On the second Sunday in August, the price of Bitcoin (BTC) fell 12% in just 5 minutes. During the same period, Ether (ETH) is down 21% and similar losses were seen with many other currencies.
Later, the general consensus as to why was an unknown company that dumped nearly $ 1 billion into the open market during 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 at the seller’s expense, but given the volume of the move, we do not believe that the seller did not know what was going to happen.
In fact, it’s entirely possible that the coordinated movement is 100% intentional. Therefore, the cryptocurrency market entered a sharp correction with a large sell off.
How was the flash crash intended
This was a well thought out move, as the buyer started buying currencies in the spot market as the price approached and there was clear technical resistance.
After the investor builds a position, he places a large market order to remove all bids in the order book and push the price below a significant resistance level.
This maneuver triggered a large number of buy orders from other investors who bought stops above the resistance level. At the same time, a short squeeze occurred as traders did not reach this resistance level.
An investor who placed a wholesale market order now enjoys an increase in the prices of the coins bought prior to the breakout after the flaring swing.
After a while, this dealer decided it was time to call the registry. Therefore, he is quietly building a short-term futures position on different exchanges, using different accounts to be as hidden as possible.
With leverage of 30 to 50 times, an investor can maintain his position even if the price of the underlying asset increases by 2% or 3%.
Once it builds a sufficiently short futures position, it sells the previously purchased BTC offer at market prices when the market shows low liquidity again.
In this way, all bids in the order book are deleted, causing a price drop that ignites, as was built before a short position with the futures contract. The result is a nice profit on the sell position.
Suppose BTC is trading at $ 9.9000 and the main resistance is trading at $ 10,000.
Trader builds a hidden position of 100 BTC with about $ 1 million in cash at an average price of $ 9.9000. He then placed an order in the market to buy 100 BTC when the market liquidity was low and this instantly pushed the price down to $ 10.4000.
This means its average 200 BTC position is $ 10 150. A move above the apparent resistance price causes other traders to buy in excess of $ 10,000 and also induces short pressure that forces the short traders to cover their positions by repurchasing the underlying asset. This creates stronger upward pressure on the underlying asset’s price and completes the first stage of the trader’s plan.
Bitcoin is now priced at $ 11.8,000, and the market-manipulating trader is starting to take a short future position with 30 to 50 times leverage. For the sake of simplicity, let’s consider the leverage of 50 times, this means that for a $ 1 investment, we get $ 50 off the underlying asset.
A trader once again builds a hidden short position in the futures markets on multiple exchanges with multiple accounts. With a leverage of 50x, he should sell shorts for 200 BTC / 50 = 4 BTC to cover his 200 BTC long position of $ 2.36 million.
He will then use a portion of the proceeds from his first purchase to cover the margin on the 4 BTC futures contract.
Of course, he can also sell more futures to expand the movement and his impending illicit profits.
the last step
The trader completes his fun strategy by selling the 200 BTC that he originally bought in the market all at once when the market liquidity is low.
This drops the price of BTC from $ 11.8000 to $ 10.1000. The long position was priced at $ 10,150. While he had to accept a small loss of $ 10,000 in his original position, he profited greatly from the short positions sold. The result is a net profit of $ 330,000, or 16.5% of the $ 2 million originally invested, and all of this is done with minimal risk.