Suspicious Trading Activity Leads to Nearly $1M Loss for Hyperliquid Trader

A trader behind recent questionable activity on the Hyperliquid platform may have incurred significant losses, potentially totaling almost $1 million, according to a report by Arkham Intelligence released on March 26.

The suspicious activity involved attempts to manipulate the price of the JELLY token to make a profit. Arkham Intelligence detailed how the trader opened three separate accounts in rapid succession, creating a series of high-leverage positions. Specifically, two accounts were opened with $2.15 million and $1.9 million long positions, while a third account carried a $4.1 million short position.

By strategically opening these positions, the trader sought to cancel out the long positions and build leverage in a bid to extract funds from Hyperliquid. The market price of JELLY spiked by over 400%, causing the $4 million short position to enter liquidation. However, due to the size of the short position, it was unable to immediately liquidate and instead was passed to Hyperliquid's Liquidity Provider Vault (HLP), which is designed to manage large liquidations.

Collateral Withdrawal and Price Manipulation

As the price of JELLY surged, the trader withdrew collateral from the other two accounts while the short position sat in liquidation. This allowed the trader to withdraw funds from accounts showing unrealized profits. Arkham's report notes that the trader was able to build up a “seven-figure positive PnL,” which they attempted to withdraw from the platform.

However, Hyperliquid's system quickly restricted the trader’s actions, limiting the accounts to “reduce-only orders.” This forced the trader to sell tokens in one of the accounts in an effort to recoup some of the funds.

Hyperliquid eventually closed the JELLY token market at a price of $0.0095, matching the trader's short trade price, effectively “zeroing out” any floating profit and loss in the initial accounts involved in the exploit.

$6.26 Million Withdrawn, $1 Million Still Stuck

Arkham reports that the trader was able to withdraw a total of $6.26 million from the platform. However, at least $1 million remains trapped in the accounts, pending potential future withdrawals. If the trader is unable to access the remaining funds, the actions could lead to a loss of nearly $1 million.

“Assuming he can withdraw this at some point in the future, his actions on Hyperliquid have cost him a total of $4,000. If he is unable to, he faces a loss of almost $1 million,” Arkham Intelligence stated.

Platform Takes Action: Delisting and Increased Margin Requirements

In response to the suspicious activity, Hyperliquid moved swiftly to delist perpetual futures tied to the JELLY token. The platform cited “evidence of suspicious market activity” as the primary reason for this decision. Hyperliquid also previously took steps to address similar issues, such as increasing margin requirements for traders after its liquidity pool was drained during a significant Ether (ETH) liquidation on March 12.

In that incident, a whale trader intentionally liquidated a $200 million Ether position, causing the HLP to lose $4 million while the position was unwound. This event led to an increased focus on protecting liquidity and addressing vulnerabilities in Hyperliquid's trading system.

A Growing Issue: Whale Hunting and Manipulative Tactics

The recent incident is part of a growing trend where traders target large leveraged positions, attempting to manipulate markets by exploiting system weaknesses. This "whale hunting" strategy has seen increasing attention on decentralized platforms like Hyperliquid, as traders look to capitalize on large market movements and liquidation events.

Hyperliquid’s decision to delist the JELLY token is likely a response to the ongoing risks posed by these manipulative tactics, as well as a bid to ensure platform integrity and protect users from similar exploits.

For more information about Hyperliquid’s actions and the role of suspicious trading activity in decentralized exchanges, visit Arkham Intelligence.