After the bloodbath we can only speculate as to what caused the flight of capital out of cryptos but we will take a look at the confluence of bearish news events that could have had an impact.
CFTC investigation into bitcoin futures manipulation
The Commodity Futures Trading Commission (CFTC) has been investigating some of the major exchanges for potential manipulation of their bitcoin spot prices that feed into the building of bitcoin futures contracts.
Back in January the Chicago Mercantile Exchange (CME) requested extensive trading data on the spot price of BTC on Coinbase, Bitstamp and itBit - which feed into the pricing of their futures contracts. However, the exchanges declined to give all the details asked for, saying it was too invasive, which is why the CFTC has stepped in and issued subpoenas to the exchanges.
Such data would include trade times, canceled or unfilled orders, order sizes and the identities of the traders. However, CME approached a third-party company to calculate the bitcoin futures price, sources said. This London-based third-party also has its own cryptocurrency trading platform.
There is a fear that “spoof trading” was used to manipulate exchange spot prices, where a trader puts in a big order on one exchange to dupe others into raising their buy price and selling at this higher bid price.
Meanwhile, one of the only currencies to see green in the past 24 hours was the stablecoin Tether (USDT), which being tied to the US dollar acts as a safe haven in times of uncertainty. It remained largely flat over the weekend with a slight rise. But interestingly, sentiment for Tether shot up in the 24hrs before the floor fell out of the market, while BTC was still around $7,400. Sentiment for Tether inversely correlated for crypto prices.
More data on bitcoin whales
Chainanlysis, a blockchain research company, also published a report on “Bitcoin whales” revealing a cluster of 1,600 investors collectively hold $37.5b of the cryptocurrency, 5m bitcoins or close to a third of the 17 million currently in circulation. The report published by the Financial Times showed that 1,600 wallets contain at least 1,000 bitcoin coins each. Just under 100 wallets contained between 10,000 and 100,000 coins.
The report also shows that in November there was a 3:1 ratio of those hodling bitcoin as a long-term investment compared to those who held it short-term for trading transactions. That ratio is now almost 1:1, with 5.1m BTC being held day traders compared to 6m held by long-term investors.
The data from Chainanalysis ends on a note of caution around the potential for price manipulation due to the concentration of ownership, the communication between the whales and the existence of informal over-the-counter markets (OTC).
The drop-off in trading volume has also coincided with the fall in BTC price, dropping from $4b in December to $1b now. Philip Gradwell, the chief economist at Chainalysis, believes this sudden rise in liquidity has been a “fundamental driver” behind Bitcoin’s recent decline in price.
“Cyber intrusion” of Korean exchange Coinrail
To compound matters, on Sunday a small Korean exchange flagged that there had been a “cyber intrusion” —euphemism for a hack—on its system.
According to reports, the exchange lost $40m worth of altcoins: $19.5m-worth of NPXS, tokens issued by payment project Pundi X’s ICO; $13.8m from Aston X; $5.8m in tokens for Dent; and $1.1m for Tron, a much hyped project from China, along with smaller volumes of five other coins.
Coinrail has stated that it has removed the remainder of its assets offline - 70 percent of its total holdings. In a statement, the exchange said that it has frozen two-thirds of the assets stolen and some tokens will be burnt to render them useless to the thieves.
Although this was cited as a factor for the drop in bitcoin’s price it is very unlikely such an obscure exchange would have such a disproportionate effect.