Episode #78: 📉 Market Manipulation

Ledger Resistance is Futile tells us how a giant semi-legal sell order on Bitstamp brought down the Bitcoin market–and made someone very rich

Coin Talk
Coin Talk
Jun 14, 2019 · 39 min read

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Show Notes

  • How a big sell order on Bitstamp brought Bitcoin down to earth


Ledger Cast


Aaron Lammer: Ledger. Hello?

Ledger Status: What’s up Aaron? It’s great to be back.

Aaron Lammer: I don’t even know how long it’s been. It’s been a long winter, however long it was.

Ledger Status: Yeah. I wish I would’ve gone and listened back to the last episode I was on to see if I was right about whatever I said at the time.

Aaron Lammer: Well, you said that you’ll listen to our episode from last week, me and Jay’s. Jay’s out this week, he’ll be back, but shouts to me and Jay’s predictions from last week. I believe that we called several of the things that happened over the last week.

Ledger Status: Yeah, in the first five minutes of that episode, y’all were like, “We don’t really know what’s going to happen next, but maybe this or maybe this or maybe this.” And let all of them happen.

Aaron Lammer: Yeah, I think it was 8000, like massive crash thousand dollar candle. Some combination of that pile I bet hit.

Ledger Status: Yeah. Basically you were predicting a significant amount of volatility and you didn’t know if you are going to, because I think we’re around seven something and you didn’t know if we’re going to end up at 8K something or 6K something or have some thousand dollars candle, and all three things happened and of course one of them, the huge down candle with a big wick was what we’re going to talk about a little bit today. But…

Aaron Lammer: Yeah.

Ledger Status: Yeah. I mean we’re in this point of fixing enormous [inaudible 00:02:47].

Aaron Lammer: But there’s been a big up candle too, right? Like there was also a massive up candle somewhere in there. Well since that.

Ledger Status: The big point technically that the whole market was watching was around 6400, because you would have thought it was going to be an enormous point of resistance because it was the center line of where we congregated basically this latter half of 2018, almost the whole year. So the idea was that if we get to 6400, it’s the most obvious short in the world and it’ll be really hard to get through it, and sell all your bitcoin then et cetera. And then we just drove through it like butter. I mean, it was basically like nothing. And that set up a classic short squeeze. I had been talking a little bit going into that range that, a sentiment wise, it was really setting up well for a possible short squeeze right through it, because there were a lot of people short, there were a lot of people that were afraid because they didn’t get into the market sooner, so they were like, “I’ll just wait until, we come back down from 6400.” And all these sentiment things that fit really well.

Aaron Lammer: So that’s like moving bus FOMO? Like you start saying the jet takeoff and that juices you to buy into the rally.

Ledger Status: Yeah, that and also people trying to counter it. So there’s sources on derivatives exchanges like DareBit and BitMax. If shorts have to pay for the privilege, it makes it more likely for them to get squeezed if on Bitfinex. If there are more people short than long, it makes them ripe to be squeezed on CME, the regulated exchange almost everyone was short. So like everybody was short going into that level. And typically in markets they’re not very kind to that. So I was really suspect that we’d stop at 6400, and I have predicted that we might hit 68 to 72, I felt like a crazy person saying that Aaron. So if you would have told me we would have gone to 82 to 8400 at the top, I was in full disbelief mode by the time we got above 7K. So of course we squeezed everyone. It would have been an extraordinarily hard.

Aaron Lammer: I want to pause you there. I’ll pause you there, because generally I’m like, “Ha ha ha, TA proven wrong for reasons I don’t understand.” And it’s not really being proven wrong. There was some percentage chance that it was going to keep going up there and everyone’s weighing it. But knowing that your mind was like 6800 and then it runs up to 8200, looking back, are you able to see any way to understand why that happened? Or do you have any explanation for it?

Ledger Status: Yeah. So the reason I thought 68 to 72 was because it was just the short squeeze and then you go back and settle in either just above 6400 or maybe on the longer dated like weekly or monthly chart. Maybe that ends up looking like a wick and you do range back below 6400 and we range 5 to 6K for a long time before you have a more thorough breakup. That was the, ‘this is just a short squeeze’ type of move. Where we ended up stopping was almost to the dollar. I know you guys are skeptical about TA.

Aaron Lammer: I’m not really skeptical. I’m just like, I cheer for every side. I like it when everyone wins.

Ledger Status: So on the weekly chart, the two prices that set the upper boundaries for that 2018 consolidation, the summer of 2018 just over 8200 that was where we had a weekly close, and those are really probably the most significant levels to consider. So the weekly close was at 8200 and that’s sure enough where we ended up closing exactly on the previous weekly that we just had. So that’s where we finally did stop after 6400 which was the top of the range in July. The next one, if it was to go further, which is possible, this could extend further, was 9600 and that was the weekly closed from April 2018. So you just look at those prior levels as the ones that you could run into.

Aaron Lammer: Well, I think I called my shot on the show already. Which is, I think I called 10000 by June 1st.

Ledger Status: You did. And I think that it’s possible, but I personally think it’s the less likely scenario.

Aaron Lammer: So I said that in a completely uneducated way. Just that my general ballpark like next move, so you’re saying is 9600 little continuation, maybe a few exchanges hit the 10K there as the rally dissolves. But one thing I haven’t understood very well in my ongoing crypto education and it’s going to come into play as we discuss the big crash that happened after 8200, which is, like I’m a hodler now. I just basically hodl the bitcoin I already have and the all coins already have. So really I don’t actually behave any differently based on where the market is. I’ve just in a hold, hold, hold position. What percentage of the bitcoin market is people who are either just holding or have some a prefigured position like, “I’m going to hold until I doubled my money and then sell or something?” Versus people who are doing shorting, riding it up and down, making leveraged BATs. All of these kind of, “I’m trying to profit in both directions,” kind of activities.

