BITCOIN PRICE MANIPULATION
Since it was released in 2009, rumors of bitcoin price manipulation have been rampant. While studies are done and theories fly, it is hard to tell who or what exactly causes the large dips and surges we’ve come to expect. Some point fingers one way, while studies and theories point in another direction.
Price is not the same as value. The market in which an asset trades determines price by means of supply and demand. This ongoing interaction between buyers and sellers determine the price of Bitcoin as well as everything else traded. In order to have value, an asset must also be useful. Bitcoin’s fungibility is perfect because one Bitcoin is similar to another. It is highly divisible and can be used to pay for goods and services in small fractions. Bitcoin is easy to verify on the Blockchain, and impossible to counterfeit in addition to being scarce, fast, borderless, and decentralized. These traits demonstrate an undeniable utility when compared to other cryptocurrencies – any of them.
Nonetheless, the debate about bitcoin price manipulation continues. One example comes from professors at the University of Texas and Ohio State University regarding the 2017 run up to ATHs. They came to the conclusion that possibly one whale on the Bitfinex exchange used Tether to manipulate the price of Bitcoin to all-time highs at the end of 2017. Many market analysts and developers disagree, as they believe there is no way one person or institution could have caused this level of bitcoin price manipulation, as data and volume charts tell a different story. It’s suggested by these bitcoin experts that fear of missing out (FOMO) from new investors is what turned it into a phenomenon and drove the price to all-time-highs.
The debate gets deeper as events occur that seem to influence bitcoin price manipulation. Such as analysis conducted for the Jan 2018 to Aug 2019 period which found the price of BTC fell immediately before CME issued payouts, approximately 75% of the time. What is not debatable are the more obvious methods used in bitcoin price manipulation efforts.
PUMP AND DUMP
Pump and dump is a popular form of bitcoin price manipulation. This method has been used across every market through all of trading history. Pump and Dump (P&D) happens when a group of traders and or investors get together at the same time on the same exchange and heavily buy at the same time. As the price starts to go up, new money from less experienced, smaller traders will jump in hoping to get a piece of the rising price. At the peak of value, the “pumpers” sell off their holdings all at once causing the value to suddenly drop – sometimes back to its original starting price before the start of the pump. Many inexperienced traders are left “holding the bag” hoping the price rises again. Many will sell at a loss.
Although illegal in most markets, it is not regulated across the crypto market. Some exchanges like Bittrex are taking steps to deter this type of trading by informing customers they will suspend or ban accounts caught engaging in this behavior. However, there are many exchanges that do nothing to deter, and as long as that is the reality, the chance of getting caught in a P&D is very real.
This type of bitcoin price manipulation is used every day across nearly every market. Spoofing is when a whale (or whales) puts in a large buy or sell order on the exchange never expecting to execute it. Doing so creates a fake resistance or support line in the order book. This can be used to manipulate buyers and sellers into changing their strategies and cause the price to stay at a lower or higher price longer, allowing whale(s) more time to buy or sell at the given price. As the order book gets closer to the spoofer’s order price, they simply cancel before it is filled and move on.
Simultaneously placing buy and sell orders of Bitcoin to make it look like there is a higher volume of activity is called “wash trading”. Traders can also use this method to show false capital gains loss to use as tax breaks. The United States passed the Commodities Exchange Act in the mid-1930s to make wash trading illegal. Since Bitcoin is considered a commodity, this is applicable in the United States. Studies from the Securities and Exchange Commission(SEC) have shown that about 95% of recorded Bitcoin trading volume is the result of wash trading.
Manipulators will continue to have incentives to find ways to affect the price despite the fact that Bitcoin programmatically maintains somewhat of a balance. The market ecosystem around bitcoin has failed to achieve a similar equilibrium thus far.