Opinions on Crypto Manipulation, What this is All Building Up to, and Its Implications

The Justice Department opened a criminal probe into whether traders are manipulating the price of Bitcoin and other cryptos. The goal is to see if cryptos are being manipulated using tactics like Spoofing and Wash Trading.[1]

In other words, its an official US investigation to see if grey and black hat tactics banned in securities trading, and illegal in general, but not cracked down on in crypto trading, are being used in crypto trading.

Unsurprisingly, news of this resulted in the price of crypto dropping (a benefit for those short on crypto or seeking to accumulate low; which is worth looking into honestly if one is looking for motives and actors), but that isn’t necessarily the point here.

If the question is “is crypto being manipulated using tactics like spoofing” then the answer is pretty clearly “yes.” It isn’t that everything that looks like manipulation is (in fact a lot of what looks like manipulation is algorithms reacting to technicals in union), it is that all of that aside there is clearly some manipulation in the space in my opinion.

I can’t say that there is manipulation for sure, but anyone who has watched the markets and/or traded in the markets for any amount of time is very likely to agree with my assessment (especially if they use a range of tools to analyze the markets like I do, odd behaviors become obvious after a while). Prices fly up and down all the time, for what seems like no reason, forming predictable patterns, and often driven by what feels like unnatural buying and selling.

Open up any exchange at any time and you’ll see what I see, giant buy or sell orders sitting on the books keeping the price from going up or from falling down at most times… then massive buy / sell orders on one side of the books pushing the price quickly one direction every once in a while (often at times when volume is low, like 4am EST).

Look at the order books and charts and you’ll see what looks like accumulation, pump, distribution, dump, in that order, over and over, producing somewhat unnatural looking, but perfectly formed, Wyckoff cycles.

Not every aspect of that is specifically illegal from what I understand, but it should be noted that the purpose of the large orders isn’t for them to be filled, it is to nudge the price in a given direction while having to fill as few orders as possible (ideally these types buy / sell over the counter when it fits their strategy, not via the exchanges).

Of course, big orders on the books not meant to be filled, for whatever reason, is essentially “manipulation” (specifically the price manipulation tactic spoofing).

Now consider traders who flip between putting orders up on the buy side and sell side.

Now consider those who do both at the same time.

Now consider the algorithms of entities that do this all day long every day.

And now consider the derivatives those entities control (futures contracts on the futures exchanges and Bitmex, short and long positions on Kraken and Bitfinex, etc).

Essentially if you go down that rabbit hole you get spoofing and wash trading for the purposes of accumulation and/or making bank on derivatives. AKA the exact type of manipulation being investigated.

Parts of that whole gambit are grey area, and some parts of this are clearly illegal, but in all cases it is clear that crypto is being manipulated both upwards and downwards for the benefit of a few and at the expense of common retail investors (who tend to panic sell low and FOMO buy high; that is deadly in the cycle being produced in 2018).

Sometimes it is pump and dump groups pumping and dumping a low volume coin, sometimes it is big players accumulating with the help of futures (this is how big players accumulate in all markets, no surprise it is happening here, especially since futures were released on the traditional markets), sometimes it is miners and exchanges pushing back against the price drops (I assume, as if the price goes too low it stands to hurt these businesses), sometimes it is the “spoofys” of the world doing that which is their namesake.

I won’t pretend that I fully understand the game and the intentions and tactics of each player, but I do think it is obvious enough that the end result is manipulation of rather epic proportions.

That said, there is also a type of manipulation where you spread bad news at opportune times.

For example, when Bitcoin is in a correction and logic says it has a good chance of correcting all the way down to the 30 RSI on the daily candles, you might have one entity leak a story to a reporter and the end result is releasing news like “The Justice Department opened a criminal probe” at just the right time, right when such a thing could easily knock down the price and explain a dump (so the big sell orders could be passed off as natural). That is called “well timed FUD + an alibi” and that too is age old and part of the same gambit these other bits of manipulation are.

So, to me at least, it is and has been fairly clear that people are rushing to use every tactic used in the past in other markets on the crypto market, likely all knowing that the clock is ticking as they do so. In this sense I think it is pretty clear that the crypto markets are and have been manipulated.

This isn’t just because they can make a quick buck in an under-regulated market, it is because crypto really is under all that rather revolutionary. It is a thing that people want, it is a thing that people like to collect, it is something a whole new wave of investors are willing to take a risk on. It is all the good things, and this has attracted the best and worst among us.

