This article is not aimed at $P****. I just randomly picked a project with obviously abnormal data related to the secondary market, so that it is more convenient to demonstrate.
This article discusses a common strategy for manipulating spot and contract currency prices. It may be the project party's own market value management team, it may be a professional market maker, or it may be a large hot money investor with a large amount of funds. Therefore, in the following text, we will use the word that everyone prefers to use and collectively refer to it as "Zhuang".
1. Let’s write the simple process first
Image source: TechFlow
2. Phenomenon
Do you often see the following unreasonable situations on the exchange?
Phenomenon 1: On-chain and spot trading volume is low, but contract trading volume is high
Image source: TradingView
Taking $Gate as an example, the contract trading volume is about 60 times that of the spot trading volume.
Phenomenon 2: Prices are high but trading volume is gradually declining?
Image source: TradingView
The price keeps rising but the trading volume is getting smaller and the MACD is clearly diverging.
Phenomenon 3: The long-short ratio of spot and contract trading orders is completely opposite, resulting in a negative funding rate
Image source: TradingView
Image source: TradingView
The rising price has caused users to be collectively bearish, but they do not have the coins in hand, so they can only open short orders on contracts. Therefore, the spot and contract markets have completely opposite market sentiments.
The exact opposite market sentiment resulted in a funding rate of -0.66%, with settlements occurring every 8 hours, resulting in a 24-hour rate of -1.98%.
Image source: TradingView
For example, trading derivative financial products (contracts) is like buying and selling a house. I am a real estate developer, and my house mainly serves wealthy person A. A bought all the buildings in my building at once. Pricing power only exists between me and A. We are the supply and demand parties that will affect housing prices.
Although B is not the homeowner, he believes that the price of this property will fall. Therefore, B spent 1 million to make a bet with A, believing that A will definitely lose money on this investment. Then it is difficult for B to succeed, because the circulation price of the house is controlled by me and A. Only the transaction between me and A will really affect the circulation price. It is enough for me and A to negotiate the transaction price. Then B It is bound to be a loss. The bet between B and A is similar to derivative financial product transactions and will not affect the spot circulation price.
Even if B believes that the inflated house price is actually only worth 1 yuan/square meter, that is impossible to realize because his transaction is not a spot transaction, but a derivative financial product transaction. Derivative financial product transactions are based on spot prices, so those who control the spot price (A and I) can determine derivative financial product transactions to a large extent.
In the above example, the real estate developer is the project party, A is the "banker" who controls the spot circulation (may control the spot price), and B is the contract user.
This is why it is often said that naked short selling in the derivative financial product market is a very dangerous behavior.
3. Some basic contract knowledge that you must know
Knowledge point 1: What is the mark price and latest transaction price of a contract?
A contract has two prices: the latest transaction price and the mark price. When users buy and sell, the latest transaction price is generally used by default. The liquidation uses the mark price. In order to objectively reflect the price situation, the mark price is calculated through an algorithm using the latest spot transaction price of foreign exchanges.
Image source: TechFlow
Gate's contract mark price description
In other words, as long as the spot price is controlled, the mark price can be controlled, and thus whether the contract market is liquidated.
Knowledge point 2: What is the funding rate of the contract?
In order to prevent the latest transaction price of the contract from being detached from the latest transaction price of the spot, the long position user will hand it over to the short position user in the form of capital fee every 8 hours, or the short position user will hand it over to the long position user, and the latest spot price will be transferred to the long position user. The gap between the transaction price and the latest transaction price of the contract narrows.
Knowledge point 3: What is the circulating market value of a project?
The economic mechanism of a project depends on the white paper. Generally, they are divided into project parties, early investors, community airdrops, project treasury, etc. If a project’s white paper is not transparent enough, it is more likely to be manipulated. For example, although the white paper gives enough freedom to the community, it also gives enough freedom to market makers and large institutions - they can freely obtain low-price chips at low positions, and once obtained, they cannot be diluted because there is no additional issuance. Or a linear unlocking mechanism.
Image source: TechFlow
4. Small market value contract control process
Find a project with a relatively small circulating market value and open a contract on CEX: Generally, you will choose a small project with a circulating market value of 1 to 10 million U.S. dollars, and the contract leverage is generally 20 to 30 times.
Preparation of funds, funds > external circulation market value: millionaire hot money investors prefer to be the banker in small market value contracts. Take $P**** as an example, with a circulating market value of $5 million. During the long decline, if the bookmaker obtains 60% of the circulating quantity at a low price, it only needs to prepare 2 million USDT and 3 million coins in hand to fully control the spot and currency of this currency. contract price.
Image source: TradingView
Control the spot market price: as long as 3 million coins are not sold, a maximum sell order of 2 million will appear in the spot market. So as a "bookmaker" who wants to manipulate currency prices, you will need to prepare 2 million $USDT as funds to maintain the spot price. Obviously, even if all $P**** except in the hands of the "banker" are sold at the same time, the price will not fall.
Control the contract mark price: As mentioned earlier, the contract mark price is the spot price of each exchange, which means that the contract mark price does not change.
