A Big Surge Ahead? Beware of Manipulation! | by Daii | The Capital | Feb, 2025

Currently, Bitcoin has been fluctuating around $96,000, with strong support around $95,000.

This was confirmed yesterday when Bitcoin briefly dropped below $95,000 after the US January inflation data exceeded expectations. Today, it has returned to fluctuate around $97,000, which further suggests that the $95,000 support is resilient.

Furthermore, data from Crypto Quant shows that the global Bitcoin reserves across all cryptocurrency exchanges have dropped to 2.5 million BTC (as shown in the chart below), reaching a three-year low.

Analysts believe that this change indicates a potential “supply shock” is imminent, and Bitcoin’s price will experience a significant surge.

But will this “supply shock” really push the price back up? My answer may disappoint you: Even with a “supply shock,” Bitcoin’s price could still fall.

Why is that? Because of manipulation.

A “supply shock” refers to a sharp reduction in the number of Bitcoin available for trade in the market, combined with strong demand, leading to price volatility. However, the outcome of this phenomenon is not always one-directional:

Bullish Logic: The proportion of non-liquid Bitcoin (i.e., long-term dormant BTC) has reached 73% (15.4 million BTC), while miners’ daily new output is only about 900 BTC. If institutions continue to accumulate at the current pace (e.g., daily net inflows into ETFs of 23,000 BTC), exchange reserves will be depleted within 100 days. Historical data shows that for every 1% increase in non-liquid supply, Bitcoin’s annual return rises by 3.2%. Non-liquid supply refers to Bitcoin that is long-term held or locked and cannot be traded.

Bearish Concerns: Long-Term Holders (LTHs) may become a “supply bomb.” After the 2024 halving, LTHs have already released 1.58 million BTC to the market. If they sell another 1.4 million BTC (56% of the current exchange reserves) in 2025, a liquidity crisis could turn into a sell-off. Moreover, the recent net outflow of $186 million from US spot ETFs shows that institutional funds are not immune either.

If you’re still not clear, take a look at the chart below, paying attention to the red arrows indicating the accelerated outflow.

Due to Trump’s election as president, Bitcoin has been accelerating its outflow from centralized exchanges (CEXs). From early November 2024 until now, more than 360,000 BTC has left exchanges. But do you remember how Bitcoin briefly fell below $92,000 on February 3rd?

You might be wondering, if supply and demand don’t determine Bitcoin’s price, then who sets it?

Centralized exchanges (CEXs) are the true price setters for Bitcoin. This is absurd and dangerous, but unfortunately, it’s a reality we have to accept.

In 2009, programmer Laszlo exchanged 10,000 BTC for two pizza vouchers, completing Bitcoin’s first off-chain transaction. At that time, the price was just an incidental consensus between two individuals. However, the birth of centralized exchanges (CEXs) in the following decade completely changed the game.

In 2010, the first Bitcoin exchange, Bitcoin Market, went live, and users began buying and selling Bitcoin via centralized order matching. In 2014, Mt. Gox collapsed due to a hacker attack, but it also made the market realize the necessity of liquidity concentration. By 2023, Binance alone accounted for 64% of the cryptocurrency derivatives market, and the top 10 CEXs monopolized 92.2% of the spot market’s trading volume.

The rise of CEXs is essentially a combination of capital, technology, and human demand: they aggregate decentralized buying and selling demands into massive order books and, through millisecond-level matching engines, turn price fluctuations into a unified global digital signal.

CEX’s pricing power is supported by three main factors: high liquidity, fiat gateway advantages, and market inertia.

2.1 High Liquidity: The Decisive Force Behind Price Determination

High liquidity means efficient price discovery: When a large order enters Binance’s order book, the market can quickly absorb it and form a new equilibrium price, whereas a decentralized exchange (DEX) might experience slippage of several percentage points due to insufficient liquidity pools.

2.2 Fiat Gateway: The Bridge Between Reality and Blockchain

CEXs are the first point of entry for ordinary people into the crypto world. Users can directly purchase Bitcoin via credit cards, bank transfers, and other methods, which completely depends on CEX’s centralized custody system (or over-the-counter trading). This seamless “fiat-to-crypto” conversion makes CEXs the core channel for capital inflows, giving them a massive advantage in customer acquisition.

2.3 Market Inertia: Self-Enhancing Price Signals

When DeFi protocols need to liquidate collateral or generate on-chain prices, over 90% of projects still rely on CEX’s API data. For example, lending platforms like Compound use prices from Binance or Coinbase to determine whether to trigger liquidation.

Thus, CEXs hold the pricing “privilege” in the crypto world. However, tragically, this privilege is entirely unregulated, and price manipulation becomes a foolproof business for CEXs.

CEXs manipulate prices to harvest leveraged traders — not an urban legend, but an open secret within the industry. Due to the lack of regulation, this is rarely exposed. CEXs have natural advantages in manipulating the market, as they control user funds and trading data. They are like hunters lurking in the dark, waiting to harvest those who gamble with high leverage.

