A Step-by-step Guide on Crashing the Cryptomarket (with a Minimal Deposit and Maximal Output)

When people think of a cryptomarket, the initial thought that crosses their mind is "extremely volatile" or "unstable". While cryptomarkets are, undeniably, more volatile than most other financial instruments, it is rare to see a flash crash like this happen nowadays.

However, the sad truth is anyone sufficiently determined (and in possession of enough money) is capable of executing a crash just like the one presented in the screenshot above. In fact, not only that- the person behind the crash will easily be able to profit off this major price change.

And since anyone can do it, it is only fair that an instruction on how to accomplish this shall be public. Presenting to you, a comprehensive guide on crashing the market (and how to profit off it).

Now, it's important to understand the basics of trading before building your evil plan of crashing the market. First, let's talk about the two most common operations on the market - that is buy and sell. On derivatives market, traders exchange contracts that have some amount of coins they correspond to, like 1 BTCUSDT contract corresponds to 1 BTC. When a purchase of a contract occurs, a long position is opened, and when a sell happens, a short position is opened.

Derivatives allow traders to speculate on an asset's price without actually having any of said assets, while also using leverage to open positions that are much bigger in USD value than their accounts are worth. Leverage is a financial tool that allows you to use your assets as a collateral (say, 100 USD) to open bigger positions (say, 1000 USD at 10x leverage, or $10k USD at 100x leverage).

On Bybit, a cryptoexchange, you can configure your collateral (by default, it's just USD) to also include cryptocoins in your account. However, the way this exchange works also allows you to collaterize your unrealized P&L (profit and loss), which you'll soon learn was a big mistake on behalf of Bybit...

Now that you know unrealized profits are used as a collateral as well, you might already know the direction this post might be heading. Long story short (no pun intended!) - whenever a trader opens a short (sell) position, it pushes the price down by exhausting purchase power of buyers (people interested in opening long positions). However, a short position is considered profitable when current price is below entry price (in an essence, it means that you sold for more value than an asset is now worth), which results in some amount of unrealized PnL displayed as profit. While a position is open, the profit or loss is "unrealized", and by closing it, the profit or loss becomes "realized".

That means that by opening a big enough short position, it's possible to generate profit from just moving the price slightly down. The first idea that might come to mind of a non-experienced reader is to close the position while it's in profit to, well, realize your profits and be done with the market. However, it should be noted that closing a short position is equal to opening a long position of equal quantity of contracts, which would... you guessed it, push the price back up, resulting in a net loss.

Now, however, you know that by holding a position (without actually closing it), you have unrealized PNL which is completely fake and cannot effectively become realized profit, because closing such position would result in a loss due to an insufficient amount of people ready to sell you contracts at a desired price, ultimately leading your closure to cause a price growth (and thus lower profit, and eventually a loss).

Here comes the idea that can utilize the concept described above to nuke the market: two coordinated traders (Alice and Bob) can start opening short positions at maximum leverage, with maximum leverage serving as a way to maximize market impact given the same amount of initial asset value. When Alice opens a position, market drops a bit of price value. The same happens when Bob opens his short position. It should be noted that now Alice has a higher unrealized profit, since the price of the asset dropped after a position was opened by Bob - which allows Alice to open a new short position, which will push the price even further, allowing Bob to have higher unrealized profit- you get the idea, I hope?

In an essence, such actions allow two traders to open positions using money they don't actually have. The resulting cascade impact on the market is nearly unstoppable when executed in favourable market conditions. Now, it should be noted that at any leverage, there is a certain position size limit. However, with an army of 100 automated bots working in unison, by the time 100th bot will open a position, 1st bot will be in sufficient profit to dump the market again - thus making position size limit not a big issue.

I have concluded that with an account of any size, up to 600 times the volume can be exerted upon any low-liquidity market. So a trader with just $10m should be capable of brutally murdering basically any market out there by opening short positions worth a total of $6 billions!! (yes, that's a lot!)

