A theoretical low cost attack scenario in PoW currencies
Where is the fault, in the attack scenario or in the assumptions?


The fault lies that you've discounted the opportunity cost it takes for an adversary or a conglomerate of miners to subvert the chain by forking off from some prior block. The key here is that there is inherent cost to forking the blockchain at some arbitrary height and re-creating the blocks. The cost can be formularised as block subsidy + total transaction fees in the number of blocks an adversary wishes to re-produce.

Firstly, honest miners will not be party to this, because they'd have to forgo their prior earnings and do double the work to re-earn the difference in your promised bribe transactions fees, so the conflict transaction you intend to bribe the miner with must be so great that it has to be double (at least) block subsidy + total transaction fees * N. Where N is the total number of blocks you want to re-organise. More importantly, what is it that the attacker seeks to achieve by donating away such a large sum worth of bribes (is it actually incentive-compatible to do so)?

Secondly, Assumption 3. simply does not make much sense as it lacks incentive compatibility. As you have shown, sure a miner can perform a naked short on an exchange before colluding to perform your described attack, there is risk to undertaking such a trade as an exchange out of popular interest can renege or withhold payments to a colluding miner that undertakes such a transaction. Simply put, it is more incentive-compatible for miners to mine transactions in an honest manner.