According to the Financial Times, the American Justice Department has opened a criminal probe to check whether traders are playing any dicey games with the price of Bitcoin and other digital currencies. Of course they should! The past few months has been a bit of a roller-coaster with prices going up and down. It begs the question, are bitcoin prices manipulated? Here is all you need to know.
In determining if there’s a manipulation is quite a cumbersome task. Never forget in bitcoin trading “There are no rules!”
I would expect to find problems with price manipulation because
- There are supposedly several very large holders of Bitcoin (and other cryptocurrencies). The concentration of wealth gives them the reason to push prices higher. In the stock market, anyone holding a huge proportion of the outstanding security is subject to additional rules and scrutiny. No such protections exist for cryptocurrency. The person telling you about how great it is, may be very incentivized to see the price go higher. Whether or not this falls under the definition of manipulation that is being investigated, we assume it occurs and we assume it distorts price.
- Miners, who usually have large positions, are also motivated to see prices rise as it should mean more money for them. They earn bitcoins for mining, so it is logical for them to want higher prices at any given time for the same amount of computing work. Again, we not sure whether this activity, if at all it exists, would meet a legal definition of manipulation for any charges to be brought. But all fingers crossed.
- We have seen and heard of manipulation in actual markets – from LIBOR to FX. Many are actually regulated. Here, to my knowledge, regulation is light if it even exists. Some traders took the time and effort to establish accounts on various platforms to “distort” price differences. They should be rewarded for their efforts. In a fragmented market, where many participants only took the time to set up on one or two exchanges and didn’t have the patience or willingness to do more work to ensure price transparency, they likely pay a price that goes to those who did that. But, like much else about crypto, we would be shocked if it ended there.
Why not try and ‘push’ markets around? Create the dislocations? It seems completely logical that someone would try to do this. Again, we can’t confirm is that is manipulation.
Nobody should be surprised that manipulation likely occurs in cryptocurrencies and their pricing. We would be interested in seeing how this investigation can proceed on things that occur on these different trading platforms that are not as regulated.
That said, Bitcoin trading is still a huge avenue to invest in; buying or selling. You can read more on what and what you need to know about bitcoin in Nigeria here.