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Bitcoin’s Drop: Bitstamp Exposed

Since the beginning of May, investor optimism has returned and most of the crypto assets registered solid positive results - something that hasn’t been seen
during the last year. However, the last few days are coming as a correction of the price. On 17th of May at 3 a.m., the Bitcoin registered a sharp downside
movement, which brought into focus significant speculations only a few hours after it had occurred.

However, before digging deeper into the specifics, it is worth to look first of all at two signs that could provide early indications about what the price was
supposed to draw as movement. The first sign comes from the current period and especially - talking about the event Consensus 2019. The second sign is
hidden in a gap price that Bitcoin’s futures registered some days ago on CME.

Consensus Event 2019

Consensus - the most anticipated annual gathering of the blockchain world that started back in 2015 and has managed to attract many companies, developers,
entrepreneurs, and investors. It has come to our attention from before that around this event, the price of the Bitcoin always drops and a confirmation of this
can be seen on the figure below. The exact dates of the events in the last three years are: Consensus (22-24) 2017; Consensus (14-16) 2018; Consensus (13-15) 2019.

Figure 1 Price Reaction Around Consensus Event (2017 - 2019)

CME BTC Futures - TA reason / 10 May 19 (21:00 UTC)
BTC Futures price made a Breakaway gap. On the 10th of May 21:00 UTC time, the market of future contracts closed at the support level of 6295 USD. On the
12th of May, the market reopened at a level that left more than a 10% breakaway gap in an upward direction.

Figure 2 CME Bitcoin’s Futures Price Gap

Breakaway gap usually describes a gap in the price that gaps over support or a resistance level. Moves like that are supported by high volume and lead to a
trend continuation as well. Gaps are used in technical analysis to identify a potential price reversal. If a gap is left on the chart, it is very likely that it will get filled
in the future.

On 17 May 03:10 UTC time, the gap got filled almost completely and a price reversal took place. A movement like this could be suitable to be used for "stop
hunting". Stop-loss Hunting is a strategy that attempts to force some participants out of their positions by driving the price at a level where many individuals
have chosen to set their stop-loss orders. However, at the same time such practices are difficult to be proven, although it is widely-know that they are used. In
this particular case, the price movement is a global event and it is foolish to state that one or another exchange can affect it. Having such a case is a gold mine
for exchanges to speculate with the momentum conditions and perform stop-loss hunting strategy.
Thus far two major signs were pointed out, the observation of which could more or less predict the sharp drop. However, this is not the real purpose of the
analysis. The real reason of having the paper is to present a comprehensive view over the performance of the Bitstamp exchange, as there are significant
speculations what exactly happened to it.
In order to have a comprehensive comparison, several exchanges will be compared in order to observe how they have performed during the sharp drop of the
price, as well as what details can be pointed out in order to have comprehensive conclusions in the end. Before proceeding with the analysis, it is worth to
mention some of the comments that appeared a few hours after the event happened.

There are several official theses: a well-planned dump, fat fingers, 5000 BTC order executed, and intentional manipulation (including manual or
automated intervention). Each of these theses worth to be analyzed and commented, as each might be the possible reason. However, an additional
examination of the charts can easily eliminate some of them and lead us to the most possible reason. Of course, nothing can be proven 100%, but at least can
be formed some comprehensive conclusions.

Figure 3 Comparison Between Six Exchanges (Bitmex, Coinbase, Kraken, Bitfinex, Binance, and Bitstamp)
Assumptions (based on figure 3)
For the purposes of the analysis, there will be six exchanges compared in total - Bitfinex, Bitmex, Coinbase, Kraken, Binance, and Bitstamp.
In the figure above is presented the price movement on each of them. The movement occurred at 3 a.m. UTC time and the critical period lasted for more than
10 minutes (this timeframe is locked between the two black vertical lines). For best reference, there are also listed the lowest reached prices, as well as the
trading volumes. As an average starting price, from which the movement should be considered is chosen a level of 7600 USD/BTC.

Price Deviation Comments

Among the 6 analyzed exchanges, Binance and Bitfinex have the best performance registered, as the drop of the price is
estimated to be around 8% for the whole 10 minute movement. On the other hand, Bitstamp is the worst performer with
19% deviation in the price. If Binance and Bitfinex are giving an example and performing in a completely different way,
then Bitmex, Kraken, and Coinbase can be seen as benchmarks, because their results can be taken as average values. It
is fair to judge that the price drop on average should be in the range between 13% - 16%. Assuming that the average
price of the benchmark basket is 6549 USD [(6411 + 6600 + 6636) / 3 ], then the registered by Bitstamp deviation is
estimated to be 371 USD (or 4.88% of the initial price in the beginning of the drop and 5.66%, compared to the average
lowest price of the 3 average performing exchanges used as a benchmark).

