On November 29th there were multiple flash crashes on Bitfinex and thus people lost millions of dollars because their stop-loss orders were executed at enormously low prices, long margin positions were liquidated with negative balances and some short positions were liquidated even though price never went that high.

Users experienced “frozen” interface, they couldn’t close positions and market orders were executed minutes later. Prices of some coins dropped 98% in one minute triggering massive cascade liquidations and then recovered back. Bitfinex denied any technical issues and stated that there were similar moves across all exchanges and that it won’t reimburse customers for their losses.

You can read in more details how many people lost their funds here.

In this article we will follow all main events after flash crashes, to understand why the war between Bitfinex and Community started and how can we stop it.

Official explanation

Shortly after crash victims started investigating an “event” in Telegram group and found out many evidences that flash crash was caused not by a normal market move, but by technical issues like server outages, bugs, poor engine implementation, not working API or presumably a “fake” order book.

There was no official announcement on website, but many people got this canned reply to their support tickets. Let’s have a look at key notes.

Yesterday we saw similar movements across multiple markets. This was not a sudden drop in a single market, but a panic across multiple markets. In a situation like this, we have to liquidate positions.

There was indeed a panic sale across multiple markets, but most investors and analysts were ready for it.

But among all big exchanges with margin trade and stop-loss features, only Bitfinex had multiple flash crashes with 90–98% price drops, and that’s exactly why investors lost their money, so we can keep “similar movements” and “panic across multiple markets” aside.

We do have protection measures to prevent flash crashes and those were precisely why the dropping markets did not drop further than they did, all the way to near 0.

Bitfinex officially admitted that they do have protection measures against flash crashes, and according to CoinDesk they have “circuit breakers” since 2015. But Bitfinex didn’t admit that this mechanism totally failed.

(Or they think that 98% drop in price is fine, because it didn’t touch 0.)

There was no malfunction in matching trades nor with mechanisms to slow down the drops on multiple markets. Your position was liquidated as it should be.

Bitfinex denied any technical issues despite the fact that they were under a continues heavy DDoS attack for many days and users complained about “frozen” interface and withdrawal problems.

Trading is a 0-sum game. We cannot start compensating users who trade leveraged positions and see their position liquidated. If we would we would soon have every user that gets liquidated request a compensation and users would start to trade at maximum leverage all the time.

First, stop-loss orders were executed enormously low regardless of using margin trade or not, so we can keep leveraging aside. Stop-loss order is an essential risk-management tool used on most markets to minimize risks.

Bitfinex added this tool to attract more users and especially professional traders, but on Bitfinex official support page there is no information that “stop order” can lead to instant loss of 98% of your funds at any given moment due to flash crash.

Secondly, Bitfinex itself heavily benefits when customers use margin trade because it massively increases daily trading volume, fees, revenue and gives a status of world’s largest exchange which attracts thousands newbies every day who mistakenly assume that the biggest exchange is the most reliable one.

However, on Bitfinex official support page there is no information that margin trade with even smallest leverage (e.g. x1.5 instead of x3.33) can lead to instant lost of all funds at any given moment due to flash crash.

Third, it doesn’t explain how short positions were liquidated way above market price and were backdated.

Market movements like this are part of what regularly happens in cryptocurrency markets. We do what we can to offer efficiently functioning markets but if we would interfere too much with how the markets move, we would affect price discovery and we will be accused of market manipulation.

True, flash crashes happen sometimes on small exchanges, this is why people choose big exchanges with high liquidity and enabled protection measures. Also small exchanges usually don’t have margin trade or stop-losses, so people don’t lose millions during flash crashes.

And don’t forget that previous flash crash on a big exchange happened in June at GDAX and they did reimburse all victims for their losses.

The liquidation price displayed in the UI is not a guaranteed price a user will see his position liquidated at, but rather an indicative price of when a liquidation is triggered. Depending on the state of the orderbook, the liquidation order gets executed against bids or asks available in the orderbook at the time the liquidation order gets inserted. If orderbooks are thin, slippage is expected to occur.

This part is very interesting, because Bitfinex order book usually looks solid.

However, after such an instant price crash within 1 minute on multiple coins, people in Telegram group raised concerns if the order book’s depth was real or fake, sharing screens with a very low trading volume during flash crashes.

Victims also downloaded trading history CSV files and analyzed the data.

ETP fell down from $3.42 to $0.11 in just literally 2 seconds. Does it look like “similar movements across multiple markets”? How about “protection measures to prevent flash crashes”?

In the middle of a flash crash somebody bought 12,720 ETP by ~$3. Then there was a 12 seconds pause with no trades at all, and later ETP continued falling to $0.05.

Was there a 96% price gap between bid and ask? Was API working? Protection measures? Where were all arbitrage bots? I mean seriously, 12 seconds for bots it’s like 12 hours for humans.

And then after 38 seconds since flash crash began, the ETP price instantly recovered to almost the same value of $3.35. How could such a huge price gap stay for 38 seconds? And Bitfinex yet denied any technical issues.

(Previously we pointed out that TradingView didn’t have data for 75 minutes when NEO flash crash happened, which can be a proof of technical issues and API problems. Later this data appeared on TV and that opened a room for accusing us in slander. Since we cannot archive Bitfinex CSV reports, please go and download CSV trading history report for NEO, ETP, OMG for November 29. If many people will have the same data, then it will be harder to accuse us in slander.)