It is important that bots open their initial positions at the highest price possible, so that the price dropping will yield them a lot of fake unrealized profit. To achieve that, let's look at an average orderbook depth of a cryptoasset. The orderbook depicts all purchase and sell orders for a specified coin, and allow us to see how many orders we'll have to fulfill for the asset's price to change.

We can clearly see three separate zones, all three of them are of interest to us. The first zone is closest to market price - it's the zone of most interest for both buyers and sellers, since that is where the most active trading is done. That is the first zone our automated bots will have to penetrate, building their positions around there.

The second zone is a "resistance level" - that's where huge orders are located. It is most important that a bot has enough money to penetrate this zone, otherwise the entire run is at risk of stalling (when there is no price change, there is no unrealized profit to feed into further price change).

Once the bot is past the resistance, a plateau emerges - the "forgotten by traders" zone with rare occasional orders of smaller volume... that is the sweetiest spot for our bots, because by flying/falling through this zone, minimal effort is required to push the price down. In an essence, this is the zone where we'll earn hundred times more unrealized profit that we put into our positions. Breezing through there will yield us a market crash as the price dwells into the abyss. Bingo!

It may seem like a highly useless idea to crash the market - after all, so far, we've been dealing with fake profits that don't allow us a single chance to actually benefit from this crash. In fact, at one point, even on a plateau, you'll meet resistance

Some resistances are worth penetrating through, but some should act as a sign to stop. Now that we've done the (seemingly) impossible, it's time to make some money. You should remember the concept of fake unrealized profit from earlier in this post - well, guess what, you can also use it to buy actual cryptocoins on the exchange! In an essence, it's like selling a house made out of ice in a desert - the ice is going to melt away, but not your money, yet the exchange is completely oblivious to this.

I've determined the point of maximum output to be the first resistance met on a plateau. At that point, bots should stop trying to trade, and immediately start using all of their available unrealized profit to mass buy coins. This way, we turn our fake USD coming from unrealized profit (that is collaterized for our positions), into cryptocoins that are NOT collaterized, allowing us to "realize" profit in a very unexpected and curious way that the exchange didn't account for.

Liquidation of every bot participating in the crash is inevitable - which means their positions will be forcefully closed by the exchange, and all of their collateral will be irrecoverably gone. That's just what happens when you collaterize fake profits - once the market starts recovering from your crash, there won't be a single way to stop the loss, since the amount of money you'll need to maintain a position open will be absurdly high.

However, coins we've bought were not collaterized, which leaves us with coins that are, in sum, worth much more than our initial deposit amount.

For the most recent and most successful test, I started with a balance of $1.47m (you won't need that much if you find a proper market to trade on - perhaps a max of $10k would be necessary, with proper fund management), and managed to open around $100m worth of positions at 45x leverage (despite the theoretical "limit" for 45x being $66.15m). My bot bugged out midway through and I only managed to purchase $1.57m worth of coins resulting in a profit of $100k (and a -35% market crash!), but the theoretical profit could've been ~$8m if it wasn't for code issues.

Why does it work this way? I have no idea. In fact, there are many questions than answers - so far, I've only tested it on Testnet, but the potential of this is absolutely horrifying. Can this be used to pump the market instead? Yes, of course! I suspect that's what marketmakers use on low-liquid memecoins to pump them to abnormal values of up to +150% the price growth in less than 24 hours. Can you protect against this? Well...

I currently only see several ways to mitigate it, fully or partially:
1) don't allow cross margin mode to collaterize unrealized PnL
2) don't allow unrealized PnL to be used for spot purchases (that sounds like a serious security vulnerability to me?)
3) limit the collaterization % of unrealized PnL in some way

I would love to see a successful execution of this tactic on some real market (so if you do - hit me up 😁), because so far it worked both in theory and in practice for me. It's hard to imagine the amount of damage that can be done to Bybit by just a single malicious actor with a clear idea of how to allocate their funds to run such an attack on market, so it's definitely important to work towards a possible mitigation of this opportunity altogether 🙏🤝.

Hope you enjoyed this post. More will come- eventually! 😄