Cryptocurrency Collusion

History has shown, market manipulation is nothing new but lack of regulation makes cryptocurrency even more volatile to such dark forces.

The US authorities are increasingly venturing into cryptocurrencies regulation and, following the announcement of a US Justice Department investigation into price manipulation in cryptocurrency markets; its price fell by over 3%. The latest action marks the first time that both major regulatory agencies responsible for US capital markets – the Commodity Futures Trading Commission and the US Securities and Exchange Commission – are now publicly involved in action challenging crypto-based fraud.

Bitcoin, first launched in 2009, works in a notoriously volatile market, where huge price swings are commonplace and cause substantial negative market pressure.  The development of block chain technology has brought it into the mainstream and it generally dictates the direction the rest of the market will take. For example, when Bitcoin is fumbling, like in the current market, every other coin and token also slips.  The cryptocurrency has now lost more than $150 billion since its height, and at present, it is barely breathing above $7,130. Even more concerning however, is that Bitcoin’s wildly fluctuating price may not be the result of free market forces.

“While the current lack of regulation in the cryptocurrency market is a large part of the appeal of bitcoin and other cryptocurrencies, it also makes it highly possible for suspected exploitations to occur.”

One of the key questions is whether or not there is any Bitcoin price manipulation going on and the inquiry is allegedly looking at the likelihood that strategies such as flooding markets with fake orders to manipulate prices are being employed. According to the Blomberg report, the initial investigations are exploring all forms of illegal activities that can impact on the market prices of cryptocurrencies, including pump-and-dump schemes, spoofing and wash trading. Financial markets, in general, seem to be predisposed to manipulation. It has happened before, and it will happen again. It seems evident from the onset that there is an ongoing manipulation of the bitcoin price. What isn’t so clear is whether such price manipulations are against the law as watchdogs have only tentatively started to treat some cryptocurrencies as securities subject to oversight.

Starting in early 2017, the price of bitcoin ballooned from $1,000 to a record high of around $20,000 by mid-December.  The market has a tendency to see ups and downs when people least anticipate it, and for some, this is a strong indication of market manipulation. Miners have a vested interest in higher prices, and the largest players in the crypto-space often take the blame, with claims they are using their power to manipulate the trading price of the cryptocurrencies. Are the whales taking advantage of the newcomers entering the market?

This virtual currency world can learn from previous cases as traders have seen for themselves market manipulation in other sectors like LIBOR or FX, and a bitcoin market dominated by a handful of big players isn’t hugely different to most other markets. About 40% of bitcoin is held by approximately 1,000 users; and they could theoretically ensemble together to tank or bolster the market. The excitement around 2017’s hottest asset class has certainly lost some of its pizazz this year, and if big investors are able to manipulate Wall Street with all its limiting legislation, swaying the crypto industry will be a walk in the park for them. The typical protection surrounding investment is  not present with bitcoin, so unlike the stock market, where anyone holding a large share of the outstanding security is bound by extra guidelines and enquiry, there is still a lack of investment protection for digital currency investors. Therefore, it is a free for all, left to whoever has the will to orchestrate a market coup, and it remains to be seen whether governments will really ever accept currencies over which they have no control.

The public got hooked on Bitcoin last year, and as its price hit the roof, it tapped into public greed, and countries around the world have begun to grapple with cryptocurrencies, trying to determine how they are going to introduce and manage them. While the current lack of regulation in the cryptocurrency market is a large part of the appeal of bitcoin and other cryptocurrencies, it also makes it highly possible for suspected exploitations to occur. However, increased regulation is expected to add more legitimacy to the crypto space in 2018.

Issues such as the infant nature of the market, the lack of understanding around the cryptocurrency space, excessive volatility, pump and dump ICO schemes and the activity of cybercriminals continue to affect the market and reduce the rate of adoption.  It is important that the main stakeholders continue to work on combating these concerns to protect the future of cryptocurrencies, especially after Consensus, the biggest annual bitcoin conference, failed to spark the bitcoin rally that financial analysts had predicted.

Has the bitcoin bubble burst or will its widespread recognition be enough to weather this storm? It remains to be seen but cryptocurrency prices have been tumbling down since the beginning of the year and many have argued the chances of recovery are slim.