Blatant Market Manipulation Highlights the Need for Provably Fair Exchanges

Another week in crypto, another accusation of market manipulation. BitMEX finds itself in the spotlight once again for potentially being the orchestrator of a flash crash on Bitstamp that sent the entire market crashing. Let’s be honest, the evidence against Arthur and his penchant for liquidating retail traders is piling up. Ever since it emerged that BitMEX actively trades against its customers you have to wonder what kind of ethics the company has in place.

Hats off to BitMEX. There’s no one who can deny BitMEX is the king of crypto futures and one of the most liquid exchanges on the market. But it’s also becoming a dictator. This Seychelles domiciled exchange working out of Hong Kong’s most expensive office space is doing something right. A lot of things actually--on June 26th, BitMEX hit a new all-time high for daily futures trading at an eye-watering $16 billion.

There are other competitors on the market and perhaps Binance will lend some additional credibility to the crypto derivatives space. Whatever your stance on Binance, it at least escaped the Bitwise report that 95% of trading volume is fake, alongside a handful of other exchange not accused of falsifying numbers, such as Coinbase Pro and Bitstamp.

Yet, despite CME, Binance, OKEx, and a handful of others, BitMEX still dominates the market. And as we’ve seen from the likes of Facebook, Google, and large financial institutions--market domination is not a good thing. It leads to people having less choice and being subjected to the practices of oligopoly companies in power.

Last Sunday 14th July, someone placed a sell order on Bitstamp for 15,000 ETH causing the price to plummet from $270 to $190 and leading to a flash crash on the exchange. Since Bitstamp is a far less liquid exchange than Binance or BitMEX, this dump made up around $3.5 million of ETH--some 15% of its entire ETH trading volume in just one trade.

You may wonder what this has to do with everyone’s favorite futures exchange. Well, it doesn’t take too long to put two and two together. You see, BitMEX pulls its price data for its contracts from just three exchanges; Kraken, Coinbase Pro, and Bitstamp.

Since BitMEX contracts are based heavily on Bitstamp’s price, this dump caused a mass of instant liquidations--over $164 million worth that spread over to Bitcoin and lead to Sunday’s plunge. Why would BitMEX do something like this? Simple. Because it makes money a lot of money out of liquidating its traders.

The BitMEX Insurance Fund builds up ad infinitum with virtually no daily drawdowns of any significance over a period of years--even during periods of high volatility. In fact, you can see that the insurance fund balance has increased 99 days out of the last 100 days.

Liquidations on BitMEX in fact, at times, account for as much as HALF of all the exchange’s revenue. Add this massive incentive to liquidate traders to the fact that the exchange has proprietary traders actively trading against its own customers for profit, and you’ve got a pretty hostile environment to trade in. Utterly cut-throat, unforgiving, and set up for traders to fail.

Whether BitMEX was behind the massive flash crash on Bitstamp last weekend or not is somewhat of a moot point. I mean, I know where I’d place my bets, but it’s not impossible that some other crypto whale or group of investors did it for other interests. Whatever the case, it comes down to centralized exchanges getting away with manipulating the market.

Of course, happenings like these in the crypto world and reports like the Bitwise one only give more ammunition to the regulators to ruin the party. Regulators who put their own multiple interests ahead of retail traders and the cryptocurrency industry. Calling on regulators to save us from the likes of BitMEX is not the answer.

Regulation, KYC, AML, for the most part, is in my opinion just one big scam. Centralized institutions and governments are fearful of cryptocurrency and try their best to keep it down. They impose exorbitant fees for supposedly preventing money laundering and crippling cryptocurrency business at the same time. And worse, most of the regulators are easily bought or have their own agenda at heart. We are adding a layer of human incompetence, corruption, and greed where none is needed. 

Exchanges like BitMEX need to be kept in check by tools that are better and more powerful than regulation. One of the distinguishing features behind Digitex Futures besides its non-custodial accounts and zero-fee trading is the fact that we will be provably fair. 

We will use blockchain technology to ensure that our order book is transparent and overseen--not by human regulators who freeze out retail traders, charge fortunes, or make their own judgment calls--but by a trustless technology, transparent for anyone to see. 

Unlike BitMEX or any other centralized exchange, we can’t be accused of front-running, last look, queue jumping, or censorship since we will keep a tight order book transparent and public. This isn’t just a good idea; this is better than regulation because it doesn’t cost extra for traders and it’s 100% transparent with blockchain technology.

Further, rather than have an incentive to liquidate traders like BitMEX, on the Digitex exchange, we will start with an insurance fund of 100 million DGTX (10% of total supply) and will maintain it at this level. 

Any excess profits from liquidations will be reallocated to our automated market makers which will be programmed to lose those profits by tightening spreads and increasing their order size. This gives traders an additional incentive to come onto the exchange and compete for these market maker losses. They can even devise strategies that exclusively target our market makers. In other words, they have a mechanical edge built into the exchange in their favor, rather than against. 

We want to create successful traders. We want more people to trade on the exchange. What we don’t want is half our profits coming from the insurance fund or to be seen orchestrating flash crashes. We also won’t be holding onto traders’ funds since they will be in non-custodial accounts and traders don’t have to trust us with their money.

Die-hard anti-crypto economists like Roubini and regulators and politicians like Trump will always use these episodes as a chance to prepare their victory dance over crypto and clamor for tighter regulation.

If they understood the technology just a little bit, they would see that there’s a better way to keep it in check. It’s provably fair and written in code. And you can’t write laws against bits and bytes.