means that for USD 1 invested, you get USD 50 of the underlying asset.
The trader re-builds a stealthy short position in the futures markets on various exchanges using multiple accounts. Since he has 50x leverage, to cover his 200 BTC long position worth USD 2.36 million, he needs to sell short for only 200 BTC/50 = 4 BTC.
You would then use some of the proceeds from your initial purchase to cover the margin on 4 BTC futures contracts.
Bitcoin and Economic Uncertainty: Patience is the Question
Of course, you can also sell more futures to further magnify the movement and also your next ill-gotten gains.