Imagine a young trader named “Xiao Li” who is confident in Bitcoin’s future. After studying various technical indicators, he believes Bitcoin will soon break the $100,000 barrier. He opens a 10x leverage long position on a CEX, putting most of his savings as margin.

At first, everything goes as Xiao Li predicted: Bitcoin’s price steadily rises, and his account profits increase. He begins to dream of a bright future, thinking wealth and freedom are just around the corner.

However, the good times don’t last. One day, the CEX suddenly shows a mysterious “needle.” In just a few minutes, Bitcoin’s price plummets, crashing below Xiao Li’s liquidation threshold. When he frantically opens the trading software, he finds his long position has been forcibly liquidated, and his margin has disappeared without a trace.

Xiao Li is devastated and confused as to why the market suddenly experienced such drastic fluctuations. He wonders if he misjudged the situation or encountered a “black swan” event.

But the truth is far more brutal. He may not know that this “needle” was the result of CEX manipulating the price.

CEXs can create this “needle” in various ways. The most common and hidden method is “targeted explosions.” CEXs analyze user trading data to identify traders who are heavily leveraged. They can then manipulate the price to precisely trigger the liquidation of these traders’ positions, seizing their margin.

Pay attention to the chart below: according to Coinglass statistics, if Bitcoin’s price is driven below $93,408 again, nearly $1.5 billion worth of positions will be liquidated. These leveraged users will permanently lose their margins. If we calculate this with 25x leverage, that’s a massive $60 million.

Considering Bitcoin was once driven below $92,000 on February 3rd, falling below $94,000 again is not out of the question. The key is that CEX’s manipulation is difficult to detect because they can disguise price manipulation as normal market fluctuations.

So, how do they do it?

The operation methods of CEXs are quite simple — Wash Trading.

Wash Trading, also known as fake trading or self-dealing, refers to a situation where traders simultaneously act as both buyers and sellers on the same exchange, artificially creating trading volume and price fluctuations. The goal of this operation is to mislead other market participants into believing that a certain cryptocurrency has higher liquidity and demand, thus attracting more people to participate and eventually driving up the price or profiting from it.

Of course, more often than not, CEXs conspire with major players (market makers) to execute “wicked” price movements beyond your imagination. A recent example was the manipulation that brought Bitcoin below $92,000, a successful “tariff war” spike, which you can read about in the article: “Bitcoin Falls Below $92,000 — End of the Bull Market or Bear Trap?”

Due to the severe disruption of market order caused by Wash Trading, many countries’ and regions’ regulators have strengthened their supervision of cryptocurrency exchanges, cracking down on fake trading activities. However, centralized exchanges (CEXs) have never given up their “price manipulation” privileges. Due to a lack of effective regulation, it’s rarely caught in the act. So far, the only exchange caught red-handed was Mt. Gox.

For a detailed analysis of how Mt. Gox manipulated prices, you can refer to my article “Bitcoin’s ‘Price’ Should Not Be Taken ‘Seriously’”. Nowadays, although there is increased regulation on CEXs, essentially, they are still unregulated, and Wash Trading continues to exist. The only thing you can do is control your leverage well, so you don’t become a victim of CEX price manipulation.

I have always said that predicting the short-term rise or fall of Bitcoin’s price is no different from flipping a coin — whether predicting an increase or decrease, there is a 50% chance of being right. Today, you should understand that due to the existence of CEXs, such predictions have lost their meaning.

The game of Bitcoin’s market has long surpassed the simple supply and demand curve. With exchange reserves dropping to a three-year low, the “supply shock” narrative seemingly paves the way for a bull market, but the behind-the-scenes operations of CEXs are like the sword of Damocles hanging overhead — they can cause panic over liquidity exhaustion or, in an instant, puncture the euphoric bubble with a single “needle.”

History has repeatedly shown that the combination of centralized power and financial markets inevitably breeds hidden harvesting games. From Mt. Gox’s fake trades to today’s “targeted explosions” on exchanges, the distortion of price signals has never ceased. For ordinary investors, rather than obsessing over short-term fluctuations, it’s more important to see through the essence of this game: in the unregulated dark forest, CEXs are both the referees and the hunters.

The real risk is not the price fluctuation itself, but the collective unconsciousness regarding the monopoly over price-setting. Perhaps only when decentralized exchanges completely break CEXs’ liquidity hegemony and on-chain price discovery becomes truly independent of centralized order books, can Bitcoin truly achieve “digital gold” pricing freedom.

Before that, we should be cautious of every seemingly rational market signal, because your opponent is not anyone else, but CEXs.

In fact, controlling your desires is the key to solving all problems. I hope these two articles can help you: one is about cognition, and the other is about strategy, so you can better understand the survival knowledge of the dark forest.