Despite the fact that Bitwise Asset Management thinks that Bitcoin (BTC) markets are efficient, regulated, and highly liquid, this doesn’t seem to be the case. Last week, a Bitcoin pair on Kraken, one of the more respected trading platforms in the space, experienced a flash crash, during which BTC lost most of its value and traders scrambled to pick up what remained of the ruined market.
According to a new analysis, however, this might not have been the fault of a faulty algorithm or market maker, but a hacker trying to siphon funds from Kraken.
Bitcoin Crashes to $100 CAD on Kraken
On Friday, the Bitcoin-to-Canadian Dollar (CAD) pair on Kraken saw a helluva day. In a matter of seconds, BTC fell to just over $101 Canadian from $11,200 — a jaw-dropping drop of over 99%. But in the minutes that followed, the price stabilized, with the rapid drop not having a material effect on the wider Bitcoin market. At first, many thought nothing of it, determining that it was nothing more than an odd visual glitch or a fat-fingered mistake, netting a few lucky traders with buy orders below the market price a hefty profit.
Just saw this.
Imagine getting that fill. pic.twitter.com/cV5nW07uYE
— Nick Cote (@mBTCPizpie) June 2, 2019
Yet, as time has passed since the sudden event, analysts have come up with theories to explain the crash. Trader Beetcoin laid out his theory on Twitter (seen below), which actually holds its water. Firstly, it is important to note that the BTC/CAD pair on Kraken is very illiquid compared to the BTC/USD pair, for instance.
In fact, as of the time of writing this, there’s not more than 75 BTC worth of buy orders above $5,000. On any other reputable exchange or pair, buy orders above $5,000 would likely amount to hundreds, if not thousands of BTC. What this means is that a single order of 100 BTC, let’s say, can absolutely destroy the BTC/CAD pair.
Beetcoin writes that a hacker used the skimpy order book to his advantage. He suggests that said entity compromised a whale’s account with 1,200 BTC, created orders to purchase BTC against CAD at low prices, and then dumped the hack BTC on the open market to trigger his buy orders on his other account.
In doing this, the supposed hacker became the “fully legit owner” of 1200 BTC at effectively zero cost compared to market prices.
1. Hacker get access to compromised account w/ 1200BTC but can't withdraw
2. Hacker puts his own limit $100 buy orders on illiquid pair BTC/CAD
3. Back to compromised account he dumps the 1200BTC on BTC/CAD to himself
— Beetcoin [LNP/BP] (@Beetcoin) June 2, 2019
If this theory is true, it isn’t clear how the hacker managed to bypass KYC and Kraken’s withdraw checks, but it does somewhat make sense.
Flash Crashes Are a Recurring Issue
Regardless of this intricacies and nuances of this latest flash crash, this highlights a recurring issue not just in cryptocurrency but asset markets altogether. Ever since the introduction of high-frequency trading and algorithmic market making, markets have been vulnerable to certain occurrences.
In May 2010, what was known as the Flash Crash occurred, when the stock market plunged 10% within minutes, only to bounce back to pre-crash in the coming hour. What sounds like something you would only see in a nascent market as cryptocurrency happened on the world’s market, the Dow Jones and the Nasdaq.
A post-mortem from the Commodities Futures Trading Commission (CFTC) revealed that high-frequency, algorithmic traders led to the collapse, as there was purportedly a lack of liquidity, leading to a domino effect of sell orders.
In the cryptocurrency world, we saw Ethereum plummet to $0.1 in June 2017 from $319 on Coinbase’s GDAX (now Coinbase Pro) as a result of a “multimillion dollar” trade. This represents more than a 99.9% loss in seconds, worse than the Bitcoin crash mentioned above.
Markets, even some of the largest in the world, are still susceptible to manipulation and technological glitches. Whether these can be fixed through new technologies remains to be seen though.