Ledger Status: Yeah. So I don’t actually remember the exact flow, but there’s this concept of, what’s the float for an asset? Right? So what percentage is actively being traded? And for Bitcoin it’s quite high. So of the total market cap, whatever the daily volume is, that’s the amount of bitcoin that’s being actively traded as a percentage. I would say it’s probably pretty high for bitcoin. But it depends on the time. So we have these periods where it’s compressing and the volume and the volatility is low, and then it spikes all at once. All this stuff is psychology on a chart. So like you saying, “This is what I feel.” That’s really not different than me saying, “This is what I see on a chart.” They’re the same thing. I’m just trying to read the tea leaves.

Aaron Lammer: I’m just using data and you’re using nothing. That’s what you’re saying to me.

Ledger Status: Yeah. I’m trying to make sense of that psychology via the chart.

Aaron Lammer: Via data. And I know that the data that informs your opinion, that I’m usually the most ignorant of is volume. And with this big crash that happened. So let’s just tell for people who are listening at home, we got up to what, 8200? 8400 maybe ish. And then out of nowhere there’s this massive crash that I think didn’t bottom out on some exchanges to like 64 or 6500.

Ledger Status: Yeah. It depends on the exchange. I like BitMax the best because it literally wicked right to 63, 75, 6400. Basically right to like a retest, if you will, of the area that we broke through so strongly.

Aaron Lammer: And in doing so, so explain briefly how these shorts are handled in terms of what exchanges numbers used in racking I short and how that plays into this.

Ledger Status: Yeah. So an exchange like BitMax, they have a Mark Price. So the derivative XPT that you trade on BitMax, it trades all by itself.

Aaron Lammer: What’s all this XPT stuff versus BTC stuff? Come on guys.

Ledger Status: It’s just a ticker that’s used but yeah, so it’s trading on its own. At the same time, it’s trying to make sure it doesn’t get too out of whack with the regular market, like your cash exchange type of market. So they have a Mark Price which is made up of other exchanges, average price. And right now, at the time of this shenanigan, Bitstamp and Coinbase blended, were there Mark Price. So that’s what they’re trying to peg with BitMax’s incentives.

Aaron Lammer: And they’re trying to choose some of the bigger, more liquid exchanges so that you don’t see extreme volatile.

Ledger Status: Basically the best ones they have available.

Aaron Lammer: Yeah. I mean, it’s like in Blockfolio you can set it to global average price. And I don’t know how they calculate the Blockfolio global average, but basically this price is like a prestige exchanges price.

Ledger Status: Yeah. And they’re trying to basically peg that, and the incentives that they offer for people longing or shorting are trying to make it to where it pushes the price back towards the mark. So if BitMax is way off in one direction, then they’re going to make people that are forcing it in that direction, pay for the privilege of doing it. So therefore, their longs are paying shorts or shorts are paying long. All of that is trying to convince people to get the price of BitMax back to the Mark Price. So what happens is the algorithms can be gamed if the underlying exchanges, something crazy happens. And because the volume on BitMax is higher than any of these underlying exchanges, you therefore have to spend less money on the underlying exchange to then have an outsized effect on BitMax.

Ledger Status: So what happens with the Bitstamp thing is someone put thousands of bitcoin for sale on market. So they just basically tossed it out there, and we’re like, “Hey, come get these cheap bitcoin.” Because if they wanted to sell it for the actual value of those bitcoins, they could have sold him OTC, they could’ve sold them over time. They could have done all sorts of things.

Aaron Lammer: Yeah. Can we talk about that for a second? So I think the order was 5000 bitcoin.

Ledger Status: Yeah, I saw 3200 at one point, but I think it might’ve been 5000 overall.

Aaron Lammer: Okay. So that’s even more to my point. Okay. So I’m going to do some back of the envelope math here. What is 3200 bitcoin in US dollars right now?

Ledger Status: Well, 5000 is 40 million. 3200 is around 25 million.

Aaron Lammer: Okay. Towards the called between 25 and $50 million worth of bitcoin was enough to wipe 10 or 20% of the total value of bitcoin off the board. Not using some sort of advanced algorithmic multi-pronged attack, but simply by putting a market order into Bitstamp. And basically my understanding is if you put in a 3200 bitcoin market order, and just keeps filling it, so first you’re filling it with the highest bids and then you keep filling with lower and lower bids and bitcoin just rides you down the mountain until you run out of Bitcoin to sell.

Ledger Status: Or new people come in to gobble that up.

Aaron Lammer: And is that what stopped it? That new buy bids kit people are like, “Holy Shit, you can buy really cheap bitcoin here, we’re going to start buying it.”

Ledger Status: A lot of exchanges have rules that they put in place to prevent the market from going to zero falsely. So some exchanges we will straight up stop trading. Like CME if bitcoin went down more than whatever, like 10% over a certain small period of time, it would just haul trading to allow the order books to fill back up. Because what happens is you empty them out and now there’s this gaping hole. So you’re spread becomes really large and it becomes really challenging. Bitstamp did some stuff, but basically what happened is it took several minutes to fill an order that theoretically could have been filled in seconds. So it created several minutes of market pressure because of their rules that they have in place that are systematic to try to prevent the market from going to zero, but it also helped prolong the effect of these people trying to sell bitcoin.

Aaron Lammer: Okay. So I’m going to be the dumbest detective in the room here.

Ledger Status: Yeah.

Aaron Lammer: Why did that person sell all of that bit coin and both drive down the price of bitcoin on Bitstamp and in the doing so affect the average price that was reflected on Bitmax and then does a bunch of shorts were wrecked. Sorry, a bunch of longs were wrecked.

Ledger Status: So a bunch of longs were wrecked?

Aaron Lammer: Yeah.

Ledger Status: There’s several things here that can be at play and it’s not without risk for someone that’s taking part in this. And to go ahead and get it out of the way, in my opinion, this was absolutely coordinated manipulation, but it’s not the…

Aaron Lammer: I thought you’re going to be like, “To get it out of the way, that was me who sold the bitcoins.”

