The Cover-Up Behind the Bitcoin Dump: Act Two (Binance Implosion)

Exchanges Apr 23, 2021

While all of the craziness was occurring with the markets amid rumors of a massive regulatory crackdown of several "financial institutions" in connection with "money laundering", Binance was quietly making a killing.

At their customer's expense.

Binance Derivatives

Over the past year or so, Binance has been curating and offering a steady diet of derivative markets to traders on their platform.

To get just a sense of how expansive Binance's derivative offerings are, their official 'FAQ' for their derivatives markets is published below.

Crypto Derivatives | Binance Support
Understand Binance Futures, Options and other derivatives in this module

Below are a few screenshots from the page (for those that don't feel like clicking)

Setting Up a Bull Trap Pt. 1: Lure the Bulls

This part of the report requires us to go revisit the charts for a second.

As we can see from the chart above, Bitcoin struggled to make it across this massive overhead resistance at $60k for some time (February 22nd, 2021 - April 12th/13th, 2021).

Then, suddenly, the price ripped above $60k

From a Trader's Perspective

Many that trade refer to technical analysis (in some form) to assist them in their trades.

Many technical analysis metrics are mentioned and shown visually to large audiences of people through mediums such as CNBC as well.

From any legitimate trader's perspective, those first 2-3 days where Bitcoin broke out appeared (at first) to be the beginning of another run for Bitcoin.

And if the trader is really legitimate, then they would enter into a long position right here. Why not? Bitcoin is in the midst of a raging bull run, Elon Musk recently bought in with Tesla, and many of the top analysts in the space have been calling for Bitcoin to top $100k at some point during the year.

It only makes sense that sooner or later, it would break above $60k and then head off to the races toward $70k, right?

Setting Up a Bull Trap Pt. 2: Trap the Bulls

Once the price of Bitcoin began cratering, the space started seeing the liquidation of hundreds of thousands of traders at once.

According to Forbes, $300 billion were wiped out in less than 24 hours as a result of these liquidations

source: https://www.forbes.com/sites/jonathanponciano/2021/04/18/crypto-flash-crash-wiped-out-300-billion-in-less-than-24-hours-spurring-massive-bitcoin-liquidations/?sh=60d923db2c89

The article summarizes the crash thoroughly, noting that:

"An overnight crash that started late Saturday tanked the total market capitalization of cryptocurrencies around the world by about $310 billion in less than 24 hours, shrinking th emarket from more than $2.2 trillion to less t han $1.9 trillion at around 8 a.m. Eastern..."
"Cryptocurrency liquidations during the flash crash totaled more than $10 billion, according to Bybt data, reaching their highest levels this year as the price of bitcoin tumbledmore than $10,000 below its latest high of nearly $65,000 on Wednesday." (a loss of -15% total [after consolidation]).

Quick Understanding of Futures Markets

Futures markets operate by allowing traders to buy and sell a financial product, called a "contract".

These contracts typically stipulate the terms of some future transaction between the buyer and the seller for some underlying asset.

Since these are essentially bets on what the price will be at some point in the future (or a smart way to hedge one's self financially).

Making a Long Bet Example

Let's say the price of Bitcois $50,000.

Bob thinks that Bitcoin will be at $60,000 in about a week (futures expiry).

So Bob decides to write up a contract that states he will purchase Bitcoin at $50k/per on that date from a willing counterparty.

In Bob's mind, this is an awesome way to make money because, while there may be intermittent fluctuations, Bob's exposure is limited to whatever the results are at the date of expiry (for vanilla futures' contracts).

Thus, if Bob believes that somehow some way, the price of Bitcoin will be at $60k or higher, then this is a great way for him to ensure that he'll make a ton of money from the difference in price since the counterparty has entered into a contract stipulating that they must allow the other trader purchase Bitcoin from them at the price of $50k.

Bob is considered to be in a "long" position.

Making a Short Bet Example

Alice sees the contracts that Bob has created and decides to purchase a few (to become the counterparty to the contract).

Alice thinks that Bitcoin is going to plummet in price in the near future. She supposes that Bitcoin might even bottom out at around $30k on the day of expiry.

If that happened, then Alice could be up $20k per contract!

Forbidden Fruit: Leverage

Using the above basic example, its hard to discern whether there's really any benefit to someone simply looking to enter into a long position.

Given what was introduced in the sample above, there wouldn't be any benefit for one to enter into a long position on the market vs. purchasing futures contracts that force the counterparty to sell them an asset at a given price at a future point in time (usually this is the spot price unless there's a premium / discount on the strike price vs. NAV).

Where Leverage Comes in

Imagine there did exist such a contract for Litecoin (smaller numbers, a bit easier to work with).

Let's say that the floating price for Litecoin on exchanges is about $250.

