Crypto Trades Seen Manipulating Prices as New Rules Loom

Amid this year’s Bitcoin resurgence, regulators are cracking down on suspicions of price manipulation in the relatively unregulated cryptocurrency markets. While the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) have begun their own investigations and crackdowns, U.S. Treasury Secretary Steven Mnuchin recently announced new rules are likely to be imposed to ensure that cryptocurrencies don’t negatively impact the financial system, according to Bloomberg.

“We’re looking at all of the crypto assets,” Mnuchin said in a television interview. “We’re going to make sure we have a unified approach and my guess is that there are going to be more regulations that come out from all these agencies.”

What It Means for Investors

Bitcoin price charts are beginning to resemble a camel’s back as the price of the world’s most popular cryptocurrency is in the midst of forming a second hump. The first hump peaked in 2017, the year of “crypto craze” when anyone and everyone who dared venture into the nascent digital currency market could, and did, make money. That bubble crashed, and not without plenty of warning. The crypto diehards, however, are still around and are starting to feel vindicated by Bitcoin’s recent surge. Others are more skeptical.

Such big price movements in short periods of time are often a telltale sign of market manipulation, argues John Griffin, a finance professor at University of Texas at Austin. Due to the unregulated nature of cryptocurrency markets, the chances that someone is artificially inflating or deflating the price of a particular digital currency for their own personal gain is significant. When the prices of those securities make big, frequent jumps, investors should be cautious. “The extreme volatility suggests that manipulation is rampant,” Griffin told Bloomberg. 

Despite many cryptocurrency trades taking place on a public blockchain, a decentralized digital ledger verifying and recording past transactions, some trades take place on crypto exchanges. Currently there are more than 200 such exchanges around the world. Unlike traditional stock exchanges, these crypto exchanges are unregulated and traders have no way of knowing whether the trading volumes and prices reported actually reflect real trading activity as opposed to market manipulation. 

That manipulation can happen in a number of ways, including: wash trading, in which a trader buys and sells a security to create the perception of more market activity than there really is; pump-and-dump, whereby a trader enters a position and then makes misleading and exaggerated recommendations to convince others to buy, pumping the price up, and then dumping the position, causing the price to fall; and whale trading, where a small number of individuals, such as so-called Bitcoin Whales, hold large amounts of a particular security and can thus exert a greater influence over price movements.

A number of exchanges are in the habit of faking their trading volumes in order to attract more coins and users, claims Hunter Horsley, CEO of San Francisco-based Bitwise Asset Management, which manages crypto index funds. Coin promoters have hired outfits to wash trade for them, inflating their coins’ trading volumes on exchanges. As much as 95% of Bitcoin exchange trading volume listed on CoinMarketCap.com is due to manipulation, a May Bitwise report indicated. “In crypto, the risk is crypto exchanges,” Jeff Dorman, CIO of crypto asset management firm Arca, told Bloomberg.

While traditional markets are not immune from manipulation, as evidenced by the Libor scandal that came to light in 2012, regulation does tend to make those markets and their exchanges more transparent and provides grounds for pursuing legal action against the perpetrators. 

Looking Ahead

Cryptocurrencies appear to be more than a passing financial fad, as Facebook looks to launch its own digital currency, forcing regulators to have to come up with a new set of rules in order to protect investors and ensure the stability of the financial system.