Expert reveals whether cryptocurrency exchanges can “create” non-existent bitcoins to manipulate the coin’s exchange rate
One of the main advantages of Bitcoin is its fixed maximum supply. The cryptocurrency’s protocol code stipulates that no one can create more than 21 million BTC in any way, and these coins are created according to a certain schedule. However, sometimes, to manipulate the market, some cryptocurrency exchanges can still create a certain amount of “fictitious” bitcoins to sell within their system. Sergei Zhdanov, CEO of Exmo trading platform, described how such a scheme works.
How can you create bitcoins from nothing?
Zhdanov simulated the situation in which it is possible to organize a major collapse of the crypto market with the help of an offshore exchange and 10 million USDT as collateral. With this amount in theory, it is possible to buy BTC worth $100 million, Cointelegraph reported. The expert explained the principle of such a scheme in more detail in the quote below.
The exchange simply credits these funds to an account, creating bitcoins only in its system. They do not exist on the blockchain. The client or an internal team of market makers then sells these bitcoins for the equivalent of $100 million, collapsing the price of the cryptocurrency on all exchanges.
Accordingly, in this case, the scale of the impact on niche coins can be far greater than the amount of money being transacted.
Bitcoin exchange rate
There is a direct benefit from this – market makers buy the same amount of BTC at a much lower price after a price collapse and make a profit. In other words, in some “gray” exchanges, which are not properly regulated, trading volumes can be formed from such fictitious transactions, where traders are essentially selling just “air”. The price of BTC on other exchanges falls because of arbitrage – the constant reselling of bitcoins between different trading venues, which quickly evens out its value from exchange to exchange.
Zhdanov said that stronger exchange regulation policies are needed to combat such schemes, which should be as comprehensive as those for the stock market. He said offshore exchanges should be regulated in the same way as Tier 1 exchanges, i.e. the most popular ones like Binance and FTX, or transactions between regulated and offshore exchanges should be restricted. This would make the market a better place for investors of different categories, according to the executive.
Bitcoin investor
We mentioned at the beginning of the news that the maximum amount of BTC could exceed the 21 million mark. As we can see, it is possible “on paper”, i.e. with manipulative schemes with selling “fictitious” BTC inside systems of different offshore exchanges. In blockchain, however, the number of BTC will really never exceed 21 million coins.
It is important to understand that such actions are the exception to the rule rather than the other way around. Still, if the management of the exchange conducts fraud and questionable actions, they will lose the audience and the influx of coins, which will negatively affect the liquidity and further affect the situation with the users.
Another situation with crypto exchange Huobi this week caused a lot of panic among investors. It’s about the temporary loss of parity of the HUSD steiblocoin backed by the trading floor. On Thursday, the HUSD exchange rate began a precipitous decline, and within hours it had fallen as low as 82 cents. This alarmed crypto-enthusiasts, as the aftermath of the TerraUSD algorithmic stackcoin crash within the Terra project ecosystem a few months ago still lingers in memory.
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Huobi representatives said that the exchange has contacted the issuer of the stabelcoin, represented by Stable Universal Limited, and is working to restore parity. By the end of the day, HUSD had indeed risen as high as 99 cents and had already returned to the one-dollar line on Friday.
Today, the HUSD is valued at $0.992, which means that in fact the situation is back to normal. Graph of the value of the coin for a fortnight looks as follows.
HUSD rate chart for a fortnight
According to the HUSD development team, the gap in price was caused by the decision to close market maker accounts in some regions to comply with regulatory requirements. The difference in timing between banks in different regions of the world created confusion, which led to a liquidity problem and a drop in HUSD.
True, it is not yet known what the losses of Huobi customers might have been. Probably, some traders sold HUSD cheaper than dollar in the panic that token could fall to zero and therefore faced losses.
We believe that such machinations can indeed happen on cryptocurrency exchanges. However, it is important to understand that any such activities pose risks to the reputation of the platform among clients, as they will affect the situation with the value of coins, liquidity, differences compared to other platforms and, finally, possible liquidation of positions. So doing this too often is definitely not an option.
Follow developments in our cryptochat. There we will talk about other important topics from the blockchain world.
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