The Truth Behind Binance: Investigating Market Manipulations at the World’s Biggest Crypto Exchange

Binance, founded in 2017 by Canadian-Chinese entrepreneur Changpeng Zhao, has swiftly ascended to dominance in the cryptocurrency market. It carved out its apex position amidst established giants like BitMEX, Bitfinex, and Coinbase. Zhao's formula for success wasn't just about seizing the right moment or intuiting the market's pulse — it also involved skirting the edges of legal boundaries where beneficial and bending the rules when possible. This audacious strategy has fueled Binance's rapid elevation, casting a shadow over the ethical standards of business in the crypto arena.

In numerous interviews, Zhao crafts an image of benevolence, yet he has demonstrated a mastery of cunning tactics and deception akin to those outlined in ancient Chinese military manuals. At the end of 2022, he destroyed his main competitor, Sam Bankman-Fried. There's little doubt now that Zhao was behind the leak of documents to CoinDesk that led to the downfall of FTX. Fortune smiled upon Zhao in an extraordinary way, as his ex-ally’s own blunders were so severe that not even his politically influential friends, the ones he'd donated to generously, could help him out of the pit he'd dug for himself.

However, in taking down FTX, Zhao has inadvertently opened a Pandora's Box, which now threatens to unleash a multitude of challenges upon himself. It's hard to imagine that a man who's ruthless with rivals would be completely honest with customers. U.S. regulators seem to agree and have intensified their scrutiny of Binance. Their findings have been more significant than anticipated.

In this report, we aim to systematically compile and analyze all the verified information about Binance's market manipulation and the ways it may deceive its users. Relying on substantiated allegations and thorough research, we will clarify the reasons behind the losses many experience on Binance.

Changpeng Zhao and Sam Bankman-Fried During Better Times Changpeng Zhao and Sam Bankman-Fried During Better Times. Source: Trustnodes

Binance Trading Products

Before delving into the manipulation tactics, let's examine the trading products Binance offers its users — unwitting participants in deceit.

  • Spot Market: Binance's spot market allows the direct purchase and sale of digital assets at live market rates. Dominating spot market trading volumes for over five years, Binance supports an extensive array of over 350 assets across more than 1,200 trading pairs.
  • Futures: The Binance Futures platform allows users to trade cryptocurrencies without owning the assets. A standout feature of these futures is the option to trade with leverage — up to an astonishing 125x. Profits from futures are significant for exchanges, especially Binance, which consistently captures more than half of the liquidations on volatile market days, often totaling hundreds of millions of dollars. Crucially, these liquidations are determined by an index where Binance's own pricing plays a pivotal role — a fact that will become significant as our narrative progresses.
  • Options: Options trading on Binance lets users speculate on the future price of cryptocurrencies without actual possession. Unlike futures, options are not subject to liquidation, making them a preferred tool for professionals hedging substantial long-term positions. Binance, however, initially provided only short-term options, with durations as brief as a few minutes up to a single day, leading to criticisms that it was more of a mechanism for extracting money from retail traders rather than a legitimate trading tool. Over time, Binance expanded its options to offer more comprehensive terms, yet it still commands less than 5% of the options market share.
Aggregated Open Interest of Bitcoin Options Aggregated Open Interest of Bitcoin Options. Source: The Block

Binance - “An Opaque Web of Corporate Entities”

Many had suspected Binance of exploiting its users long before any formal accusations were made. If BitMEX operated with an affiliate that traded against its clients, what's to stop Binance from engaging in similar practices? As the sole custodian of sensitive information like stop orders and liquidation thresholds, Binance sits at the poker table with a full view of its opponents' hands.

In 2023, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) brought forth multiple charges against Binance. They described Binance as “the world’s largest centralized digital asset exchange, emerging through an opaque web of corporate entities, all of which are ultimately controlled by Zhao.”

Binance's Proprietary Trading Operations

In the CFTC lawsuit, Zhao is named as the direct or indirect owner of approximately 300 separate Binance accounts, in addition to Merit Peak Limited and Sigma Chain AG corporate accounts, which engage in proprietary trading on the platform. The issue at hand involves distinguishing between market-making activities, which provide liquidity and profit from bid-ask spreads, and proprietary trading, where a company trades for its own gain alongside its clients, leveraging market volatility.

The inherent risk of proprietary trading, potentially leading to a complete loss of assets, led to the implementation of stringent regulations post-2008 crisis to curb such practices in banking. The notorious collapse of Sam Bankman-Fried’s crypto empire, due to proprietary trading of Alameda Research and misuse of FTX client funds, is also a relevant example.

Another problem with Binance’s operations lies in transparency. While Alameda Research's existence was public, Binance’s trading activities remained hidden, only coming to light through U.S. regulatory allegations. This lack of transparency raises questions about the integrity of Binance's operations and the potential conflict of interest with its users' trust.

“Binance does not disclose to its customers that Binance is trading in its own markets in its Terms of Use or elsewhere, consistent with its apparent attempt to keep its proprietary trading activity on its own markets top secret,” notes the CFTC.

Options Trading

Binance has occasionally been the only entity selling options on its platform. Typically, options trading involves two independent parties: a buyer and a seller. The CFTC points out that such instances actually involve Binance trading against its customers.

Insider Trading

Binance recently implemented a policy aimed at curbing insider trading, mandating compliance from its managers, employees, and agents. Yet, it has been disclosed that the 300 accounts connected to Zhao have been exempted from this policy's mandates and are not subject to the anti-fraud and manipulation surveillance systems.