Ledger Status: No, just for everyone’s safekeeping. I do not have thousands of bitcoin. All right, so let’s do the game theory of what happened. This was not without risk for whoever took part in it, but it was, to them, probably worth the risk and there’s probably very little regulatory concern for them doing it on the bitcoin market. Now if they went and did this on a much more regulated market, it might’ve been more legal trouble for them, but it’s probably not in the bitcoin market. Other than the fact that CME also uses Bitstamp as one of its index exchanges, and Bitstamp recently got a BitLicense from the state of New York. So Bitstamp may have to provide some forensics to authorities et cetera. But whoever did this was probably not within the realm of the United States regulators, long arms.

Aaron Lammer: Let me ask a question here. We’ve been hearing for years about this bitcoin ETF, and the most recent narrative about it is there can’t be a bitcoin ETF until there is market manipulation, [hijinx 00:16:56] get carteled. Is this the kind of market hijinx that would be unacceptable if there was a bitcoin ETF?

Ledger Status: Unacceptable is a strong word but it doesn’t make the case stronger, for the Bitcoin ETF. I would argue all markets are manipulated. Our own Donald Trump said stuff like, “You know the stock market, it looks like a great buy here. Like China trade talks are going really well.” That is very clear market manipulation as well because they could have talks falling apart in the market sound 2% and they’re salvaging it by saying, yeah the talks are going fine blah blah blah.

Aaron Lammer: But if I took a traditional market, okay, so the big coin market cap, and I want to talk about bitcoin and all coins later, but the bitcoin market cap is what? A 200 and some odd billion come $30 billion, something like that?

Ledger Status: No, you’re putting in another big pump in there. I think it’s around 140 billion.

Aaron Lammer: 140. Okay. No, sorry though. I think the overall market cap is too infant, so bitcoin is about 130 million. So if I took a different market for some sort of an asset that’s approximately the size of the bitcoin market, I have no idea. Can you think of an example of a 100 billion ish market?

Ledger Status: Not off the top of my head. Let’s say silver?

Aaron Lammer: Yeah, let’s say like bronze maybe. I think silver might be generous.

Ledger Status: I think bitcoin might be bigger than bronze, but…

Aaron Lammer: So if I go in the bronze market and I figure out that the price of bronze as being a mixture of several bronze exchanges and I find the most vulnerable one and put in like a mega whale, a bronze sell order that I ride down. Would that be a crime? Like would that be, what crime is that? If it was one.

Ledger Status: Yes, I think it could be a significant crime. It would be something that could put you at risk. And the legislators put out fines to participants on CMEs markets if they manipulate markets. So people get fined for a trading con futures the wrong way, or in a way that manipulates market. So yes, crime but punishable by fines probably. Typically.

Aaron Lammer: Yeah. It’s a giant air quotes crime.

Ledger Status: Yeah. And they have various rights and licenses to trade on particular places.

Aaron Lammer: It’s a penalty. It’s like yes, is pass interference a penalty? Yes. Is it a crime? Oh No, it happens all the time. And you’ll lose a few yards, you keep doing it.

Ledger Status: Right. Stuff happens, but it might not be good, but it still happens and it still happens on regular markets as well. So there may have been consequences for this if this was just like any other market. But there probably won’t be for anyone participating. Now let’s get back to why this was a good…

Aaron Lammer: Game theory.

Ledger Status: Yeah, game theory.

Aaron Lammer: Why was this a good plan?

Ledger Status: I don’t know the exact volume that day, but I’m going to reference the volume going on over the last 24 hours. So BitMax is volume over the last 24 hours was greater than $5 billion. Bitstamp was more like $110 million. So now you can take that 24 hour volume and then consider what does it take to adjust the market on Bitstamp. And by that metric, you can spend a smallish amount of money, say 25 to $50 million on Bitstamp, and affect the market in a big enough way. And because bit stamp is the underlying Mark Price peg for BitMax, you can spin that 25 to $50 million on Bitstamp and have an outsized effect on an exchange like BitMax, which has many, many times that volume traded on their exchange.

Ledger Status: So the person could have known that, “Hey, I’m going to go toss this bitcoin for sale on Bitstamp.” They’re not trying to get the best price. If they were trying to get the best price, they would have tried to sell it OTC. They would’ve sold it over time with what’s called like something like an iceberg order, where it’s just an automated hammer the market every 10 minutes or something like that.

Aaron Lammer: [inaudible 00:21:17] even more like simpleton way they could have sold that on multiple exchanges. So they weren’t riding a single order book all the way down.

Ledger Status: Yes, and your average market participant wants to trade without effecting the market because you’re creating slippage for yourself if you’re just tossing it all on one. They wanted to do what they did. So you could assume that this same participant they were on the way down, they probably were on an exchange like BitMax and saying, “I’m going to be short.” So they’re simultaneously selling their bitcoin on Bitstamp while there is in an established short position on Bitmax. And then they are using the fact that BitMax is a highly leveraged exchange and what happens there is people are over leveraged. In fact, in April, Arthur Hayes said the average participant on Bitmax was trading 22x. So they were trading 22 times the underlying equity that they were putting up. And you can trade up to a 100x on BitMax. That’s what people still talk about, right?

Aaron Lammer: Yeah.

Ledger Status: But 1x would be saying, “Okay, well I have $8000 on BitMax and therefore I’m going to go long $8000 worth.” 22x means you’re going 22x times that. What happens if it goes, say you’re 10x, if the price of bitcoin changes 10%, then you’ve actually changed 100% so if you, if it goes against you 10% you lost all your money.

Aaron Lammer: If I read you correctly, like to me it seemed illogical to spend that much money to bring down the price of bitcoin that much, because you’re like losing a lot of money on that bitcoin. However, if you make a parallel bet, say have the same amount of money but leveraged 100x, so anyone’s allowed to go 100x leverage BitMax?