For whatever reason you believe that Charlie Lee has something up his sleeve that will revolutionalize blockchain itself, thereby pushing Litecoin to the forefront ahead of Bitcoin and all other crypto assets.

You know that you have the ability to purchase some Litecoin and just wait until that point in the future when the price has appreciated.

This would work, but you only have $1,000 and Litecoin costs $250 at that point. This means that you'll only be able to purchase four litecoins at max and time is running out (in your head).

You're also a bit bummed because, while you believe Litecoin is going to appreciate in price, you don't think it will go up exponentially (by the expiration date). You were hopeful for a price of about $325

But with only four Litecoin in-hand, that means that your overall profit would just be $300 if Litecoin appreciated (which is meager to you).

Time goes on and you do eventually see Litecoin pass the $325 price mark.

And while this is a success for you (money made), this outcome is inherently inferior to what you know others are getting. You lament your situation and think to yourself, "Man, if I were rich, I would buy like 400 litecoins all at once rather than the meager four I could afford. Then my profits would be greater than what they were by several orders of magnitude!"

Margin and Leverage

Someone hears your complaints and agrees with what you're saying as far as it being a shame that you were only able to profit from 4 Litecoins vs. 40 or 400 $LTC.

That's when they ask you if you're interested in being able to trade on margin.

What is Margin?

Margin essentially refers to the base amount of an asset that leverage is calculated & derived from. As 'babypips' accurately characterizes it, "You use margin to create leverage."

So if you only have $1,000 to spare (for the four $LTC at $250/each), someone might decide to grant you the ability to "leverage" that $1,000 for a $10,000-sized position on the market instead (10x).

You're thankful, but confused. What's in it for them?

Simple.

As the price of the underlying asset decreases by 1%, you lose 10% of your stake (in order to remain consistent with the 10x leveraged position that you've been given).

Thus, it will only take the underlying asset depreciating by 10% in the spot market before the trader is liquidated out of their position.

'Why is This Done?'

The purpose of doing this is to ensure the entity granting leverage that the total losses on the position do not exceed the trader's ability to pay (if that happens, then the market becomes insolvent).

Re-Examining Binance's Derivates Trading Setup

Now that we have a clear understanding of how futures contracts works, let's take a second to go back to Binance's website and examine their implementation of these futures markets.

Counterparty Liquidation

Below is a screenshot from Binance's website detailing the process of 'counterparty liquidation':

source: https://www.binance.com/en/support/faq/360033525471

According to Binance, 'Counterparty Liquidation is the final step taken only when the Insurance Fund cannot accept the bankrupt client's position.'

So, in essence, Binance is functioning as the clearing house for their own platform (while also being the counter-party as well).

There's another page on their website that goes into some detail about the purpose & construction of the 'Insurance Fund'.

Insurance Fund | Binance Support
The Insurance Fund is designed to use the collateral from fees on non-ba...

On their page, it states:

"The Insurance Fund is designed to use the collateral from fees and non-bankrupt clients to cover losses when the client accounts go below 0 in value. the primary purpose of the Insurance Fund is limit the occurrences of counterparty-liquidation."

Going further, Binance iterates that it will hold itself financially liable for all trades placed on their Futures' market:

"In the cases where a trader in liquidation (defined as collateral maintenance margin) has less than 0 USDT after all liquidation is otherwise unable to liquidate positions, the trader is bankrupt and Binance will need to take over remaining positions."
"In the vast majority of these cases, Binance will use the insurance fund to take the positions, and offload them onto the market slowly. The insurance fund will collect liquidation fees from clients that do not result in client bankruptcy. If the insurance fund is unable to accept positions from the liquidations, then the counterparty-liquidation will occur."

Insurance Fund Backed by USDT

As one may have guessed, this "insurance fund" is backed by USDT.

source: https://www.binance.com/en/futures/funding-history/2

At the time of writing, the insurance fund is hovering around 229M USDT total.

Binance Customers Get Liquidated En Masse

Being the primary clearing house & the counterparty for trades occurring on their platform, Binance is taking on the unique risk of insuring each and every single trader on their platform (against themselves).

Logically, this makes no sense and, as some of the links shown below from Reddit will tell us, this isn't making a ton of sense for Binance's clients either.

Traders Being Liquidated Under Suspicious Circumstances

Take a look at the following Reddit post from a Binance derivatives exchange customer that found themselves unable to physically access the platform to manage their trade, resulting in liquidation

Futures wallet got liquidated because of outage, lost 70k from binance

In the post, the user links to this press release that was published by Binance (implication here is that what happened to the trader that allegedly lost $70k+ on the platform was not an isolated incident - prompting Binance to offer a claims application process where said users would be able to make a claim and maybe receive some sort of refund).

source: https://www.binance.com/en/support/announcement/f10f171479e2478ca7663907a1ed5bcc

Some of the other replies on this thread (in Binance's subreddit) detail equally dark experiences that traders have had with Binance lately:

Keep in mind that the post above (as well as the multitude of additional users volunteering their own personal experience of being ripped off by Binance) occurred over two months ago.

