Thread by @smdiehl

Let's talk about market manipulation and how the cryptocurrency exchange ecosystem is an unregulated cesspit. (1/) 🧵

A exchange business is one that connects buyers with sellers, it maintains what's called an "order book" which matches the price intention of buyers (called the "bid") with the seller (called the "ask"). (2/)

A market maker combines this price information of what a potential buyer is willing to pay with the quantity they will purchase, for that proposed price and quantity from sellers. A match between buyer and seller is called a "fill". (3/)

The entire process of market making and price formation for commodities and securities is a highly regulated process. The most recent legal frameworks are Dodd Frank in the United States and MiFID II in Europe which lay out very precise rules on legal and illegal behavior. (4/)

For crypto assets, all we have is a wild west environment of unregulated offshore companies that have no restrictions on what they can do. So they're speedrunning history's worst financial catastrophes. Their behaviour follows a well-known set of patterns of market fraud. (5/)

The first pattern of market manipulation is called "front running", whereby an exchange (which sees all order flow) can use its privileged information to place its own trades before its customers. (6/)

If the exchange sees the price of an asset going down, it simply dumps its holdings before its customers have time to react and trades against its own customers using private information. (7/)

Front running is highly illegal in normal markets. Market makers are required to do "best execution" in which they offer a price most favourable to the client rather than themselves. In crypto markets theres no restriction and you can screw your customers all day every day. (8/)

Without this restriction, front running effectively allows market makers to basically print money by extracting it from their clients by having into foresight into their trading intent and unfair execution preference. (9/)

The second common type of manipulation is "wash trading". In normal markets there is a restriction that buyers and sellers must be different parties and the market maker is responsible for matching unique buyers with unique sellers. (10/)

In the absence of this restriction, a market manipulator can buy and sell an asset to themselves thus driving up demand, the volume of trades, and potentially moving the price in proportion to the synthetic non-economic demand. (11/)

Wash trading is absolutely rampant in crypto markets which are already very thinly traded. When an exchange wash trades with itself, it creates the illusion of synthetic demand for an asset without any actual demand, thus inflating the "market value" of worthless products. (12/)

Some studies have estimated that 95% of exchange traded volume of Bitcoin and other assets are wash traded between the exchange and itself to create the illusion of volume when there are no actual buyers. (13/)
cnbc.com/2019/03/22/maj…

The Tether scandal I covered previously is directly related to wash trading and insider collusion with unregulated exchanges, but in a composite form of market manipulation behaviour known as "cross-product manipulation". (14/)

https://twitter.com/smdiehl/status/1393669812220465162

Many exchanges offer a wildcat "surrogate US dollar" called a stablecoin which claims to be a share in a money market fund parked in a shady bank in Bahamas, but as reporters have discovered doesn't actually any cash equivalents it claims. (15/)
en.wikipedia.org/wiki/Wildcat_b…

60% of all bitcoin trades are for Tether, where a large volume of real inflow retail dollars are now traded against a massive volume of leveraged debt-piled-on-debt-piled-on-debt to offshore tax-haven companies.

If this all seems like a house of cards, it's because it is. (16/)

The third behaviour is "pump and dump schemes" whereby insiders collude to drive up the price of an asset, so the price rises, and then collude to simultaneously dump the asset thereby extracting money the inorganic price formation. (17/)

A research paper by Dhawan and Putniņš studied pump and dumps and found an insane level of market manipulation of crypto assets, with one occurring nearly every day. Such a high rate of manipulation is unprecedented in financial markets. (18/)

papers.ssrn.com/sol3/papers.cf…

The last is manipulating exchange infrastructure itself to create fake trades or outages to control price action. In normal markets there is an illegal practice called "spoofing" whereby buyers create a flurry of orders to drive price and then cancel all the bogus orders. (19/)

Unregulated exchanges can create spoofed buy orders, cancel orders arbitrarily, and induce unexplained system outages during times of market instability when it serves their financial interests. And their customers have no legal recourse. (20/)

bloomberg.com/opinion/articl…

It's unfair to even call crypto assets a "market" given how manipulated and one-sided these gambling products are. This isn't "financial innovation" in any way, it's casinos for degenerate gambling that simultaneously enables ecological destruction and criminal extortion. (21/)

Crypto is actually even worse than gambling. It's like going to a casino run by the mafia where the dealer can see all your cards, stack the deck, halt the game, and doesn't have to cash out your chips.

The house always wins, but with crypto humanity always loses.

/fin