Ledger Status: Yeah, but you’re going to lose your money. The people doing this did not go a 100x.

Aaron Lammer: This is like huffing pure gasoline, to be going a 100x, but I see what you’re saying. If you a steak the same amount of money in both pools and you lose money on Pool A and you gain money on pool B, the Pool B winnings are leveraged. So they’re way bigger than the pool A.

Ledger Status: Yes. If they use the same amount of money, I don’t know what someone would have used what the right calculation would be.

Aaron Lammer: None of this is an advice. In fact, it’s explicitly not advice. Don’t try this.

Ledger Status: And no one could afford this anyway, except for people that have at least that $50 million [crosstalk 00:23:52]

Aaron Lammer: If you’re listening to this podcast, you can’t afford it.

Ledger Status: Correct.

Aaron Lammer: We don’t have a single listener who has this much money.

Ledger Status: So what they would have done was they would have participated in this on both sides because they knew the amount of volume that they had to dump on Bitstamp to affect the price in the first place. So why not be short on the other exchange while your market dumping thousands of Bitcoin on Bitstamp. And then the other thing that they likely did was they had bids weigh down on BitMax. Because this was leveraged on BitMax, someone could presume, because this happens a lot, that when you dump stuff, you’re triggering a lot of liquidations and a lot of stops. And then the wicks on the derivative exchange end up longer than the wicks on most of the regular exchanges. So because the market was so over levered, you are basically forcing that exchange down further than others. They probably had bids estimating the effect that they’re dumping on Bitstamp estimating the effect that that would have on BitMax, they probably had bids all the way down in order to long on BitMax.

Ledger Status: And because BitMax is whatever I said, like 20 times the volume, they could probably fill for much, much, much more than the 25 to 50 million they dumped on Bitstamp. So they’re like triple dipping, right? Because they’re selling on Bitstamp, they’re shorting on BitMax and then after the dump they’re closing those shorts and longing on BitMax. So they are fully taking advantage of the whip saw. And because such a smaller amount of the volume is on the underlying exchanges, it makes it more ripe to participate in this manipulation. Whereas let’s say for example, it was cheaper to, or the volume was 10 times on Bitstamp what it is on BitMax, you could never have this outsized effect. Because Bitstamp would be able to absorb the weight of your dump and it wouldn’t have that outsize effect on BitMax. So this is absolutely a symptom of the derivatives exchanges being so much larger than the underlying cash markets.

Aaron Lammer: Okay. And so that kind of was, I guess brings us back to what my initial question was, so it feels to me like an event like this confirms how much the leveraged made up money traded at made up leverages can control this market? As someone who’s holding bitcoin, did this give you any pause? Like does this freak you out at all that it’s this easy to create a artificial $1000 candle? I’m putting air quotes around artificial but…

Ledger Status: No, and I would argue that it’s not artificial, it’s just immature. Bitcoin is not as mature of as say The Nasdaq or whatever you, or oil. But these things happen all the time in other markets. I don’t know if you remember, there was this famous, the rogue wave guy that was an options short seller in the oil and natural gas markets. And there was this like guaranteed trade that worked for a long time on a pair of trade between oil and natural gas. And then it just blew up in everyone’s face that was participating in it. And that was absolutely a manipulated move in a similar fashion. And what happens is once something starts unwinding, it just all falls apart, right? Like you make money, you make money, you make money, you make money for a long time and then you die. That’s what can happen sometimes in these types of scenarios.

Aaron Lammer: So in the scenario of this guy, if he had lost the bet, it would have been because he failed to bring the market down lot far enough to wreck those longs.

Ledger Status: Well in the oil market it might’ve been structured differently.

Aaron Lammer: No, no. I met this guy in our scenario on Bitstamp.

Ledger Status: Yeah.

Aaron Lammer: How would have he failed, like if you tried to shoot the moon and gotten like fallen short, what does that scenario look like?

Ledger Status: Their risk was to be selling bitcoin for under market value and not get away with it. So they don’t move the market as much as they calculated they could and therefore they didn’t get as good of a sell price.

Aaron Lammer: They’re a behavior ends up looking like a panic sell basically. They’re driving the market down and selling simultaneously.

Ledger Status: Right. But it’s probably not the biggest risk in the world because they probably bought those bitcoins sometime when it was like sub 5000. So they were still going to make us dollars on them, but they wouldn’t have gotten the best price that they could on the sale itself. And it was worth that risk I would presume, to them, and I have to reiterate, this is me speculating applying game theory.

Aaron Lammer: Look we’ve got our Reddit T-shirts on, we’re just spinning a few conspiracy theories amongst friends here. But if this person, he, she or bot, this is a pretty great robot trade actually. Like if you could program a AI to see opportunities like this across the exchanges and just pull the trigger on them, it’s a good robot. You got there.

Ledger Status: Well your robot has to have quite a heavy war chest in order to pull it off.

Aaron Lammer: Well I think robot has been like algorithmically trading in the background for like 10 years let’s say. And it just finally ready for its biggest move yet. So it makes this move and it succeeds. It gets down far enough. What do you think the payout was for the person who did this?

Ledger Status: I mean, it all depends on how, how much they were bidding on a BitMax or other exchanges.

Aaron Lammer: Let’s say they we’re equal bets, let’s say Bitstamp and BitMax had the same war chests. What do you think the upside, so we know that the downside was that they sold their bitcoin for like at the lowest, like 6500 or something like that. What do you think the upside of the positive pool money was?

Ledger Status: What was the total size of that? Let’s say $1000.

Aaron Lammer: Yeah, I think 1000. It was a couple of little moves there.

Ledger Status: Let’s say it was $1000 and let’s say that they put the same amount of bitcoin on their bids as they did on Bitstamp. So 5000 Bitcoin. Let’s say that they’re leveraged was 5x, and let’s say that they played at both directions, both short sided and long sided. So your a thousand dollar candle, times 5000 bitcoin, times 5x leverage, times twice playing it both down and up would be $50 million. So keep in mind they didn’t lose $50 million on Bitstamp. They sold $50 million worth. So there’s slippage was probably some 10% of our 50 million.

