One of the pillars of Cryptocurrencies is the fact that it can be bought and sold without the intervention of any government or third-party overseeing the market. Alternatively, is it? Bitcoin for one closed the year of 2016 at $1,000, and by December 2017 it hit over $19,000; not forgetting that in November its price tripled under just a month’s time. However, the euphoria died just as quickly with bitcoin prices plummeting down to only $7,000 by February 2018.
Theoretically, you could use a cryptocurrency to purchase goods and services; they are called currencies, are they? Moreover, currencies should be able to buy stuff. However, for that to happen, a particular cryptocurrency needs to attract a large number of users (merchants and consumers alike), which experts say has yet to happen.
Hence cryptocurrencies largely remain financial assets – like stocks and bonds – that buyers buy in the hope that they will appreciate with time. So the mantra is, buy massively when the prices are low and sell aggressively when the prices are at their peak.
The benefit with currencies is that the central government tend to control the market. Putting in place checks, and balances to avoid things from getting exaggerated and out of hands. On the other hand, cryptocurrencies just like any other financial asset, tend to fluctuate wildly.
What makes cryptocurrencies much more dangerous is that there SHOULD NOT be any entity controlling the market. Well, other than the pure forces of demand and supply in the market. We see an increasing number of investors with little to zero experience with risky assets increasingly purchasing cryptocurrencies.
That puts them in a huge risk, especially when there is a rapid rise and fall in the value of these financial assets . But what if the sudden rise and fall is manipulated by a few big players in the market. It could be quick cash for them, while the inexperienced lose a lot of money in it.
That is why the United States’ Justice Department since May 2018 has been conducting criminal investigation examining whether there is price manipulation in this seemingly uncontrolled digital markets. It is not yet clear what period the Justice Department is investigating; experts believe it is the sharp rise and sudden fall, which occurred between late 2017 and early 2018.
With a $350 Billion total market capitalization, the digital currencies is but a fraction of the global stock market, which is said to be slightly shy of the $100 trillion mark. However, their value tends to soar up so fast, attracting so many investors within such a small time,
For instance, while bitcoin prices were soaring up quickly between late 2017 and early 2018. The seventh-biggest digital coin, bitconnect, collapses is a matter of hours in early January 2018. Costing many investors hundreds of millions of dollars. All eroded in a matter of seconds.
So where’s the Evidence that the Cryptocurrencies markets are being manipulated?
There have been allegations that the cryptocurrencies market has been manipulated for years, and these allegations have been coming from several sources. However, let us focus on the evidence put forth by Neil Gandal, the Professor of Economics, Tel Aviv University and Tyler Moor, the Assistant Professor of Computer Science and Tandy Chair of Cyber Security and Information Assurance at the University of Tulsa.
In 2014, the two analyzed the collapse of Mt. Gox in early 2014, thanks to the transactional history data that got leaked out. Researchers from around the world dug into the data that showed about 18 million transactional history from April 2011 to November 2013. The transaction was linked to users accounts; not the real identities of the owners.
The data unveiled suspicious trades to particular accounts. The analysis by Gandal and Moor, for instance, claims that there are a number of considerable suspicious activities. The first suspicious activity they noticed is the ‘Markus bot’ that is reporting non-existent trades. The seconds is a ‘Willy bot’ that conducted trades for Mt. Gox itself to buy Bitcoins from its own customers but never letting most of them withdraw the proceeding from their accounts.
Former Mt. Gox CEO, Mark Karpeles was in trial in a Japanese court in 2017, and he confirmed that (Mt. Gox) operated these ‘Willy’ accounts and that the trading was done automatically. The trade deals done by this bot led to a significant increase of trade at Mt. Gox, and as a result, the prices rose as the bots were active. The two researchers believe this is just one of the suspicious trades that the US’s Justice Department ought to investigate.
There was another research by Texas finance professors Amin Shams, and John M. Griffin released an SSRN working paper in June, which concluded that over 50% of meteoritic rise in Bitcoin prices in 2017. The two professors focus on the Bitcoin flow into and out of the Bitfinex, which is one of the biggest and least regulated exchanges in the industry. That is according to an article published in the New York Times.