So, for all the scum and scams, it is also clear that there is a lot of organic demand, many willing to place large buy and sell orders for real, a real use for derivatives products, and a legitimate need for reporting on this.

Thus, I think the answer here is a lot like the answer with ICOs and Ether (themselves truly revolutionary in many ways despite their flaws).

Clearly Ether and ICOs look a bit like securities, that won’t go away and can’t just be ignored… and in fact, ignoring it will make things worse down the road for the masses!

You can either string out the obvious conclusion, crashing the market a bit here and there, causing a panic, or you can create some sensible and unique rules that help the average investor now.

The way things have been done so far has kicked the can down the road only to hurt the average investor and funnel vast fortunes into the hands of big players (those who manipulate, those who know the game and can out maneuver the manipulators, and those who run the platforms and mining operations who keep the system going).

We have entities like the DOJ, CFTC, and SEC (and honestly to some extent Congress and the IRS) who are supposed to be watching out for the little guy (to some extent). Yet, they have been slow to act (which would be fine if they were not going to act at all, but since it is becoming increasingly clear they will act… it honestly just sucks a bit how they are acting slowly).

Will they actually seek to help the average retail Joe-schmo? Or will we see a well ordered series of events that actually ends up crashing crypto, losing retail HODLer vast fortunes, all in the name of justice?

It was clear crypto was manipulated a year ago, when the price $1k. All these entities could have stopped it then. There would have been very little damage (those who held since 2014 could recoup, new investor would avoid being trapped, we wouldn’t have funneled countless fortunes to some shady players, there was still distributed computing and blockchain invented, it was open source, etc).

They did not do anything though. Instead the thumb twiddled and watched Bitcoin get pumped to $20k while Joe-the-retail-schmo racked up another un-payable tax bill (the IRS really isn’t going to see the money they think they will… its going to be ugly; get ready for that, it will create another panic down the road).

Anyway, what is has been and here we are fast forwarded into the future and the IRS is expecting money while the DOJ investigates crypto asking the question “is crypto manipulated?!”

To say it is too little too late is an understatement. However, since we are here, it would be nice to see the next move be a move that actually benefits the average person.

It sucks a little to make everything from the new rules to the tax code hurt the average investor and favor the big players, but it’ll hurt even more if somehow all these fireworks end up causing another 2015.

As, like it was in 2015, the best of traders will manage to get out with their fortunes while the least nimble will be crushed.

In other words, all those who are actually doing the wrong thing stand to benefit and those suckered in because those who will crack down dragged their feet will get hurt.

It is like the very opposite of how it should be really. So, fingers crossed that isn’t what happens.

Still, if the question is “is crypto manipulated in any sense” the answer is clearly “yes”… so the sooner that bandaid is ripped off, the better at this point. And, even better than that, if the outcome is something sensible like new rules that help the average person and inhibit the worst practices of the worst among us.

On Tether: When manipulation comes up people like to point to Tether and say “the reason Bitcoin went up so much is that Tether was used to save it when it looked like it was going down” (see: Much of bitcoin’s 2017 boom was market manipulation, research says). While I’m sure the data does suggest Tether was used to defend Bitcoin at key levels, this view of the world as presented is narrow and even slightly offensive. First, Tether (if taken at its word) only comes into existence when someone deposits money in a 1:1 ratio. Thus, what we are likely seeing is big players depositing countless millions in Tether to defend Bitcoin’s price drops indirectly with cold hard cash. So what dropped crypto at these times? Well, at best equal and opposite manipulation of those who wanted the price to go down (those flooding the market with crypto to push the price down; which is why it needed defending)! My point here being, considering those who push the market up, but not the equal opposite forces who push the market down, is a very narrow view of what is clearly occurring in the crypto space. Also, assuming Tether is not backed by dollars assumes all exchanges and big players who deal in Tether are being duped, while the more obvious conclusion is that they can’t or don’t deal in dollars and Tether is acting as a bank of sorts for these entities. Bitfinex is a major exchange, you can’t even access it if you don’t use TUSD or crypto. If you don’t access Bitfinex, you can’t save or dump crypto! That is the simple answer. The Tether issue is important, but to use it as FUD every time the price drops is… well that looks a lot like that other type of manipulation where the media reports FUD at key moments.

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Citations

  1. U.S. Launches Criminal Probe into Bitcoin Price Manipulation. Bloomberg.com.

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