Trust in a Trustless Network: The Case of the Bitcoin Flash Crash on May 19, 2021

Abstract

Bitcoin and other cryptocurrencies enable trustless peer-to-peer transactions. Nevertheless, many investors keep their coins on centralized crypto exchanges such as FTX. We shed light on the potential abuse of trust by analyzing the flash crash on May 19, 2021 when Bitcoin plunged by 30%. Binance experienced an outage during this crash, i.e., it halted trading for retail clients and stopped providing transaction data. We find evidence that Binance backfilled these missing transactions with data that does not conform to Benford's Law. The Bitcoin futures price difference between Binance and other exchanges was seven times larger during the crash than in a reference period. Data manipulation is a plausible explanation for our findings. These actions align with Binance aiming to limit losses for its futures-related insurance fund.

Keywords: Cryptocurrency, Bitcoin, Derivatives, Market Crash, Binance, Crypto Exchange, Trading Outage, Fraud, Extreme Volatility, Benford's Law

JEL Classification: G10, G12, G14, K22