Aaron Lammer: 10 to 15 at the tops.

Ledger Status: Yeah. So maybe they spent, if you will in slippage on Bitstamp, 5 or $10 million and in this scenario would get in $1000 candle and 5000 bitcoin worth. But it was probably more than that because they would have used the liquidity on BitMax is high, so you could probably spend more money. And that would have been upwards of 50 million of profit.

Aaron Lammer: Yeah. See, this is what slightly disturbing to me about these scenarios as, so you wonder and go, “Well how did this person get 5000 bitcoin in the first place?” Well, they were probably like pulling moves like this when bitcoin was under $1000 and have like been building up a war chest, that war chest just got even bigger with this play. So now we know that this person has $50 million plus to play with to do a similar move. Like the bitcoin market gets more mature, and it takes more money to do something like this, but it seems like the people who are into manipulate the bitcoin market are richer than ever.

Ledger Status: I think there’s many people and organizations that could have done something like this. There’s more people or more organizations that have access to thousands of bitcoin than you might think. It’s not just like a couple of OG crypto people on Twitter.

Aaron Lammer: Not just the North Korean government.

Ledger Status: There are governments, there are other exchanges. If you really wanted to get into conspiracy theories.

Aaron Lammer: Woooo! I like that one.

Ledger Status: If you really wanted to get into conspiracy theories, you could say what if a Bitfinex or Binance Management were the ones that were playing shenanigans on Bitstamp and BitMax.

Aaron Lammer: Yeah, and Binance needed a little cash infusion there too.

Ledger Status: Well, I think Binance has plenty of cash. But say what they wanted to make up their $40 million deficit.

Aaron Lammer: Yeah. But you know how it is. You take an owl, you just want to pop back up hard. You’re like, “You guys I haven’t planned to get back all that money and then some.”

Ledger Status: We’re gonna get some evil mail. I am not saying it’s either.

Aaron Lammer: We already know that [Sizzy 00:33:09] listens to the show. He knew about us calling him the Zuckerberg of crypto.

Ledger Status: I’m not saying this with Sizzy. I think Sizzy in fact it would have been dis incentivized to do this. But anyway, it could be an exchange. It could be, it could be anyone with that initial whatever, $50 million, $100 million worth of capital. A lot of people have that type of money. The people that I don’t think it would have been would be people with exposure to american regulatory bodies. So because they would know, hey bit stamp has a bit license, Bitstamp wants to participate in the US, someone is KYC it over it Bitstamp to have made that move. So it was probably somebody that was at least comfortable enough to take that exposure on Bitstamp and then you could never prove it was them on any of those other exchanges. I doubt BitMax is exactly going to open up their customer information for the authorities to say that someone was on the other side of that.

Aaron Lammer: Is there like reporting out there or any block chain analysis that tries to figure out like who are these whales who are like making big moves like this? Well we ever know who sold those 5000 bitcoin?

Ledger Status: Probably not publicly. No. I mean Bitstamp executives probably have a pretty good idea at least who was the person that technically sold them because they know the account. Therefore, the state of New York and the CFTC will probably know that individual as well. If that individual is accessible, then maybe they’ll have a have an interview with those bodies. But this is all just speculation on why someone would have been incentivized to do that. Because the reality is unless someone was panic selling, they did have no reason to do it other than to participate in some kind of Shenanigan like we were talking. So that’s my theory.

Aaron Lammer: I was already going to bring up how this gives me a queasy feeling about the exchanges before you even brought up the idea of exchanges trading on other exchanges, which we know from the Quadriga case and Bitfinex and many other examples happens. We know that people are running exchanges keep money on other exchanges. It seems like the power it gives an exchange like Bitstamp, which isn’t even one of the biggest exchanges, right? Bitstamps it’s not a top five exchange, is it?

Ledger Status: They’re one of what the BitMax report would have called the 10 real exchanges in the world. There’s a difference between topics change and real exchange.

Aaron Lammer: Right. Right. Okay, good point. Well, so it gives an exchange like Bitstamp that has an ability to influence BitMax prices, the ability like they could have looked at this situation, seeing that order and been like, “Oh no, no, no, no stop, we’re stopping trading.”

Ledger Status: No, exchanges have to be really cautious. Exchanges that are like super libertarian. [crosstalk 00:36:14].

Aaron Lammer: Well No, I’m not saying that they should have done that. I’m saying that if they had an interest, like let’s say they had $50 million in longs going on BitMax leverage or something like that, we already know that people are moving money across these exchanges. So I guess I just feel like since exchanges themselves have positions, it seems crazy that one exchange can so deeply influence the outcome of those shorts and longs, which we now know are a huge part of the bitcoin market.

Ledger Status: Yeah, I would say, for exchanges they would not want to trade on their own exchange because there’s a lot of ethics issues that come into this and the legitimate exchanges. And I’m going to say, I think Bitstamp is an exchange with a great reputation and probably pretty good people at it and I have no suspicion that they participated in market manipulation on their own exchange. I think someone just tried to take advantage of Bitstamp as an underlying mechanism.

Aaron Lammer: Right, but when the Bitstamp therefore being incentivized, if they see someone trying to abuse Bitstamp as a mechanism to protect their own interest and haul trading, we’ve saw like Coinbase halted trading during the Boron.

Ledger Status: Yeah, in the heat of the moment. I think their systems took over and took the safeties that they had in place. That’s why that market order lasted several minutes instead of a few seconds because it would have crashed the price further. I have no doubt that Bitstamps engineering team has had many a meeting to figure out how could we better facilitate mass market trading like this where a whole bunch of coin goes for sale at once or whatever. But they’re not going to try to get in the middle of a market and say, “Hey, this is not how it should be. It’s wrong.” They’re not going to get in the middle of it during the fact. They’ll try to review and continuously monitor the way that they handle issues moving forward so that it’s a fair place to trade with high integrity because that’s what these exchanges want. And for whatever it’s worth, I would just throw it out a few, like I would say that’s probably true of a Bitstamp, of Coinbase, of Kraken and even Bitfinex and Binance.