People also pointed out that one month ago there was an article claiming that Bitfinex displays orders from other exchanges as their own, which might potentially lead to flash crashes. And one more article claiming that Bitfinex allows wash trading to increase their daily trading volume.

If both these allegations are true, then Bitfinex’s order book depth and trading volume are not real and it’s not a world’s largest exchange at all.

We do understand that you are completely overwhelmed by what happened. And we are sorry you lost money. I wish we could bring you better news, but we cannot compensate you or any other user who sees his position liquidated in a market like we saw yesterday.

If you still think that all victims of flash crashes were newbies that over-leveraged margin positions with illiquid assets, then here is a short sum up:

There were multiple flash crashes because of technical issues and some prices lost 98% in seconds (ETP). Even a small leverage like x1.5 (instead of x3.33) will cause a liquidation of current position, or even a cascade liquidation of all other positions. You can keep margin trade aside, because people lost 90% of their money just by using stop-loss orders without any leverage. And stop loss order is an essential risk-management tool. Short positions were liquidated much higher than market price and were backdated. Users couldn’t close their positions because of serious lags and market price orders were executed minutes later. NEO is not illiquid asset, it was 12th market cap coin on a world’s largest exchange. GDAX reimbursed victims of flash crashes for their losses. Bitfinex provides tools like margin trade and stop loss orders to increase their daily trading volume, get more fees, higher revenue, and attract more users. But they failed to implement safe protection measures preventing flash crashes and instant loss of all money. Instead of reimbursement they hired lawyers to threaten all critics (read more about it below).

Media

After investigating canned replies from Bitfinex, all members of Telegram group felt being deceived and started taking actions. Some guys coordinated legal actions while others approached for media attention contacting different journalists, writing about flash crashes on social media platforms and gathering all victims together into one chat.

Originally there were two different groups:

People who were concerned about Bitfinex’s shady Tether business and wanted them to perform an audit. People who lost money in flash crashes and just wanted to be refunded.

Here Bitfinex team made a first serious strategic mistake. They have already been under a significant pressure because of DDoS attacks and Tether scandal, so they could reimburse all victims and thus gain lots of supporters on their side and save a reputation of a largest and most reliable exchange. That could buy them some time to prepare for an audit.

But they decided to leave victims without any reimbursement. That created a very dangerous situation, because two very different groups of people started gathering together and these two forces accelerated each other.

As a result all Bitfinex’s tweets and reddit posts were filled with angry comments about flash crashes, Tether, lags, withdrawal problems, and media started writing articles.

November 30: Newsbtc (flash crash), FinanceMagnates (flash crash)

December 1: Bitfinexed (Tether), DavidGerard (Tether & bad PR)

December 2: BusinessInsider (flash crash), TheMarketMogul (flash crash)

Threats

Bitfinex still had a choice to fix a conflict peacefully, but they chose another path. On December 4th, CoinDesk stated that Bitfinex has hired the law firm of Steptoe & Johnson to threaten all critics with litigations.

“To date, every claim made by these bad actors has been patently false and made simply to agitate the cryptocurrency ecosystem. As a result, Bitfinex has decided to assert all of its legal rights and remedies against this agitator and his associates.”

And this was a second serious strategic mistake by Bitfinex team, because they decided to go against the community and that never ended up good even for biggest players in crypto world (Mt.Gox, GHash.IO).

Also Bitfinex’ed (main Bitfinex’s accuser) claimed to be under a heavy spam attack since November 30.

Community strikes back

As a result it started a typical streisand effect and community exploded with even more tweets, posts, comments and articles about legal threats, Tether, flash crashes, lags, withdrawal problems, questionable trading volume and order book.

And the storm began.

Citron Research agreed to help bloggers cover legal fees.

Community started donating money to Bitfinex’ed to defend himself against Bitfinex’s lawsuit.

December 5: Bloomberg (Tether), Nasdaq (threats), Bitcoin.com (threats), CCN (threats), BitcoinMagazine (threats), DavidGerard (Tether & threats)

December 6: Cointelegraph (threats), ETHNews (Tether, CEO identity), aft (Tether), Biznews (Tether), WeLiveSecurity (DDoS)

December 7: Bitcoin.com (flash crash, leaked report)

December 8: Bitcoin.com (threats), Bitcoin.com (withdrawal issues), Reddit post with 4,500 upvotes (Tether)

December 10: Jerrybanfield (Tether), TracandTrapThem (Tether)

December 11: SeekingAlpha (Tether)

December 12: ETHNews (DDoS), HackRead (DDoS), LatestHackingNews (DDoS), SiliconAngle (DDoS), Vittogol (DDoS)

December 14: BitcoinExchangeGuide (Tether & mismanagement)

December 15: TrustNodes (warrant canary), JamesCrypto (Tether)

December 16: BeingLibertarian (very good Tether analysis), Bitcoin.com (class action lawsuit, flash crash, Ifinex)

December 17: Bitcoin.com (Tether)

December 19: Cointelegraph (invitation codes, DDoS)

December 21: TrustNodes (new accounts, Tether)

December 22: UnTether (Tether long read)

December 24: UnTether (Tether digest)

December 26: SeekingAlpha (Tether)

DDoS attacks enlarged. Users experienced “frozen” interface, bugs, market positions were executed much later.

After DDoS attacks people got negative balances even on exchange wallets and support didn’t answer for days.