Opinion: Crypto Market’s Fragmented And Decentralized Structure Can Make It More Vulnerable To Manipulation

Kevin Mwanza
Written by Kevin Mwanza
Bitcoin trading Bitcoin developers decentralized structure
The fragmented and decentralized structure associated with crypto markets is vulnerable to manipulation, according to a research analyst at CoinDesk. Image: Unsplash

The sudden drop of bitcoin’s price on May 17 across a number of exchanges was a good indicator of how vulnerable a fragmented and decentralized structure such as crypto markets is to manipulation, according to a research analyst at CoinDesk.

According to Galen Moore, a senior researcher at CoinDesk, the bitcoin price tumble was not random and was caused by a large bitcoin seller placing a large order well below the market, causing downward pressure on the price and triggering auto-liquidations of long positions in hundreds of millions of dollars.

Manipulation due to fragmented and decentralized structure

This kind of manipulation, Moore says, is possible because crypto markets have a shallow depth as they are fragmented among dozens of the largest exchanges.

“This situation may be worsening,” Moore wrote.

“Bitcoin’s bid-ask spreads have widened on most of the largest exchanges in 2019, indicating decreasing market depth. Exchanges that are part of price discovery infrastructure are thin enough that a large-ish order will move the price.”

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To resolve this problem, exchanges such as BitMEX have revised their bitcoin price index components while others like Deribit have promoted a different way of handling liquidation.

But Moore says that as long as deep pools of liquidity remain on shallow pools, bitcoin’s market structure will be out of balance and manipulators will have incentives to find ways around these patches.