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Message: <blockquote data-quote="Identity" data-source="post: 22740729" data-attributes="member: 559166">Researchers Neil Gandal, JT Hamrick, Tyler Moore, and Tali Oberman have written a fascinating paper on <a href="https://techcrunch.com/tag/Bitcoin" target="_blank">Bitcoin</a> price manipulation. Entitled “Price Manipulation in the Bitcoin Ecosystem” and appearing in the recent issue of the <a href="https://www.sciencedirect.com/science/article/pii/S0304393217301666" target="_blank">Journal of Monetary Economics</a> the paper describes to what degree the Bitcoin ecosystem is controlled by bad actors. To many it’s been obvious that the Bitcoin markets are, at the very  least, being manipulated by one or two big players. “This paper  identifies and analyzes the impact of suspicious trading activity on the  Mt. Gox Bitcoin currency exchange, in which approximately 600,000  bitcoins (BTC) valued at $188 million were fraudulently acquired,” the  researchers wrote. “During both periods, the USD-BTC exchange rate rose  by an average of four percent on days when suspicious trades took place,  compared to a slight decline on days without suspicious activity. 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.” The team found that many instances of price manipulation happened  simply because the market was very thin for various cryptocurrencies  including early Bitcoin. “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,  that 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. Indeed, the paper later shows that  even if the fraudulent activity is set aside, average trading volume on  all major exchanges trading bitcoins and USD was much higher on days the  bots were active. The associated increase in “non-bot” trading was, of  course, profitable for Mt. Gox, since it collected transaction fees. But the Willy Bot likely served another purpose as well. A theory,  initially espoused in a Reddit post shortly after Mt. Gox’s collapse  (Anonymous, 2014b), is that hackers stole a huge number (approximately  650,000) of bitcoins from Mt. Gox in June 2011 and that the exchange  owner Mark Karpales took extraordinary steps to cover up the loss for  several years.   The bottom line is simple: if Bitcoin wants to be taken seriously it  probably shouldn’t be this easy or legal to manipulate the markets.  While 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 a first  examination,” write the researchers.</blockquote>

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