How A Single Order Crashed Bitcoin’s Price Over 20% In 5 Minutes

There is never a boring day in the cryptocurrency world. After an insane bull rally we finally saw the first major correction, wiping over $20 billion off crypto market’s overall valuation and caused a panic selloff for Bitcoin. BTC/USD touched as low as $6,178 on Bitstamp because of a massive 5,000 BTC sell order. What followed was a cascade of events which snowballed into a selloff…

1. 5,000 BTC Sell Order Placed on Bitstamp at $6,200

A user on Bitstamp placed a $31m sell order – 5,000 Bitcoin’s at the price of $6,200. Because Bitstamp is an exchange and not a liquidity provider, the sell order tanked the price as low as $6178.

2. BitMex Price Index Tanks

BitMex is the exchange with the highest volume for Bitcoin because it allows for leverage trading of up to 100x. It uses a price index for its futures contracts which consists of the average price between Bitstamp and Coinbase Pro. In other words, the price index gives 50% weight to the price to each exchange. As such, if the price drops significantly on either Bitstamp or Coinbase Pro, the price index will be affected. This is exactly what happened, because Bitstamp’s price tanked to $6,178 the BitMex price index dipped to a low of $6,471.

3. BitMex Liquidated $250M Worth of Long Positions

The dip in BitMex’s price index triggered the liquidation of futures contracts which created more negative pressure on the market, dragging down the price of Bitcoin on other exchanges.

4. Bitcoin Price Dips Over 20%

As traders began to panic sell on other exchanges, the price dipped below $7,000 before stabilizing at the current price of $7,312 on Coinbase Pro.

5. Bitstamp Launches Investigation

After realizing what had happened, Bitstamp announced on twitter that they are launching an investigation into the massive sell order.

Bitstamp confirmed that their trade engine worked as intended by executing the sell order for the client. Because Bitstamp is a regulated exchange with KYC verification in place, they should be able to contact the client and verify if he intended to place such an order.

Some speculate that the trader mistakenly typed in $6,200 instead of $8,200 in what’s called a “fat finger” mistake. If that is the case, there is a possibility of Bitstamp reversing each trade that resulted from the market order.

We have seen something similar happen back in 2015, when a user on the Gemini exchange accidentally placed a huge market order in error. Gemini ended up reversing all traders as the result of the order. Whether Bitstamp will follow a similar path will depend on their terms of service and whether the order was made by mistake in the first place.

What Can We Learn From This?

Technically, placing a huge sell order at a low price isn’t illegal in its own sense. It might be a bad idea to place such an order, but if you are a whale wanting to dump your bag nothing is stopping you. That’s why Bitstamp said that their “system behaved as designed, processing and fulfilling the client’s order.”

What would be illegal however, is if the whale coordinated his sell order with a short position on BitMex to take advantage of the price drop. @camilo_esq from twitter summarized the scenario:

It would make sense for BitMex to reevaluate their price index and see if they can include more exchanges in calculating it. So far BitMex did not comment on the situation or release any update regarding a potential update to their price index formula.

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