Same Issues Reported During the April Crash

On April 18th, Binance issued the following tweet (during the earlier hours of the morning for those in the United States).

Scores of users ended up responding to this tweet detailing their horrific experiences using Binance's site.

Below are just a few examples:

Other Instances of Clearly Fraudulent Activity

Below is a tweet from Binance from April 20th, 2021 (very recently), detailing the return of "$BNB" (their exchange coin) withdrawals.

Apparently, there were "temporarily suspended due to a large volume increase causing a withdrawal backlog."

Here is the tweet:

What's even more curious is the fact that Binance also suspended withdrawals for several other assets at the conclusion of the market dump.

Below are the additional relevant tweets:

Fortunately for us, there was a user that responded to this thread with a screenshot showing the message that they were given by Binance at one point:

The actual photo itself is posted below (for convenience):

Binance's Actions During the Sell-Off Place Suspicion Upon Them

Since the market sell-off, there have been a slew of reports indicating that Binance (and Kraken), were the two hot-spot destinations for futures' traders (specificially short sellers, which is curious).

A recent CoinDesk article published recently titled, 'Crypto Futures Saw Record $10B Worth of Liquidations on Sunday':

Crypto Futures Saw Record $10B Worth of Liquidations on Sunday - CoinDesk
Record futures liquidations show leverage was excessively skewed bullish.

Below is a relevant excerpt the CoinDesk article about the massive sell-off over the past weekend:

Of particular note is the statement that, "Forced closure of long positions or bullish trades accounted for $9.26 billion, or over 90% of total liquidations, which shows the leverage was excessively skewed bullish across the board."

What the CoinDesk article fails to mention however, is that the very same website where they pulled that stat from also contains more granular information about what percentage of those liquidations Binance was responsible for.

That data is included below:

As one can see, Binance was responsible for approximately $5 billion out of the $10.146 billion total liquidations on April 17th, 2021 (approx. 50% of all liquidations).

Out of those $10.146 billion worth of total liquidations, $9.26 billion of them were liquidated long positions (representing 91.2%).

For Binance specifically, $4.69 billion out of their total $5 billion transactions were traders in long positions on their exchange (representing 94% of total liquidations for them).

Another Factor Contributing to Liquidations

Apart from the bull trap, made up Treasury Dep't news spooking traders, and general unavailability of Binance's platform, there was yet another factor that led to the cascading liquidations we observed in the prior section.

As stated by  the CoinDesk article covering this same phenomenon:

"Bitcoin dropped sharply, from $60,000 to $52,148 early Sunday (April 17th, 2021), dragging alternative cryptocurrencies lower. As prices started falling, margin requirements increased and exchanges liquidated longs (squared off with offsetting shorts), adding to downward pressure in the market."

While there are many times that CoinDesk has been inaccurate / dishonest in their reporting, this specific statement reveals several nuggets of truth that yield significant insight into what occurred on the markets this past weekend.

Specifically, that past sentence tells us that:

  1. The real market trouble came on Sunday morning (i.e., April 17th, 2021; this date will be important for us to remember for the next part)
  2. Margins Requirements Increased: This would , of course, lead to even more liquidations
  3. The consequence of #2 was even more increased sell pressure on the markets.
  4. Since Binance is the counterparty (with the "offsetting short"), they're the ultimate winners of every single one of these trades.

Remember what was said previously: Binance serves as their own clearing house for all of these trades on their exchange.

So all of these "counterparty liquidations", as they call them just resulted in pure profit for the exchange.

Ton of Negative Feedback About Binance Does Not Bode Well For the Space

As revealed in other investigations, Binance's finances seem to be directly attached to Huobi, OKex and Bitfinex as well.

Some evidence that this is true can be found in a Twitter thread published recently by Librehash exposing an address which had well over 1 million+ $ETH enter into it from Binance, Huobi, OKex and Bitfinex.

Thus, if there are any rumblings below the surface that Binance is not honoring basic agreements with their customers or behaving in an honest manner (i.e., honoring deposit amounts, allowing customers to withdraw from the exchange, etc.), then there may be a lot of trouble on the horizon for all four of these crypto exchanges (Huobi, OKex, Binance and Bitfinex).

Crypto Space Looks a Lot More Dangerous

In light of the facts presented above, its worth seriously questioning the legitimacy of the crypto sell-off that occurred a few days ago (April 17th, 2021).

However, in the hours and days since, several individuals have 'come out of the woodwork' to make the argument that the decline in Bitcoin's pricing and hash rate came about as a result of a large mine explosion in China.

This, too, will be debunked.

Tags

cryptomedication

Happy to serve and help wherever I'm needed in the blockchain space. #Education #EthicalContent #BringingLibretotheForefront

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