Market Manipulation Using Crypto-trading Bots
Investopedia defines market manipulation as, “the act of artificially inflating or deflating the price of a security [,product, commodity, or currency;] or otherwise influencing the behavior of the market for personal gain”. Could this be done, or has been, in the cryptocurrency market? And, moreover, how? It’s possible that trading bots could be manipulating the crypto-market. Before jumping into the details, let’s first briefly examine how a trading bot functions.
A Historical Overview
A trading bot works by automatically buying and selling something, all according to a programmed script. Since bots lack basic human intuition and intelligence, their reliability has proven to highly questionable and even controversial. For instance, over 30 years ago, there was a 23% drop in the stock market in an event now referred to as the infamous Black Monday Wall Street crash. The crash was attributed, by many, to early versions of program trading conducted by trading bots. These bots weren’t very “high functioning”, because they were programmed with overly simplistic instructions which made them sell based solely on if the price went below a certain level.
Due to the lack of the availability of instant information in those days, which a lot of us now tend to take for granted, a sort of mass hysteria was created which led people to sell large shares of their stocks out of fear. Obviously, trading bots have now become more sophisticated and “more intelligent”. Let’s now take a look at a fairly recent market manipulation by today’s trading bots.
The Rise of Crypto-Bots
Crypto-bots came into existence almost as soon as the crypto-market started to take off. One recent case, pointed out by Venture Beat, was when crypto-exchanges noticed that several bots could have been trading using Neo. This activity came under the radar because of irregularities in trading patterns on their platforms. Neo crashed when its price fell from $37 to $3.74 within a few seconds. Many investors suffered significant losses as a result of this crash. This is a classic example of market manipulation carried out completely by non-human entities.
Other Types of Market Manipulation
Earlier this year, Business Insider reported that crypto-traders had been using the Telegram messaging app to conduct typical “pump and dump” scams. These scams are carried out by a fairly large group of buyers who all purchase at a particular designated time. This gives off the false impression that prices are going up, which lures in naive investors who “buy in” to the hype. As soon as the group senses a sizable profit, they immediately sell. This sell off leads to a crash that the naive investors have to suffer. According to Business Insider, this type of market manipulation was found mainly on Bittrex and Russia’s crypto-exchange, Yobit. Cryptos that were targeted included UBQ, Chill Coin, and VCash to name a few.
It Seems Never Ending
Whenever there’s a lot of money being made, there will always be people looking to exploit the situation. When Coinbase added support for Bitcoin Cash, the crypto-exchange had to suspend operations due to allegations of insider trading. There were also some scams reported with Ripple’s XRP trading and questionable operations of BitConnect’s trading bot.
As the crypto-market continues to get bigger, the number of attempts at market manipulation could go up as well.The sophistication of these attempts could also increase. Therefore, crypto-enthusiasts should remain vigilant at all times.