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- Good morning all,
- I'm a professional derivatives trader for a wall street bank and I get amused/annoyed when I see people call every price move "manipulation." Actual manipulation is common in all markets, but is generally responsible for just the tiniest percentage of price moves and occurs for reasons that would surprise you.
- Most markets (including bitcoin) are driven in the short-term by imbalances between buyers and sellers. Some of these imbalances are purely coincidental. For example, maybe an early bitcoin adopter wants to buy a mansion so they decide to sell 20,000 coins. Unless there's a buyer ready that day to make a big purchase, this will send the price lower, perhaps substantially. And of course it's not about one seller or one buyer, but sometimes instead of 1000 buyers and 1000 sellers, you'll have 1300 sellers and only 700 buyers for a few days. After the price drops, people notice the lower price, think about it, and may decide to buy more. Most buyers and sellers aren't sitting in front of a computer poised to trade though, so there is a time lag. People also underestimate the "humanness" of markets. Over my career, I've occasionally misclicked on my computer screen and accidentally bought or sold 10x as much size as I intended causing the price to immediately move sharply. I've done this in japanese equities, utility options, and other markets, and most traders have made similar mistakes.
- Additionally, no one knows the "fair" value of bitcoin (or any other asset.) When the price swings from $550 to $600, it doesn't necessarily reflect new information or new opinions. It may just be "noise" occurring within the broad range that the market thinks is fair value. For example, if most bitcoiners think bitcoin is fair around $600, large amounts of money might step in to buy at $450 and large amounts to sell around $900, and any swings in between can occur on low volume.
- It's not easy to profit from manipulation. Transaction costs are substantial and it's risky; what if you sell bitcoin to force it down but a big buyer steps in immediately after? To profit, you need to be very confident that 1. You will be able to move the price substantially, and 2. You will be able to trade much larger size in the opposite direction. #1 is easy, #2 is very hard.
- So, when the price moves, first ask, "is there new information?" But most of the time, it's just unknowable randomness, aka "noise.'
- *edit: To clarify something a lot of commenters are talking about - a very common form of manipulation is the triggering of stop limit orders. It goes something like this: you think there are stop limit orders at $80 in crude oil and the current price is $80.15. So you sell crude down to $80, trigger the stop losses which push it down to $79.70, then buy back your crude. With transaction costs and slippage, you might make $0.25 (out of the $0.45 move) if all goes well. The reason I call this trivial is because the entire thing happens in a few minutes (or sometimes in hundredths of a second with algorithmic trading), and the "manipulator" is first selling then buying so the price is likely to end up around where it started. In BTC this might cause a $30 price swing since it's so thinly traded, but it wouldn't cause the price to shift long-term. It might cause a sharp spike in a chart, but has no impact after a few hours.