Market manipulation & short squeeze problems

[jasonge27]

Anyone who trade the BME contract would want to understand how easy it is for big mining farms to manipulate the index, and what are their incentives to manipulate or not to manipulate the index.

[0xSSoul]

It is a good question. The farm could stop mining to increase the BME index. If half of the miners in the whole world stopped, BME index would double. The farm would gain from a long position of BME contract, while lose the mining reward. The net P&L depends on the amount of long position and real hashrate holded by the farm.

In the other hand, the short position holders could setup more miners to decrease the BME index. At last, short and long will reach a balance level.

However, BME contract makes it very interesting that the farm may benefit from stopping mining, which leads to a more effective and healthy mining industry.

[jasonge27]

The real players in this game are actually mining pools such as BTC.com, AntPool and NiceHash. BTC.com have ~30% of the network hash power. They can turn their mining on & off easily to manipulate the BME index value. The result is that the index maybe very volatile. This can be a problem for the short positions which makes it a less desirable hedging tool for miners.

[0xSSoul]

The mining pool like BTC.com could turn off to manipulate the BME index. But, they did so at great cost, that thay must still pay the users of pool the real BTC when turn of the hashrate，otherwise the users would change to use other pool immediately. What is more, because the BME index is the average over time and changes every 14 days, the pools need continuously off the mining to affect the index. The farer index such as BME168 averages over longer time, requiring more cost to manipulate. Last but not least, we are considering dropping the early settlement of the contract #39， which makes it is hard to benefit from manipulating the index to reach the contract index range.