To a crypto layperson, hearing about Bitcoin price manipulation via sophisticated yet easy-to-procure trading bots may conjure dime-a-dozen conspiracy theories.
The deeper one delves into the intricacies of this exciting and often treacherous crypto industry though, the more sense such talk makes.
Not only is price manipulation very real and – at a closer glance – quite blatantly obvious, it is yet another major hurdle in the path of regulation, institutional adoption, and by extension: mass adoption.
According to CoinList’s Andy Bromberg, such practices “hurt the market’s reputation and they hurt individual investors”.
How do crypto trading bots work and why do people use them?
Long story short: trading bots are algorithmic auto-traders, capable of opening and closing positions, mimicking the activities of several trading accounts and pulling off a number of other hair-raising stunts that squarely put a nail into the coffin of crypto trading legitimacy, every time they’re executed.
These bots can be programmed to push a number of abusive trading strategies long banned in other markets, such as “wash trading” (the artificial generation of seemingly massive trading volumes, through the simultaneous opening of buy and sell orders) and “spoofing” (the opening of fake orders to generate fake buy- or sell-volumes, thereby pumping or driving down the price of an asset) etc.
The goal of such shenanigans is always to make money at the expense of the ‘honest’ trader.
Price manipulation hurts individuals, and it hurts mass adoption
How price manipulation hurts individual traders is self-explanatory: the mini pump-and-dump schemes resulting from abusive trading activity net profits for the bot users at the expense of regular, well-intentioned traders who believe they’re playing on a level field.
The damage wrought upon the overall direction of the crypto industry by these short-term profit-chasers is truly massive. They de-legitimize the very mechanisms responsible for crypto asset price-discovery, compromising the integrity of the market and prompting regulators to squarely deny ETF proposals, citing these issues.
It’s the reason that the CBOE wouldn’t get anywhere with its ETF proposal – and therefore withdrew it from consideration just minutes before publication of this article.
Can the industry self-regulate and rid itself of this “disease”?
The short answer is yes. The Winklevoss twins are already involved in various efforts and initiatives aimed at self-regulation, and the community as a whole acknowledges the need for some sort of market regulation.
But the real problem is that instead of punishing such activities, exchanges often welcome them as means to pump their own volumes. Indeed, some exchanges are known to readily put bots programmed for abusive trading activity at the disposal of their users.
While all this goes on, crypto enthusiasts over at Reddit entertain themselves by dabbling in a bit of attempted price manipulation of their own: a thread aimed at tricking bots into gleaning positive crypto sentiment off internet chatter was launched, and it took off big time.
Unless of course, the bots upvoted it themselves… oh dear God, Skynet.
The author is invested in digital assets.