Ledger Status: They want to be a place where you can trust them to do the right thing.

Aaron Lammer: I always try to disagree with Jay at least a certain amount, I would call that a generous assessment of the intentions of those exchanges. I will acknowledge that some of those exchanges, that’s true of. I will not go as far as they, all of those exchanges. I would say the bottom half of those exchanges without naming names I think are out for themselves and if they see a way to make a buck or to improve their own dominant situation. I actually think that’s the bigger thing. I don’t think it’s so much about literally making money trading. I think it’s about owning the market and owning share. I think that they’re all pretty much like ethics lists when it comes to…

Ledger Status: But they would not want to do something that’s going to hurt their customers because they rely on their customers trusting them as a place to trade because their customers are putting millions of dollars on their exchange trusting them. So manipulating your own exchange is not good. Manipulating someone else’s change.

Aaron Lammer: Don’t shit where you eat, go on someone else’s exchange?

Ledger Status: Yeah.

Aaron Lammer: Well. That’s your place into my overall theory here though that like these exchanges are betting on other exchanges and are going to be like, “Ah, can you believe these fuckers trying to like wreck our long. Let’s get them.”

Ledger Status: And more importantly I might argue that perhaps there are individuals inside of an exchange that see weaknesses in an exchange and are able to use their funds to do stuff, but this is beyond, I wanted to talk about the game theory of the act itself. Trying to speculate who’s the person that did it is beyond my ability to do so.

Aaron Lammer: I understand. I understand that these are on certain way unknowable things. Let me ask you for a prediction then.

Ledger Status: Okay.

Aaron Lammer: How mature does bitcoin need to get before this kind of stuff gets rooted out? How long are we going to be in the wild west of market manipulation? Do you think on the bitcoin markets?

Ledger Status: Probably several more years. I would say like BitMax in particular has such an outsized influence on the market and as a derivatives exchange, it’s a little dangerous for the derivatives exchange to be so much larger than any of the underlying platforms. This type of thing is much more difficult when the spot markets or the cash market exchanges are by far the dominant place to participate. So I think the derivatives markets need to be smaller than the cash markets and that requires several things. But right now for most of the world, they have chosen to use the derivatives markets to be their place of trading of choice, and as long as there’s this high leverage with this many dollars on them, then the markets are ripe for this type of shenanigan.

Aaron Lammer: Okay. Let me ask you a binary question then.

Ledger Status: Okay.

Aaron Lammer: I know we’re both bitcoin fans, we’re both rooting for Bitcoin, right? Would you rather have BitMax and highly leveraged derivative trading knowing that it’ll probably be influenced in the longer term by manipulators or a bitcoin ETF? Let’s say you can’t have both a bitcoin ETF.

Ledger Status: Bitcoin ETF.

Aaron Lammer: Yeah. Why don’t we just get rid of all this derivatives trading. It’s like clearly what’s in the way.

Ledger Status: So derivatives trading exists in all markets though. It’s not in the way. It’s just that…

Aaron Lammer: You can’t ban it. Like what happened if BitMax they got shut down?

Ledger Status: If bit Max got shut down, derivatives trading would happen in other places. That are unregulated. And eventually derivatives trading will occur like it is now on CME in places that are more typical, I guess for that type of trading. You cannot get rid of derivatives trading, gamblers and everything else, like that’s-

Aaron Lammer: Gamblers going to gamble.

Ledger Status: I mean people do that in the equity markets too. Like there’s people that trade synthetics that aren’t actually the underlying equities, but they’re trading them anyway and they’re shady gray market types of places that will always exist. What will help the bitcoin market is for a traditional place where the average Joe like you or I is willing to put our money, but it has all the same baseline features of a place like BitMax, maybe with a little more sanity on a leverage point of view. For example, what if I could go to E-trade or TD Ameritrade or Charles Schwab or like one of those big markets and what if that market was 24/7, which is a huge downfall of CME in my mind, so what if that market was 24/7 and what if they did have traditional options trading and they had leveraged, but maybe you can trade 2 to 4x, which is basically what you can do in the traditional stock market for someone with a regular low margin account.

Aaron Lammer: I love how like, “Hey how can we get rid of all this risky gambling?” And you’re like, “What if we could do this risky gambling more easily at a more reputable website?” I’m sure it’s going to come in. I mean why not?

Ledger Status: It will. It’s coming on those markets. So the question will be how do they expose their own derivatives products to those customers? I mean they do it with stocks as you know, someone can go on Robin Hood and sell options and then get margin called for tens of thousands of dollars because they had no idea what they were doing. To BitMax’s credit and any of the exchanges in the crypto market, they don’t have margin calls in the sense that you have to go deposit new money, they just liquidate your position so then you don’t owe your whole life to them. On these traditional markets you can owe the brokers lots of money. Like they can take your house if you do the wrong thing. And that’s available to retail traders. You can do it from an iPhone app with Robin Hood and that’s very dangerous.

Ledger Status: So I think that these regulations are skewed and they’re not really well built for retail in the first place. And some of the rules they do have don’t make any sense. Like in the US and the stock market, if you have less than $25000 in your account, you can’t day trade at all. But you can buy weekly options that will almost certainly go to zero. So they’ll let you lose your money really quickly. Just they have certain rules around it.

Aaron Lammer: Speaking of extreme gambling, how are you’re a Hera tokens doing?

Ledger Status: Oh, Hera has taken a hit man on the trading market.

Aaron Lammer: Oh, they’re down.

