Are Cryptocurrencies Easy Targets for Pricing Manipulation?

cryptocurrency, bitcoin
The unexpected hike in prices could be a sign to any savvy investor that the prices are being manipulated.

A look at warning signs that something sinister might be happening behind the scenes in the crypo-economy.

As The Scope Weekly previously reported, the staggering rise in popularity of Bitcoin and other cryptocurrencies in the past few years has been a source of great speculation and interest. As more people became aware of the potential to earn some fast profits, more investors jumped onto the Bitcoin wagon in the hopes of getting rich quick.

As stories of everyday investors cashing in on cryptocurrencies began to circulate to broader audiences, even more, people began investing cash in the digital currency. The result was a sort of investing frenzy, with almost anyone with some spare cash to investing into Bitcoin and other forms of cryptocurrency.

Despite the amazing success stories of one or two lucky people who have managed to make tons of money, seemingly overnight, there are some things that simply don’t add up about the sudden rise in the value of Bitcoin. Is pricing manipulation at play?

Anyone who works or invests in regulated markets, including the share market or the foreign exchange market, recognizes that there are certain rules that govern those markets. Yet there are no rules or regulations keeping the people behind digital currencies in line. Which of course, is also part of its appeal.

After watching the price of Bitcoin languish for almost three years as a low-price currency option, the massive surge in price in just a few short months should serve as a warning. In fact, the unexpected hike in prices could be a sign to any savvy investor that the prices are being manipulated.

So, are there any real indications that anything sinister might be happening behind the scenes?

Pricing Extremes

Since 2011, mass sell-offs have caused Bitcoin prices to lose half their value 9 nines in total.

Prices were at $82.75 on 3rd July 2013. Just 12 months later the price shot to $620.34 on 1st July 2014. A year later, the price of Bitcoin fell sharply and by 1st July 2015 the had dropped to $260.72.

Despite such volatility, the price of Bitcoin rose back to $660.54 by 1st July 2016.

However, it was the massive surge in price a year later that saw prices jump up to $2,453.56 by 1st July 2017. The surge sparked a buying frenzy and just a few short months later and Bitcoin prices peaked at $19,498.63 on 18th December 2017.

Without warning, prices started to tumble rapidly. Bitcoin shed half its value in just weeks. The value had fallen to a low of $7,845.87 by the 7th February 2018, backed by rumors of massive sell-offs.

Is Bitcoin a Victim of a Pump and Dump Scheme?

On Wall Street, it’s well-known that large share brokerage firms and institutional investors have the power to influence prices of certain stocks. Larger companies such as these have the available funds to purchase millions of shares at a time.

If a large institutional investor, such as a hedge fund, 401k fund, or other large investment firm decides to sell large numbers of shares of a particular stock, the general public often tends to follow suit. The result can be that the price of that stock falls.

It’s quite legal for large investment firms to buy and sell large numbers of stocks at any given time. However, there is a certain ‘dark’ element of the share trading world that blatantly flaunts the rules for their own gains.

There are some companies and individuals who will deliberately ‘pump and dump’ certain stocks. The term ‘pump and dump’ simply means that a company or group of investors may intentionally buy certain stocks in an effort to artificially pump up the value, importance, or future potential of a particular company’s shares in order to encourage more people to buy it.

The entity responsible for pumping up the stock’s value might fabricate press releases, generate a buzz about the stock, circulate a rumor about the future potential of the company, or just keep putting it out to the general public as a ‘great’ stock tip to buy now.

As the price of those shares rises to the forecast maximum price, the unscrupulous investor will then sell their holdings, reap huge profits for their efforts and close their investment position, or ‘dump’ their stock. The result usually sees those shares fall in value back to more realistic prices, leaving regular investors coping with financial losses.

Pump and dump

Pump and dump schemes are illegal in the share trading world. However, that doesn’t stop them from happening in the stock market – or in many other markets too.

When looking back at the spectacular rise in price in Bitcoin and other cryptocurrencies, the timing of a number of factors seems too coincidental. There has been a surge in the number of stories circulating about regular investors reporting that they ‘got rich quick’ by investing in Bitcoin.

There was also quite a lot of activity between larger Bitcoin investors in late 2017 on certain chat applications, such as Telegram or Discord about the idea of pumping the prices before dumping their holdings to realize profits,

Within the same timeframes, there has also been an influx in ‘investor’ groups and hedge funds claiming to invest money into Bitcoin on behalf of members or regular investors.

Now that the price has spiked, investors should be asking who stood to gain the most by artificially pumping the price, before dumping their holdings when prices were at their peak. While it might be illegal to pump and dump on the share market, cryptocurrencies aren’t bound by the same rules and regulations.

Will Bitcoin Investors Cash in On a Poop and Scoop Deal?

The opposite of a pump and dump scheme is called a poop and scoop deal. Unscrupulous traders leak rumors and make it known that a massive sell-off is happening. They essentially smear the media with ‘poop’ stories in an effort to spark average investors to also sell in the hopes of cutting their losses

The result is that prices drop rapidly, at which point the trader picks up more Bitcoin at a bargain price when prices fall and wait for the cycle to begin again.

