How Expensive is a Bitcoin Dump?

Between 8PM and 9PM Eastern Time on October 10, 2018, the market saw a huge drop in Bitcoin price. On Coinbase, it plummeted from $6,500 to just barely above $6,000. This approximately 7% dip recovered fairly quickly, as the price has seemed to stabilize around $6,200 on the exchange.

But this type of market movement has become very common in 2018’s bear market. This movement is characterized by a pretty large market sell (greater than 5% in a single hour — although usually it only takes a few minutes). Needless to say, they’re centralized — i.e., one person or group is initiating the sell. It isn’t a collective movement that just happens to occur together. Throughout September, we’ve seen several of these price movements — some are illustrated below:

This type of movement isn’t too surprising; the 24-hour volume of Bitcoin on October 10, 2018 was about $3.8 billion. By contrast, volume was $24 billion on January 5, 2018. With the volume of trades shrinking by 84%, the trade sizes make much bigger impact on the price of Bitcoin.

But what exactly needs to be put in, in order to make this movement? I ran a small experiment to understand what the costs are and the different scenarios. At 2:40PM Eastern Time on Coinbase Pro, I pulled the entire order book by using the Coinbase Pro API.

The Order Book Statistics

Keep in mind that these numbers aren’t representative of a trend for Bitcoin. These prices that were collected were just a snapshot at a certain point in time; order books change frequently, and I didn’t collect the data over a period of time, only once at 2:40PM on October 11th.

Side Note 1: Bids and Asks

For those of you that aren’t too familiar with Order Books, it just contains all of the orders that people make. For example, if someone puts in a bid order for Bitcoin at $5,000, that person is saying that they are committed to buying Bitcoin at $5,000. On the other hand, if someone puts in an ask order for Bitcoin at $10,000, then they’re saying that they are committing to selling Bitcoin at $10,000. Order books change all the time, as traders place new orders (bids or asks) and orders are cancelled.

Side Note 2: Percentiles

The 95TH and 75TH Percentile represent “95% or 75% of all orders are at this price or below.” For example, looking at the 95TH percentile, you could say that “95% of all bid prices range between $0.01 and $6,070.”

The Order Book Contents

I collected a total of 14,898 bid orders and 16,614 ask orders. Bidding summed up to a total of $42,123,500.44 in orders with orders as low as a penny — 655 penny orders, in fact, with most of them for about 70 Bitcoins, or $0.70 order total.

Ask orders heavily outweigh bids. With a total of $3.37 billion ($3,371,962,925.86 to be exact) in the order book for asks, 4,579.053 Bitcoins were placed for sale with prices as high as $9,999,999,999.00. In fact, only 0.160781 Bitcoin are on sale at that price, spread across four orders.

Despite the Asks containing more USD value, the total BTC value is larger for Bids simply because bid prices are much lower (recall, there were asks for almost $10 billion, which heavily inflated the price of bitcoin on the ask side). With this data, I determined just how much money had to be spent in order to push Bitcoin prices one way or another.

The Results

Keep in mind that the market price of Bitcoin was $6,214.31 at the time. The Market Price is the cheapest price you can get if you decided to buy Bitcoin at a certain point in time, and it’s dictated by the lowest ask price.

The Cost of Applying a 7% Dip

With the market price of $6,214.31, applying the 7% dip would mean that the price fell by $435.00 to a resulting market price of $5,779.31. To get to this actual price, someone would have to sell enough to fulfill 5,129 bid orders on the existing Order Book, or 34.4% of the entire existing Order Book. Fulfilling all of those orders means a total of $9,658,386.33 worth of Bitcoin to be sold. In other words, for $10 million, a person or group could theoretically drop Bitcoin prices by 7% even if only by a fraction of a second if there were no buy limit orders to resist the drop.

While the drop in Bitcoin is only 7%, remember that other cryptocurrency assets are pegged to Bitcoin prices. Therefore, by dropping the price of Bitcoin, you significantly pull down the entire market cap of cryptocurrencies. As a result, markets panic and you see sensationalized articles like this one.

You may not even need $10 million, because of a snowball effect. On the actual exchange, people have other types of orders set up as well — namely, stop loss. Once a certain price below market price is reached, stop loss orders are executed. When those orders are executed, it drives the prices down even further.

On the other hand, it may cost significantly more if buy limit orders are triggered, but unfortunately, those can’t be measured through the Order Book, just like stop loss.

As icing on the cake, market panic reacts to the heavy red candles. Manual selling frequently occurs in these events as well, because many traders begin to worry about the prices dropping even more. So the reality is, in order to drop the price by 7% or more, the executor would need at most $9,658,386.33. In actual execution, it costs significantly less due to the stop loss effects and manual selling mentioned in the previous paragraphs.

Crashing Bitcoin to a Penny

Theoretically, it is possible to crash BTC to a penny— at least, for a temporary amount of time. The reality, though, is that exchanges like Coinbase have safeguards against these types of flash crashes. But let’s pretend.

In the order book that I pulled, there were a total of 14243 orders above a penny, or 95% of orders. Those bid orders equal 69,037.26 Bitcoins. So at the time of the Order Book (2:40PM EST on October 11, 2018), someone with at least 69,037.26 Bitcoins could have moved the price down to a penny by simple executing a Market Sell.

There are at least nine individuals or groups with that much Bitcoin.Out of those nine, many are exchanges — e.g., Binance, Bittrex, and Huobi. I say at least because it’s quite common for individuals or groups to use multiple wallets for various reasons: spread risk, categorize use cases, anonymize wealth, etc.

Other Hypothetical Bitcoin Price Doomsday Scenarios:

In Conclusion

A Word of Caution

As mentioned before, my analysis was executed on an Order Book snapshot, and Order Books change constantly. Therefore, this Order Book snapshot could very well be an outlier; further study should incorporate Order Book trends over time.

Furthermore, limit orders will fight against the drop in price, but I couldn’t account for limit orders in my analysis because they just aren’t seen in the order book; after all, they aren’t triggered until the price falls below a certain threshold.

Also, at the time of my analysis, the market price was $6,214.31. Depending on general market sentiment of the price, $6,214.31 might or might not be considered a low price that can catalyze more bid orders or sell orders.

What This Data Implies

In general, this data and analysis should be a guideline to demonstrate some ways of thinking you can explore when you see future dips or increases in prices. Sensationalized articles like Crypto Market Cap Loses $17 Billion Overnight tend to mislead uninformed readers, as it sounds like $17 Billion was actually pulled out of the market.

But in reality, because all altcoin prices are essentially pegged to Bitcoin prices, a drop in Bitcoin prices will subsequently reduce the value of other coins as well, which results in the $17 Billion loss, despite the fact that $17 Billion was not actually pulled out of the market. Millions of dollars can cause billions of dollars of loss.

Questions?

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