Ledger Status: Oh yeah. It went down quite a bit. I think someone that actually their hardware wallet got hacked and they market dumped some Hera and some other stuff. But hero was illiquid enough that it affected the market dramatically. But that’s okay. I’m still, I paid nothing to get my Hera and then I did very well. So I’ve done fun with my Hera. I’m a Hera hodler for what I have left, but I sold a little bit of it.

Aaron Lammer: Speaking of depressed alts, which apparently I didn’t know Hera never really had its glory days I guess where like before you could trade it. I started [inaudible 00:46:06].

Ledger Status: No, no. When we talked last time-

Aaron Lammer: There was trading, it was already trading.

Ledger Status: … It was both on IDEX and on Bittrex International. So I had a couple of listings but it’s pretty low volume.

Aaron Lammer: I’m off of Bittrex, they kicked me off because I live in New York. It’s a dirty shame.

Ledger Status: Classic.

Aaron Lammer: I had to move my coins to something called the Atomic Wallet or something and then I was like, did I just download some wallet after googling it? That’s probably a scam.

Ledger Status: You shouldn’t say that on air.

Aaron Lammer: So, okay, we had a discussion on the show I think last week or a couple of weeks ago where I was basically like we’ve been dancing around the maximalist position, bitcoin position a lot for like the last year and I think we declared 2018 the year of the bitcoin maximalist. And so my bold argument about bitcoin was basically if you look at the entire crypto market and you take the safer a Dean [Ambrusia 00:46:58] view that altcoins except bitcoin are shit coins and are going to zero, as a person who studies markets does all of that value then flow to bitcoin? Because if so, bitcoin is massively undervalued right now.

Ledger Status: I don’t know that I’d say bitcoin is massively undervalued right now. I also don’t know that I would say altcoins are done because people want to increase their bitcoin and they are lured to alts. No matter what you try to do.

Aaron Lammer: I like this take. I like that you always come, you and Kang have a certain essential similarity, which is like, “What, you think people aren’t going to gamble?”

Ledger Status: Right? I mean if you tell someone, “Hey look, this person over here, they bought one bitcoin and then they bought this alt coin called Verge or Ripple and then they had 10 bitcoin, after they were done.” That will always have a draw to people. So the problem is there are too many altcoins and there’s obviously zero barrier to entry to creating new ones. So I actually think that there’s a ticker called like Total and Total 2 on TradingView, but it’s basically the market cap of altcoins and then of altcoins plus bitcoin. You can also see these on the website. It’s like a coin market cap and there’s better ones like on chain effects. Anyway, bitcoin dominance is pretty high right now, but 2017 really created like a altcoin extravaganza, like the first couple months of 2018 actually.

Aaron Lammer: A Super Airdrop Festival, if you will.

Ledger Status: Yeah, the Super Airdrop Festival took bitcoin dominance down to like 40% and now bitcoin dominance is around 60% before that bitcoin dominance was always like 80% plus. So we could go, if we went back to like normal, we could go to bitcoin dominance getting upwards of 80%. I personally think that that probably won’t happen if for no other reason because there’s always so many altcoins and they have these supposedly supplies, but they’re so illiquid that that’s what the zombie token thing is that I’ve described before.

Aaron Lammer: Yes.

Ledger Status: So like even if the altcoin market cap is battling against bitcoin well enough and maybe it goes up and bitcoin loses some dominance. That doesn’t necessarily mean it’s going to go to your alts. Like it could go to the alt flavor of the month. And then there’s graveyards worth of altcoins that didn’t pump and all that kind of stuff. So it’s still a dangerous thing.

Aaron Lammer: I think about that with regards to my SUMO bag. Where it’s like Cryptopia has been shut down.

Ledger Status: Yeah. So it was gone man.

Aaron Lammer: Those coins are stuck on Cryptopia. SUMA is still traded on some other exchange while my coins are stuck on Cryptopia and they are counted in the overall Total 2 or whatever as part of the market cap of overall crypto. But I can assure you they’re worth zero, like their actual value is zero. So I guess that would either suggest that the overall market cap of crypto is inflated by a lot of dead token weight, or you could say that’s value that’s just waiting to accrue to the stuff at the top, which is philosophically how I’m starting to think of it. I feel pretty bullish about bitcoin right now, and I actually feel bullish about the alts that are traded on Coinbase right now. It seems to me like there’s a certain amount of the value that’s locked in the let’s say, below the 50% mark of overall market cap coins among the entire range. All of that value is starting to seem like pretty dead zombie token ish to me.

Ledger Status: Yes. And there will be stuff that 100 or 1000xs out of the grave yard. Maybe it’s something that comes back to life, maybe at some brand new token that started at zero. But for the most part when I’m looking at this, I look at bitcoin and every now and then some other coin as investments, I look at any alt coin as a trade. So it’s not that I won’t participate, but you’re going to have a hard time convincing me why I should hold it for a long time or dollar cost average in a significant way into it. Whereas with Bitcoin, of all of the cryptocurrency market, I believe in bitcoin in an investment vehicle and as a pretty darn good hedge to the end of the world, as y’all have talked about. So if all the main currencies of the world go to crap, one of the most interesting things we saw of your Reddit theories, the one that I liked a lot is the fact of fear and Chinese capital flight and unknowing what’s going to happen with the yuan and the dollar that coincided with the bitcoin move up pretty strongly.

Ledger Status: And I wonder if because of the relatively small size of bitcoin’s market cap, et Cetera, it made it lend itself well to going up in the uncertainty of those currency markets.

Aaron Lammer: You could also say that if you look at the road between now and November 2020, expect turbulence America. If you’re just like, “I track bitcoin entirely by American fear and like yeah, it’s going to be a great time for American fear over the next year.”

Ledger Status: Yeah. Between the US election, between bitcoins having, between the state of the traditional markets and the slowing economy. I think bitcoin’s a fantastic solution.

Aaron Lammer: China, Iran, North Korea, there’s tons of turbulence opportunities out there.

