“Price Manipulation in the Bitcoin Ecosystem” a paper written by Researchers Neil Gandal, JT Hamrick, Tyler Moore, and Tali Oberma. Entitled and appearing in the recent issue of the Journal of Monetary Economics, the paper describes to what degree the Bitcoin ecosystem is controlled by bad actors.
Mt. Gox – PRICE MANIPULATION
The analysis was run on Mt – Gox, a Bitcoin exchange in which approximately 600,000 bitcoins (BTC) value at $188 million are fraudulently acquired.
The USD-BTC exchange rose by an average of four percent on days with suspicious trades. According to the paper; the spikes were likely caused by the suspicious trading activities. In the late 2013 “The rate jumped from around $150 to more than $1,000 in two months.”
The team found that many instances of price manipulation happened simply because the market was very thin for various cryptocurrencies.
“Despite the huge increase in market capitalization, similar to the bitcoin market in 2013 (the period examined), markets for these other cryptocurrencies are very thin. The number of cryptocurrencies has increased from approximately 80 during the period examined to 843 today. Many of these markets are thin and subject to price manipulation.”
The manipulation happened primarily via two bots, Markus and Willy. They seemed to be performing valid trades but did not actually own the bitcoin they were using. During the Mt. Gox hack a number of these bots were able to create fake trades and make off with millions while manipulating the price of BTC.
The publicly reported trading volume at Mt. Gox included the fraudulent transactions, thereby signaling to the market that heavy trading activity was taking place. The associated increase in “non-bot” trading was, of course, profitable for Mt. Gox, since it collected transaction fees.
The bottom line: If Bitcoin wants to be taken seriously, it probably shouldn’t be this easy to manipulate the markets. As decentralization is supposed to replace regulation, it’s clear that there is still a way to go before it can be truly taken seriously. “As mainstream finance invests in cryptocurrency assets and as countries take steps toward legalizing bitcoin as a payment system (as Japan did in April 2017), it is important to understand how susceptible cryptocurrency markets are to manipulation. Our study provides the first examination,” write the researchers.