A new research paper titled “Price Manipulation in the Bitcoin Ecosystem” reportedly clarifies that some of the price action that helped bitcoin before the collapse of the Mt Gox exchange was driven by fake trades, as the market was being manipulated by “one or two” big players.
The study, published in a recent issue of the Journal of Monetary Economics, specifically analyzes the market at the time the Mt Gox exchange was still up and running, and claims that in late 2013, when bitcoin’s price surged from $150 to over $1,100, the market was being manipulated.
Mt Gox notably handled about 70% of bitcoin’s trading volume at the time, and dramatically went down in 2014 amid hacking allegations, as thousands of bitcoins were reportedly stolen from the platform. It then filed for bankruptcy, and the case is still unfolding to this day.
The paper’s authors – Neil Gandal, JT Hamrick, Tyler Moore, and Tali Oberman – claim that two bots were responsible for the price action. The bots, dubbed Markus and Willy, supposedly traded bitcoin’s they didn’t actually own, to the point “600,000 bitcoins (BTC) valued at $188 million were fraudulently acquired.”
The bots helped boost transaction volume, which in turn helped bitcoin grow. The paper reads:
“Based on rigorous analysis with extensive robustness checks, the paper demonstrates that the suspicious trading activity likely caused the unprecedented spike in the USD-BTC exchange rate in late 2013, when the rate jumped from around $150 to more than $1,000 in two months.”
Per the study, the exchange itself wasn’t too worried about the increase in “non-bot trading” as the fees were increasing its profits. Another theory, mentioned on Reddit in 2014, alleges the bots were also used to hide that Mt Gox was hacked and lost about 650,000 BTC in 2011, helping CEO Mark Karpales masquerade the loss.
Cryptocurrency market manipulation
In light of their findings, the researchers warned that nowadays cryptocurrency markets may still be manipulated, especially taking into account the amount of illiquid markets new cryptocurrencies brought in.
Per the researchers, there were about 80 different cryptocurrencies at the time the bots manipulated the market. Nowadays, data suggests there are over 1,400 different cryptocurrencies spread across dozens of exchanges.
Taking all of this into account, the researchers add that “it is important to understand how susceptible cryptocurrency markets are to manipulation. Our study provides a first examination.”
It’s clear cryptocurrency markets are easier to manipulate than regulated markets. Cases, however, are extremely hard to prove. For example, some say insider trading occurred when Coinbase added support for Bitcoin Cash, but an ongoing investigation has seemingly found nothing so far.