Ledger Status: Yeah, I think there’s a really good argument to be made for bitcoin. And it may be relative to some other currencies, like it may not be relative to the dollar. The dollar could be okay, but I mean interest rates are still negative in Europe. Like what if we have a significant recession? Like what are they going to do? Where is the market for yield in the real world?

Aaron Lammer: I generally don’t engage in Austrian school of economics on this show, but I [inaudible 00:53:17] that was, if you bought bitcoin at the high with Argentinian pesos, you are up money right now.

Ledger Status: Yeah. And people were doing that. I’ve actually talked to a couple of people from there and heard podcast [crosstalk 00:53:33].

Aaron Lammer: So we hear so much about how dangerous bitcoin is. The peso, the Argentinian peso as much more dangerous over that time period on the basis of its inflation, which increasingly makes me look outside of America, where I’m just like, I think that the narrative of bitcoin, if it ever really approaches a maximalist view is going to start with the world’s lower 50% stable currencies. Which is a lot of currencies. There’s only like a few stable currencies. Most of the currencies are not very stable.

Ledger Status: Yes. And someone that lives in a place where that’s where their primary income is made, they see the risks better than we do as Americans. So I think that we’re spoiled and if you combine a lot of those markets and some of those folks say, “You know what, for me it’s a great hedge to be in bitcoin.” If they’re putting 10% of their salary or 20% of their salary into bitcoin, holding it there and then only moving it out when they have to buy things. Like that’s enormously bullish for bitcoin. And I think that’s a real world possibility.

Aaron Lammer: I agree. Especially if you allowed people to manage their finances algorithmically. So if you were to just say adjust for inflation in the moves, always hold a certain percentage of my money in like crypto and a certain percent in say the Argentinian peso and just like let the APP create like the most opportunistic way to manage that. I mean you already see parts of the world where people are managing their bank account and cell phone minutes. So people are willing to get pretty creative and are in pretty dire situations. I don’t know what percentage of the world lives in a like bad currency inflation situation, but it wouldn’t shock me to learn that half of the world lives in a problematic currency situation.

Ledger Status: Or more other than the fact that almost any of those places, if you hand them 20 bucks instead of 20 bucks worth of whatever they have in their native currency, they’ll say, okay, I’ll take that dollar. My thing is, if bitcoin can be some form of safe haven asset for them that they have greater or some degree of trust in, in addition to their own currency. And then very important to this to me is The Lightning Network or something like it is successful, then that gives bitcoin a great opportunity to fulfill Jack Dorsey’s vision of being the money of the Internet. As an E-commerce person, the lack of fees through the lightning network, that can really transform the way people transact online. The way small transactions work, you’re solving the fee problem with bitcoin basically if The Lightning Network or something like it works.

Aaron Lammer: Which is back to the Toshi original vision, which was basically like fuck PayPal.

Ledger Status: Yes. And you’re creating a really impressive argument there, in my opinion, for being bullish bitcoin in combination with all of your turbulent thesis for the world. So yes, I’m looking at bitcoin as an investment. I am unwilling to look at that as like a thing that has a chance, but you can make an economic argument for it and then pull up something else. I don’t care what it is. I don’t care if it’s Ethereum, I don’t care if it’s Tezos, EOS, certainly not bitcoin cash or any of those things, any altcoin, it might do better than that argument for a hot minute and I might be willing to trade it for that purpose, but I don’t think I’m willing to put it together for the next year, two years, three years, and treat that as a long term investment like I’m willing to do with bitcoin.

Aaron Lammer: Okay. My last question. Ledger.

Ledger Status: All right.

Aaron Lammer: I feel like my biggest mistake during the last bull run was like doing exactly what you said, buying alongside the moving bus or I was like, “Ah, I want to put in more money in.” Which eventually led me to buy significant portions of bitcoin above $10000 which was a mistake. So this time I’m just hodling my position. I was just lucky right now, we’re sitting just under a thousand dollars bitcoin. Will you be buying bitcoin, let’s say above $10000 if it should happen, if the next jump gets us up around 10000, what’s the highest amount that you’re comfortable buying bitcoin for?

Ledger Status: If I’m buying at 10000 is because we’ve already breached 10000 and we’re consolidating back to 10000. To me right now, if we hit 9600, that level that I was talking about earlier, I will be at no corner for a bit. I’m a coiner today, around 8200 I was a no corner. I’m playing it pretty tight right now. Like we’re at the top end of the trading range and we’re due for some consolidation. Even if it doesn’t mean we go way lower, I want to be more careful about where I’m buying because the risk for a down move. We painted down there with the wick from a Bitstamp shenanigan 64 to 6800 depending on the exchange we’re looking at. We did that temporarily. I think there’s a very good chance that we revisit that territory and have some kind of consolidation, whether we’ve topped out and the 8200 weekly close was the highest will get or whether we get hyped up again and go up to that other 96, maybe 10K level. I don’t know.

Ledger Status: I have to play that on the lower timeframes, but I do think that we’ll see 6000 something bitcoin again. So I’m in a zone of caution at the moment. So the only way I would do that is if we go to like 12K and then we consolidate there.

Aaron Lammer: You’re only buying a $10000 dip situation.

Ledger Status: Correct.

Aaron Lammer: Thank you so much Ledger. Where can people find you? What are you pushing right now? What’s your number one?

Ledger Status: Just go to ledgerstatus.com, we’re putting out episodes as well. We talked about this Bitstamp thing. Basically the day it happened.

Aaron Lammer: Ledger has a podcast with a Kane Noctum. It’s great if you enjoy the kind of stuff we were just talking about except much more intelligent because I’m not there. Subscribe to the Ledger cast.

Ledger Status: Thank you.

Aaron Lammer: The podcast app you’re currently listening to.

Ledger Status: And keep listening to this because it’s still the most fun podcast in Crypto.

Aaron Lammer: Thank you. Come back soon.

Written by

The official podcast of Bitcoin crashes. Hosted by @aaronlammer and @jaycaspiankang. Mailbag/contact: hi@cointalk.show

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