Opening a long position in a contract: After ensuring that the mark price is under control, use your own funds to open any leveraged position in the contract. If you want to be prudent, you can open a little lower, if you want to be aggressive, you can open a little higher - it doesn't matter, anyway, the mark price has been controlled, and the dealer's long position will never be liquidated.
Use funds to pull the market or use small counterparties to trade: For coins with poor depth and small market capitalization, it does not require much funds to pull 100% of the spot market in one day. If you can't pull it up, then open a small account yourself and place a high sell order at a price of +100%. After the transaction is completed, it will naturally be displayed as +100% of the price increase or decrease of the currency in the last 24 hours. After seeing this news, retail investors will pour in and start to generate a lot of short-selling demand.
Use the funding rate to make money stably: There are very few sell orders in the spot order book at this time, but there are many short sellers in the contract. This causes the spot price to be higher than the contract price, resulting in a negative funding rate. The larger the gap, the more negative the funding rate becomes, which means that even if the mark price remains unchanged, the short side will have to pay a high funding rate to the long side every 8 hours just for holding the position.
Under this game mechanism, the dealer continues to make money by relying on the funding rate. As a more extreme example, $SRM can earn 16% every 24 hours just by holding the position.
Source: Binance
Coincidentally, exchanges have recently frequently revised funding rates to help narrow the price gap between the spot market and the contract market. However, they did not find the root cause of the abnormal funding rate. Expanding the rate range will not solve this problem. Instead, it will help project parties/market makers/large institutional investors use funding rates to harvest retail investors.
Adjust LINA funding rate
Source: Binance
Adjust MTL funding rate
Source: Binance
You will also find that $LINA and $MTL were the demon coins that were pulling the market some time ago, and the contract funding rate showed a large negative number.
5. How bookmakers make profits
The first profit point: buy low and sell high on spot.
Please remember that being a banker is not a charity. The currency you buy is not gold or Bitcoin. In the end, you must make a profit through selling. The so-called pump is for subsequent dump.
The second profit point: contract funding rate.
The third profit point: Take the coins you don’t want to sell and lend them directly to the lending market. For example, Gate can be placed in Yubibao to obtain an annualized rate of return of 499%+.
Source: Binance
After reading the process, everyone can also find that the prerequisite is to control the circulation of current currency. If it is a coin with a large number of linear unlocking mechanisms, it cannot be manipulated for a long time. Each unlock changes the amount in circulation.
6. What’s the problem?
Question 1: Can the contract Open Interest (open position) exceed the spot circulation market value?
The contract only requires $USDT to open a position, while the spot requires coins to sell. The difficulty of obtaining coins to form selling pressure in the spot market is different from that of short selling in the contract market.
Returning to the third step of the third part, the user who is the banker has already withdrawn the coins into his own hands. Even if some users believe that the currency is seriously overvalued, they will not be able to form selling pressure in the spot market. At this time, the user will switch to shorting the contract. In other words, the user's trading tendency cannot be released in the spot market due to the problem of low circulation, but can only be shorted in the contract market.
Back to the marked price in part two. The marked price of the contract is the latest spot transaction price, which has been controlled by the project party/market maker/large institutional investors. Therefore, how the contract liquidates its position has also been controlled.
Therefore, when contract OI > spot circulation market value, it means that users’ transaction needs cannot be reflected in the spot price due to the scarcity of the currency. The extra contract OI will aggravate the phenomenon of spot price deviation.
Question 2: When the funding rate is abnormal, can expanding the upper and lower limits of the funding rate really promote fairness?
The current solution for exchanges is to expand funding rates, which ostensibly solves the problem of price differences between spot and contract markets, but actually expands the ability of project parties, market makers, and large institutional investors to harvest retail investors. Generally, the current funding rate range of exchanges is between [-2%, +2%]. Further expansion will actually increase the profits of the "bookmaker".
Therefore, although the existing funding rate mechanism helps the market price of derivative financial products anchor the spot market price, it does not help the trading market become fair. On the contrary, it may make the trading market become more unfair.
7. How to avoid risks as a retail investor
Note 1: Be wary of projects with small market capitalization but high leverage contracts. Giving large investors a very unequal competitive advantage over retail investors
When the user chooses to follow the spot buying and open long contracts, enough buyers have been accumulated for the project party/market maker/large institutional investors, and they can ship the goods in batches and start harvesting retail investors again.
Note 2: Projects with higher absolute value of funding rates
Note 3: The banker does not do charity, and the final cost of pulling the market is to make a profit by selling the market.
Escape early and be careful to become the dealer's taker. When the thought "This currency is a value currency and I want to hold it for a long time until the next bull market" comes to mind, it is not far from the dealer selling it. His purpose in pulling the market is to cultivate this user mentality and take over the market for himself.
Playing against the dealer in the small-capitalization contract market is like playing Texas hold'em poker with him. He is both a player and a dealer.
[Disclaimer] There are risks in the market, so investment needs to be cautious. This article does not constitute investment advice, and users should consider whether any opinions, views or conclusions contained in this article are appropriate for their particular circumstances. Invest accordingly and do so at your own risk.
This article is reproduced with permission from: "Deep Wave TechFlow"
Original author: OwenJin12