Is Bitcoin a Victim of a Short and Distort Scheme?

Both pump and dump and poop and scoop schemes involve traders actually buying and selling the asset in question. However, the derivatives market now also includes cryptocurrencies, with Bitcoin futures options and contracts for difference (CFDs) being traded on exchanges such as LedgerX.

When there is a pump and dump plan in place, there is also often an equally illegal ‘short and distort’ scam waiting to happen. In basic terms, a ‘short and distort’ scheme is when an investor purchases a contract for the difference on a particular asset. CFDs are part of the derivatives market and essentially mean that an investor ‘bets’ on the price of a particular cryptocurrency rising or falling without actually buying the asset.

At their most basic, CFDs are contracts between two or more parties based on an agreed asset where the buyer and seller both agree to settle any rise or drop in prices in cash on the contract date.

In the case of a ‘short and distort’ scheme, the investor is betting that the price of the asset will fall to a specified value. If the value of the asset specified on the contract falls to or below the specified amount, the investor is paid out in cash on that ‘bet’ taken

Many sophisticated investors understand the complex world of derivatives and use them to their own advantage legally. However, there are also unscrupulous investors who use the ‘short and distort’ scheme to generate more profits.

Those investors may leak rumors or bad news about a particular cryptocurrency being sold off by the big players, commonly known as ‘whales’ in crypto-circles. The objective is to create a panic that sparks less experienced investors to begin selling off, which drives prices down to where the whales will make their big profits.

Unfortunately, many investors often don’t realize that there is an entire market revolving around the changing prices in various asset classes. Big players tend to win during a ‘pump and dump’, when they sell out at peak prices before attempting to drive prices down. If the investor intends to buy again at bargain prices once prices have plummeted, they hope to make more gains from the eventual poop and scoop.

However, finding ways to short cryptocurrency means the whales can cash in even bigger profits on a ‘short and distort’ when the prices are on the way down too.

Does Pricing Manipulation Really Happen?

While there are plenty of rumors and examples of how cryptocurrency pricing could potentially occur, does pricing manipulation really happen? The lack of cryptocurrency regulations means it will always be susceptible to some level of manipulation.

Recent research from Neil Gandal, JT Hamrick, Tyler Moore, and Tali Oberman indicates that the recent volatility in Bitcoin’s price may have been manipulated by one or two big players. The researchers aimed to identify and analyze the impact of suspicious trading activity in which around 600,000 Bitcoins worth around $188 million US at the time was fraudulently acquired.

Bloomberg also reported that an unknown investor moved nearly 25,000 Bitcoins, valued at around $159 million at the time, to an online exchange on November 5, 2017. The move prompted panic and uncertainty among online trading forums that the investor was planning a mass sell-off.

It’s further estimated that only around 1,000 users own about 40 percent of Bitcoin. According to Alex Sunnarborg, co-founder of Tetras Capital crypto hedge fund, the top 100 Bitcoin addresses control 17.3 percent of all issued cryptocurrency. Kyle Samani, managing partner at Multicoin Capital says “I think there are few hundred guys.”

If any of those big players or whales chose to coordinate their trading activities and all buy at the same time, the result could be sufficient to inflate prices. If those same whales all sold at similar times and cashed out, the move would also cause prices to fall.

What Should Investors Do?

It’s worth remembering that cryptocurrencies are considered a speculative asset class, at best. They aren’t tangible. They’re bits of digital code that aren’t regulated at this time.

It’s also worth remembering that smaller cryptocurrencies are even more susceptible to pricing manipulation by whales. With coins such as Qtum, Storj or Gnosis, the top holders control more than 90 percent of issued currencies.

If you, or someone you know, is considering investing in any type of asset, always be sure to do your due diligence. Invest in your education and learn about various asset classes. Know what you’re investing into and how your investment could be affected before agreeing to anything. It’s also prudent seek advice from a trusted professional.

Resources:

Pricing history: https://99bitcoins.com/price-chart-history/

Pricing manipulation: https://www.express.co.uk/finance/city/905222/bitcoin-price-news-latest-manipulation-cryptocurrency-surge-plummet-stock-exchange

https://www.bloomberg.com/news/articles/2017-12-08/the-bitcoin-whales-1-000-people-who-own-40-percent-of-the-market

Current Bitcoin sell off:

https://www.reuters.com/article/us-global-markets-bitcoin/bitcoin-skids-amid-broad-cryptocurrency-sell-off-idUSKBN1FM11M

Short and Distort:

https://www.investopedia.com/articles/analyst/030102.asp

Pump and Dump:

https://www.investopedia.com/terms/p/pumpanddump.asp

Cryptocurrency Pump and Dump: https://btcmanager.com/breakdown-cryptocurrency-pump-dump/

Cryptocurrency Futures:

https://www.investopedia.com/news/tradestation-customers-embracing-cryptocurrency-futures-despite-volatility/

https://www.bloomberg.com/news/articles/2017-11-27/calling-a-bitcoin-top-here-s-how-you-can-short-the-digital-coin


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