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High-frequency jump analysis confirms suspicion of bitcoin price manipulation - new article by Olivier Scaillet


The bitcoin exchange rate often exhibits extreme fluctuations. There is a pattern behind it.


The high degree of anonymity as well as pronounced data protection are key success characteristics of cryptocurrencies. At the same time, the two factors make it impossible to analyze frequently occurring and sometimes significant price jumps. This makes the bankruptcy of "Mt. Gox", at times the largest Bitcoin exchange platform, all the more significant. In 2014, customer funds were stolen to a considerable extent from this company as part of a concerted hacker attack. As a result, an important part of the internal database of "Mt. Gox" became public - including the complete trading history with the identification data of the individual market participants for the period from April 2011 to November 2013.


Detached from central banks and market makers

Bitcoin in particular has repeatedly recorded episodes of extreme volatility and obvious discontinuities in price trends. Since cryptocurrencies basically function completely detached from central banks, which could intervene if necessary, the reaction to new information, be it fundamental or speculative, leads to high volatility with sometimes extreme price swings compared to conventional currencies. In addition, the relative illiquidity of the Bitcoin market and the fact that there are no market makers lead to a great susceptibility to above-average high trading volumes. This also increases the risk of price manipulation. With this in mind, I worked with two SFI PhD students, Adrien Treccani and Christopher Trévisan, to analyze the price spikes in the Bitcoin exchange rate and to investigate whether low liquidity is a major reason for the phenomenon. The basis of our investigation was the leaked database of "Mt. Gox". Based on the available data, we were able to infer whether individual transactions were initiated by an aggressive buyer or seller as part of a unique empirical analysis. Based on 6.4 million transactions, we were able to identify 124 days on which at least one conspicuous price jump occurred - this corresponds to about one suspicious price movement per week, which is a disproportionately higher number compared to similar studies for regular large-cap stocks and indices. This suggests that the intensity of price jumps depends to a large extent on the characteristics of the relevant market - for example, its liquidity or the specifics of its participants.


"Whales" dominate price developments

Moreover, our analysis has shown that price jumps are anticipated by abnormal trading activity and liquidity conditions: The imbalance of order flows, the share of aggressive, exceptionally large traders known as "whales" in the Bitcoin market, and the bid-ask spread - a key indicator of liquidity - allow reliable predictions of upcoming price jumps. A deeper look at market conditions after a price jump also shows that most indicators have deteriorated. However, these factors return to their original levels before the price jump in less than 30 minutes. Additionally, comparing price levels before and after price jumps shows a significant persistent influence: positive (negative) jumps occur during local bearish (bullish) phases. Empirically, however, positive price movements have significantly larger bounces than negative ones. Such price jumps - possibly caused by manipulation attempts by whales - are an essential part of the price dynamics of the Bitcoin market and probably other illiquid markets as well. Fortunately, however, they are associated with several factors that investors can observe using publicly available market data. Moreover, it is likely that the market structure has changed since the period under review - particularly due to the opening of new crypto exchanges and the increase of traders in the Bitcoin market. However, there are still "whales" actively participating in the Bitcoin market today. The Bitcoin price trend is thus likely to remain extremely volatile, not to say unpredictable, in the future. Against this backdrop, investors are urged more than ever to carefully monitor market conditions before buying, as sudden market movements can have a strong negative impact on the price.


The article was published in the Finanz und Wirtschaft journal in German.

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November 14, 2021
  News and Insights