Wash Trading

Crypto exchanges have a history of using wash trading to bloat trading volumes, creating an illusion of heightened market activity. The SEC found that from September 2019 to June 2022, Sigma Chain engaged in such trades on Binance.US, significantly inflating trading volume figures. Astonishingly, in the initial hours post-launch of Binance.US, trades between Sigma Chain and accounts held by Zhao or other Binance executives represented over 99% of the trading volume, which settled to 70% by the end of the day.

Though the main Binance.com platform wasn't included in this investigation, it's worth noting the pattern of Binance employing similar strategies across its various divisions. This casts a certain irony over Zhao's comments made in 2019: “CREDIBILITY is the most important asset for any exchange! If an exchange fakes their volumes, would you trust them with your funds?”

Binance Futures: A Driving Force Behind Bitcoin Market Volatility

According to a study published in the journal 'Applied Mathematical Finance' in 2022, BTC/USDT perpetual contracts on Binance Futures are the main source of Bitcoin market volatility. The authors highlight a significant asymmetry: these contracts exert a substantial impact on other trading instruments, while the reverse influence is minimal or sometimes inversely related.

This dynamic deviates starkly from traditional financial markets, where spot and futures markets typically exhibit mutual influence. The study further reveals a pattern where a surge in Binance Futures trading volume tends to precede an uptick in Bitcoin volatility within the subsequent five minutes. This raises a pressing question: Who accumulates massive futures positions and then triggers sharp price fluctuations only to sweep retail traders out of the market?

Volatility Flows Between the Main BTC-USD Instruments Volatility Flows Between the Main BTC-USD Instruments. Source: The Role of Binance in Bitcoin Volatility Transmission

The New LIBOR?

The Bitcoin market often invites comparisons to traditional finance, and one can't help but think of the LIBOR scandal. LIBOR, the benchmark rate that once acted as the cornerstone for valuing money on the international stage and pricing derivatives worth hundreds of trillions, was rigged by a group of major banks for their own benefit. This key rate, surprisingly, was underpinned by a relatively paltry volume of actual interbank loans — merely around $500 million daily — and hinged on subjective assessments that were easily swayed by self-interest and collusion.

Post-scandal, the rate's oversight shifted to the UK's Financial Conduct Authority (FCA), and banks' submissions were embargoed for three months to prevent misuse. Yet, practices once outlawed in traditional markets are resurfacing in the realm of cryptocurrency. From Ponzi schemes reminiscent of Bernie Madoff to financial cover-ups akin to Enron, the crypto market might be setting the stage for its version of the LIBOR debacle. In the world of Bitcoin, a pivotal pricing instrument, one not even based on the actual Bitcoin but on contracts, is dominated by a single entity — raising the specter of a scandal where collusion isn't even a necessity.

CoinMarketCap - A Tool of Information Warfare

When Binance acquired CoinMarketCap in 2020, the main information aggregator of the cryptocurrency market, it sparked widespread controversy. The acquisition raised immediate conflict of interest concerns, as CoinMarketCap is responsible for listing and ranking exchange activities — a function that now falls under the umbrella of an exchange itself.

Prior to Binance's takeover, the legitimacy of CoinMarketCap's trading volume data was already under scrutiny due to suspected inflation with fake volumes. However, it's been observed that post-acquisition, the exchange rankings on CoinMarketCap appeared more credible. This is not entirely unexpected, given that Binance already tops the charts in both 'Spot' and 'Derivatives' categories with its outsized trading volumes.

But here's a strategic maneuver: Binance has the ability to influence which cryptocurrencies appear prominently on CoinMarketCap. By omitting the circulating supply of certain coins, they effectively manipulate market rankings. Given that CoinMarketCap ranks cryptocurrencies by market capitalization, which is the product of circulating supply and price, the omission of this data effectively keeps less-favored coins from rising to prominence.

This method places favored assets on the front page while pushing less prioritized ones, no matter how advanced, to the obscurity of page 20 and beyond, below tokens with a mere $5 capitalization. In contrast, other data providers like CoinGecko accurately reflect an asset's circulating supply and rank it appropriately. Yet, if Binance decides to exclude a token's circulating supply on CoinMarketCap, it remains hidden from the platform's vast audience. Unfortunately, efforts to rectify this through communication with CoinMarketCap are often futile.

Binance's Perspective

To present a complete picture, it's crucial to consider Binance's stance. The exchange has challenged the CFTC's authority in legal motions filed in July and October 2023, seeking dismissal of the lawsuit. Binance's defense primarily argues that the CFTC lacks jurisdiction over the charges brought against them. The documentation submitted, while voluminous, did not address the specific concerns raised in this publication and by the CFTC itself. A similar response was given to the SEC's allegations.

Zhao acknowledges owning two Binance accounts: one for his Binance Card and another for his cryptocurrency holdings. He justifies these accounts as necessary for converting cryptocurrency into fiat money. As for the related firms' activities, Zhao describes them as standard liquidity provision operations. This echoes BitMEX's defense, although subsequent revelations showed BitMEX was actually trading against its clients.

Patrick Hillmann, former chief strategy officer at Binance, who has since left the company along with a dozen other top executives, also made comments on the matter. He asserts that Binance has never targeted stop orders or liquidation prices unlike other exchanges, and does not engage in trading against its users, marking a “huge difference” with Alameda Research's practices. However, this analogy may not be the best fit, considering that Bankman-Fried’s team was audaciously vocal until their final moments when an $8 billion loophole was found in their accounts.