BitMEX recently suffered an attack that resulted in $1.2 billion in liquidations. Despite the significant amount of money that its users lost, data reveals that the platform is still susceptible to market manipulation.
BitMEX’s roll in the crypto derivatives market
BitMEX is one the biggest and most liquid Bitcoin and crypto-asset derivatives trading platforms around the world. Data from Skew reveals that in the last 24 hours the Seychelles domiciled exchange reported over $3 billion in BTC futures volume.
The significant amount of money traded in this platform allows it to occupy the fourth place among the largest Bitcoin futures exchanges.
While competition is fierce in the crypto derivatives market, BitMEX continues to dominate with the highest open interest in BTC futures. Open interest is considered to be the total number of outstanding derivative contracts that have not been settled.
Due to the importance that the derivatives giant, founded by Arthur Hayes, has in the cryptocurrency market, it recently was the target of a botnet attack. Samuel Reed, the chief technical officer at BitMEX, affirmed that the exchange failed victim to an attack on March 12 resulting in a 25-minute outage.
The incident sent Bitcoin down to as low as $3,700, wiping out $1,800 from its price in a single day. Data reveals that almost $1.2 billion in BTC long contracts were liquidated during the bearish impulse.
Although BitMEX said to be working on improvements to prevent bad actors from attacking the platform again, it seems like it is still vulnerable to market manipulation.
Profiting from mass liquidations
The Bitcoin BitMEX index, also known as .BXBT index, is a composite that reflects the average price of Bitcoin using volume data obtained from multiple sources. The index weights are computed via API connection from Bitstamp, Bittrex, Coinbase, Gemini, Itbit, and Kraken.
According to BitMEX, different tools are employed to identify “malformed and anomalous data,” which is disregarded.
“The index weight calculation removes constituents with insufficient trade volume… If an exchange is to lose service and no trades are printed for over 15 minutes, BitMEX services may automatically remove that constituent from the index until trading resumes.”
Even though BitMEX argues that its proprietary mechanisms help prevent market manipulation, the fact that over 52 percent of the data is pulled from Coinbase makes this claim highly doubtful. The low levels of liquidity in Coinbase Pro suggest that it only takes $2.8 million, approximately 430 BTC, to move the price of Bitcoin by 1.5 percent.
Under this premise, pumping and dumping Bitcoin in Coinbase while trading in BitMEX becomes a highly profitable strategy.
It is unknown whether anyone is currently implementing this form of market manipulation, but if so it would not be the first time that this happens.
In mid-July 2019, a trader placed a sell order on Bitstamp for 15,000 ETH. The substantial supply increase resulted in a 30 percent flash crash that pushed the price of Ethereum down to $190 within minutes.
During that time, BitMEX relied heavily on Bitstamp’s price. As a result, the dump caused an instant liquidation of over $164 million worth of long positions.
Now that over 50 percent of the price data for the .BXBT index is taken from Coinbase, a similar event could take place. Having in mind that as much as half of the BitMEX’s revenues come from liquidations, the exchange appears to be highly incentivized to liquidate its users by placing seizable orders in Coinbase.