Banging the Close: How Brokers are Playing with the Bitcoin Markets for Profit

By Jumpy Bitcoin, Mining, Broker, Volatility

There is a practice in the bitcoin mining industry that is affecting prices on public exchanges, impacting commerce across the entire cryptocurrency economy. This is the practice of over the counter liquidity provision. In layman's terms, this is when a broker offers large amounts of USD or other fiat for equally large amounts of bitcoin.

Bitcoin volatility
The miners need this type of service because some of them are chasing returns in terms of dollars on the original investment of the mining equipment and to cover overhead costs (like electricity and rent) which are generally calculated and paid in terms of fiat currency. When miners uncover a block, they suddenly have about 12000 worth of USD in BTC, but need to pay the bills quickly, reinvest in more equipment, and return capital to investors. In order to assure themselves of acceptable returns in terms of fiat, the miners may opt to make a futures contract with a private party with flexible quantities based on the actual production of the miners. The other party promises to pay a set number of dollars for the bitcoin whenever a block is uncovered.

So, if this is an essential product for the miners to have access to, how is it impacting the rest of the economy? The answer is a method that bankers have used to manipulate markets for nearly a century. 

It is called 'banging the close.' When a futures contract is negotiated, the price might be based on the current market price of bitcoin or might set a certain time in the future upon which the rate is based. A broker with the capacity to make these large contracts will also be holding huge amounts of bitcoin that he wishes to liquidate at opportune times. He can use these coins to manipulate the price of his future bitcoin income by overwhelming the market with sell orders at the time set forth in the contract. Thus, the miners get a lower artificial price for their hard-earned coins, which was manipulated by their counterparty.

The key to this method is that the size of the mining income tends to be huge in comparison to the order volume going through BTC/USD exchanges. Over time, the number of coins in the economy might serve to dilute the power of individual brokers, but they are able to turn a pretty penny with these techniques for the time being. 

Banging the close contributes to one of the largest threats to bitcoin, which is its own volatility. Businesses and common investors watch bitcoin warily as it bounces up and down like a yo-yo, and this keeps many potential market participants on the sidelines. When brokers dump a lot of coins at once to manipulate prices, the market corrects itself creating either an elastic bounce back or scares people into a sell-off. Either way, it contributes to the overall volatility of bitcoin. As businesses are pricing their goods in terms of dollars and letting middlemen handle their BTC payment interfaces, it also changes the price of everyday items that a buyer might want to purchase without waiting for the market to self-correct.