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

63 Pages Posted: 28 Oct 2022 Last revised: 19 Dec 2022

See all articles by Tim Baumgartner

Tim Baumgartner

University of Ulm - Department of Mathematics and Economics

Andre Guettler

Ulm University - Department of Mathematics and Economics; Halle Institute for Economic Research

Date Written: December 18, 2022

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

Suggested Citation

Baumgartner, Tim and Guettler, Andre, Trust in a Trustless Network: The Case of the Bitcoin Flash Crash on May 19, 2021 (December 18, 2022). Available at SSRN: https://ssrn.com/abstract=4260876 or http://dx.doi.org/10.2139/ssrn.4260876

Tim Baumgartner (Contact Author)

University of Ulm - Department of Mathematics and Economics ( email )

Helmholtzstr. 22
Ulm, D-89081
Germany

Andre Guettler

Ulm University - Department of Mathematics and Economics ( email )

Helmholzstrasse
Ulm, D-89081
Germany

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

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