Traded Volumes Comments

Focusing on the bars, showing the progress of the traded volumes, it is obvious that the volumes for Bitfinex, Coinbase,
Kraken, and Binance are repeating a similar logic, not only as candles, but as relative values. Unfortunately, Bitmex are not transparent in this regard. However,
the most important difference is again for Bitstamp. It is normal and expected, when the price heads south rapidly, the trading volumes to be increasing and
the figures standing for the short volumes to be dominating. Such tendence can be seen for Bitfinex, Coinbase, Kraken, and Binance.

On the other hand, once the price bounces and heads up in order to perform a correction, there should be again an increased volume registered with volume
dominated by buyers. As it can be seen, this is the case again for the group of benchmark exchanges. It is obvious, that the sharp correction registered for
Bitstamp is accompanied with relatively low positive volume. Similar suspicions exist for Bitmex, but due to the fact that this exchange is not sharing their
trading volumes, no clear conclusions can be made.

Candle Analysis
Important conclusions can also be made by looking at the each of the candles during this 10 minutes period of time. Usually, when there is an aggressive
movement, it is supposed that the order book will be able to match a lot of opposite pending orders. This will result in the price bouncing up and down,
although the momentum movement will be prevailing. The important thing to note in this case will be that there will be shadows for most of the candles
during the 10 minute period (matching the orders on the downside way will easily create shadows for the candles if not for all of the 1 minute candles, then at
least for most of them). This is something that cannot be seen for Bitmex and Bitstamp. Having such a case points to a possible scenario of price manipulation.
Breaking Down the Scenarios

Why it is not a well-planned dump

A well-planned dump would mean that the general price movement on Bitstamp would generally be completely different one from all of the rest exchanges.
This is not the case, although the worst performance is with it. It could be speculated that the dump was expected (as it started exactly at 3 a.m. UTC), but it is
absolutely foolish to believe that it could be triggered by a single exchange. This is not a serious statement and it must be rejected, as Bitstamp itself cannot act
as a factor that will be able to affect the market solely.

Fat Fingers
The term fat fingers stands for a possible mistake performed by an employee inside an institution (in this case meaning the exchange). However, it is important
to note, that if there is a mistake with a big order executed, then there is always a possibility of correcting it if not immediately, then right after it was sent by
mistake. Furthermore, the price movement is a fact and it was registered at all of the exchanges. What is the chance in reality to have someone performing a
wrong trade during this exact period of time, stacking at the same time with the direction of the price - it is nearly impossible. This statement is also less likely
to be true, simply due to the reason that it will be more of a matter of luck to have someone in panic, who had triggered additionally big order in the same
direction at the same moment.

5000 BTC order executed

At the time of the analysis, this is the most widely-spread scenario. However, there are a number of questions we should ask ourselves - who will be the one
who will sell in a single or in several orders a total volume of 5000 BTC? Who will be the one that will hold such a huge amount of funds in an exchange? Why
this trader / whale would decide to sell this amount at once or in 10 minutes period of time?
Actually, there is no need to seek for answers, speculating over theories that does not lie on serious fundament. There is no need to be a professional trader to
know that this is a thesis that is not likely to be the true case or even to be close to reality at all.

Intentional manipulation (including manual or automated intervention)

The possibility of having an intentional manipulation, but just seen as in addition to the overall market movement is the most likely case. This scenario can
include two additional sub scenarios - the first one is considering having a low liquidity (1) at that moment of time, while the other one directly points to a case
of having a “stop hunting” practice. (2)

(1) The low liquidity is a typical scenario for smaller exchanges, that experience momentum difficulties to settle trades in periods of sharp price movements.
(2) The “stop hunting” practice is typical for the FOREX industry, but it can be successfully implemented for various assets that are traded through platforms.

None of the two can be measured or detected with a guarantee. However, the practice shows, that (1) masks (2) most of the time and it is used as an excuse.
Most probably, there is a software sitting with Bitstamp that was performing exactly this - stop-loss hunting in a volatile moment. This seems to be the most
likely reason for the great deviation in the performance of the exchange, compared to the other exchanges that have been analyzed.

Although the topic can go further and further while digging deeper and deeper into the details, it is obvious that Bitstamp behaved poorly and against the
traders’ interests. Suspicious for similar behaviour are coming also from Bitmex, where there are even no trading volumes reported and where candles were
without shadows (very similar to the case of Bitstamp).