Crypto exchanges have broken price calculations

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znh

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Disclaimer: I own some BTC, not a lot, but enough to pay for an overseas holiday (if the price does not dive while I am typing this). Not sitting on the sidelines. I am a programmer and work in the financial (investment) industry.

My biggest problem with BTC

->The price has been fluctuating wildly simply because the way exchange pricing is done is flawed.

Let me explain: Let me compare this to buying a share like NPN (Naspers)
I buy a share, there is no half, or fraction shares, you either buy a whole one or nothing. If you sell you also sell the whole thing. Now if I could buy small fractions I could manipulate the price up (or down) with small trades with rather low risk to myself(little money). You tend to see people manipulating penny stocks like this.

BTC is priced as a whole but the price is given as the last fraction that was sold. And people get to sell/buy a very small fraction, up to 8 decimals, so you are allowed to buy 1/100000000, once a sale is made that is the "new price". So with lots of little trades the price can be manipulated up or down.

The latest price should be calculated as the pro-rata average price (weighted average) of the last complete bitcoin sold.

Eg. Let us assume 4 trades in this order (if theory this could be 1000 trades, the same idea would hold)

1/10 at $5000
4/10 at $4500
4/10 at $4000
1/10 at $3500

The current exchanges will list the price as $3500 (And everyone will panic and sell accordingly)
The price should be listed as 1/10 * 5000 + 4/10 * 4500 + 4/10 * 4000 + 1/10 * $3500 = $4250 (A small fraction bought/sold should have almost no movement on the price)

Exchanges should at least have a rolling average for each complete bitcoin sold. The current model of pricing is driving the wild fluctuations, rendering the use of bitcoins useless since people would not spend it. It only serves the exchanges' greed since it leads to lots of trades (lots of panic selling). 1% of the higher amount is more money for the exchanges.



The problem explained in simple terms:
The problem is not fractional ownership, the problem is that the latest price is simply the last sold price no matter how small the fraction. Which is not true.

If a Pizza costs R80 and I slice it in 8, then proceed to sell 8 pieces, first ones at R12 each, people just want a slice and not prepared to buy the whole pizza, then some more at R8 since the got cold but cold pizza is still ok, but the last one I was planning to eat myself but my colleague offer me @R20 for it, he forgot lunch.

The exchanges would price a pizza now at R160 (R20 * 8 slices), and everyone should be paying R160 for a pizza.
Total money in my pocket = R100 (R80 base cost + R20 profit).
Tomorrow when I go to the shop, they looked at the price on the exchange and now everyone is paying R160 for a pizza.
The price should in fact be no more than R100 per pizza (Weighted average per pizza).

Soon we are all buying Pizza since it is the best way to preserve your money, but the price calculation is flawed.
 
BTC is a currency, not a share. It's based on supply/demand (but mostly due to speculation, not actual use)
 
Exchanges list the price as the highest buy offer actually, not the last price that someone sold at... At least on all the ones I've seen. That kinda invalidates your whole post :confused:
 
Archer said:
Exchanges list the price as the highest buy offer actually, not the last price that someone sold at... At least on all the ones I've seen. That kinda invalidates your whole post :confused:
Click to expand...

No, they are giving the price for 1 BTC, the highest offfer is mostly not for 1 BTC, if I want the price for 1BTC I would likely fill the first 20-50 orders. Hence me complaining about false pricing
 
The manipulations only have an effect where there is a really large gap between unfulfilled existing buy and sell orders. A quick look at the order book / depth chart is mandatory if you're looking to quick sell or buy amounts above the average transaction size.
 
znh said:
Exchanges should at least have a rolling average for each complete bitcoin sold. The current model of pricing is driving the wild fluctuations, rendering the use of bitcoins useless since people would not spend it. It only serves the exchanges' greed since it leads to lots of trades (lots of panic selling). 1% of the higher amount is more money for the exchanges.
Click to expand...

This is exactly why I think the exchanges have it set up that way. There's a huge amount of small trades driving the price up/down. I've also seen this but I thought that this is just how share trades are normally shown/done (I've never traded so I'm unfamiliar with the setup).
 
Bitcoin's daily volume averages somewhere around $2bn across hundreds of exchanges and currency pairs. I highly doubt that anyone trickling a few fractional trades is going to make any difference to the prevailing price. Sure you could bid high or offer low for 0.01 BTC but that order will be snapped up in microseconds by which time a dozen other trades would already be happening. You could manipulate prices if you had larger quantities (multiples of BTC) to burn, but then is that really any different from any other security?
 
garp said:
Bitcoin's daily volume averages somewhere around $2bn across hundreds of exchanges and currency pairs. I highly doubt that anyone trickling a few fractional trades is going to make any difference to the prevailing price. Sure you could bid high or offer low for 0.01 BTC but that order will be snapped up in microseconds by which time a dozen other trades would already be happening. You could manipulate prices if you had larger quantities (multiples of BTC) to burn, but then is that really any different from any other security?
Click to expand...

I think it is possible if you have a group of say 50 people manipulating the price on the Luno ZAR exchange. Shouldn't be too difficult to change it to extent until the price gets a bit too different from the other exchanges when people will start making use of arbitrage and thus stabilizing the price a bit.
 
SaiyanZ said:
I think it is possible if you have a group of say 50 people manipulating the price on the Luno ZAR exchange. Shouldn't be too difficult to change it to extent until the price gets a bit too different from the other exchanges when people will start making use of arbitrage and thus stabilizing the price a bit.
Click to expand...

That many people collaborating on a relatively low volume exchange, sure. But this has nothing to do with the divisibility of BTC or whether you price whole Bitcoins or not. It is theoretically possible to do this on any exchange for any type of security, whether you can trade it in fractions or not.
 
garp said:
That many people collaborating on a relatively low volume exchange, sure. But this has nothing to do with the divisibility of BTC or whether you price whole Bitcoins or not. It is theoretically possible to do this on any exchange for any type of security, whether you can trade it in fractions or not.
Click to expand...

I think with other securities there are minimum fees or trade amounts which makes it unviable to manipulate with small trades.

Does Luno and other exchanges charge a minimum transaction fee or is it a fixed 1% of the trade amount? I would think that there is no minimum charge as this would make Luno and other exchanges unviable for small purchases. eg. Buying a loaf of bread from PnP with BitCoin. You can't have a minimum transaction fee of R50 or even R5. So it should be easier to manipulate because of the low fees compared to other normal security trading.
 
SaiyanZ said:
I think with other securities there are minimum fees or trade amounts which makes it unviable to manipulate with small trades.

Does Luno and other exchanges charge a minimum transaction fee or is it a fixed 1% of the trade amount? I would think that there is no minimum charge as this would make Luno and other exchanges unviable for small purchases. eg. Buying a loaf of bread from PnP with BitCoin. You can't have a minimum transaction fee of R50 or even R5. So it should be easier to manipulate because of the low fees compared to other normal security trading.
Click to expand...

It's a flat 1% fee, though I've only been charged it on 30% of my purchases.

People could be collaborating on Luno ATM, as there are +8 bitcoins for sale at R58000, with a buy order for 6 bitcoins at R57999, making a spread of R1. If either were serious about buy or selling, they could just adjust their price by R1, so it does look someone is keeping the price elevated, at the risk of taking a hit if someone else sells 6 bitcoins.

The next sell order for >1 bitcoin is at R58500; the next buy order for >1 bitcoin is at R57786, giving a more realistic spread of R714.
 
Luno uses maker/taker fees. People with buy or sell orders don't pay those fees as they are makers, adding liquidity into the exchange.

A taker is someone who fills an order, being a buy or a sell.

This is why you see sometimes a R1 difference between buy and sell orders, because no one wants to pay the 1% fee.

IMO the fees are a bit high, but hey makers don't pay so that's not so bad.
Other exchanges charge a fee regardless, Bittrex charges 0.25% for make or take.
 
Interesting thread :)

We'll determine and display the price as an average between the spread. So the average of the highest buy order and the lowest sell order on the order book.

On our exchange the lowest the spread will ever be is 1 (So R1, 1 MYR, 1 NGN etc depending on the region). Anything posted within that spread will see orders execute immediately and be seen as a taker order.

In terms of our fees, we charge volume based fees. The more you trade the lesser fee you pay - https://luno.com/en/countries#trade-fees
 
Here's someone trying to price manipulate with 0.001 BTC trades (About R50). Marked them in yellow on the right. They could have tried to be less obvious. Looks like they failed though.

luno.jpg
 
znh said:
No, they are giving the price for 1 BTC, the highest offfer is mostly not for 1 BTC, if I want the price for 1BTC I would likely fill the first 20-50 orders. Hence me complaining about false pricing
Click to expand...
You don't know what you're talking about. The quoted price has nothing to do with the last traded price but with the bids and offers currently on the table. In the case of Luno it's an average of the two rounded upwards. Only people that put in orders can change the price. If someone suddenly panic sells it creates a large gap which is usually filled by buy orders again. This invalidates your whole argument. The price given on most sites is also a weighted average of the most popular exchanges so the last few trades can't cause panic selling.

Random717 said:
It's a flat 1% fee, though I've only been charged it on 30% of my purchases.

People could be collaborating on Luno ATM, as there are +8 bitcoins for sale at R58000, with a buy order for 6 bitcoins at R57999, making a spread of R1. If either were serious about buy or selling, they could just adjust their price by R1, so it does look someone is keeping the price elevated, at the risk of taking a hit if someone else sells 6 bitcoins.

The next sell order for >1 bitcoin is at R58500; the next buy order for >1 bitcoin is at R57786, giving a more realistic spread of R714.
Click to expand...
The reason for that is that Luno charges between 0.5 and 1% for fulfilling an order but not for putting in an order. So if they were to adjust the price they would take a hit but not if they keep it there and waited for someone else to come along. These are usually traders with small buy and sell margins so they can't afford the fee. On exchanges where the fee is charged either way it usually doesn't matter and you'll get larger spreads.

SaiyanZ said:
Here's someone trying to price manipulate with 0.001 BTC trades (About R50). Marked them in yellow on the right. They could have tried to be less obvious. Looks like they failed though.
Click to expand...
I have also seen people continually adjusting their price upwards or downwards and then starting all over again to try and push people to move. Probably automated bots doing this.
 
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