Yesterday the Wall Street Journal published a long article by Paul Vigna and Alexander Osipovich analysing the impact that trading software based on computer algorithms is having on the bitcoin market.
There is the talk of the risk of prices being literally manipulated through the use of appropriate software, and the fact that this is one of the concerns that is making SEC commissioners perplexed to comment on the approval of the bitcoin ETF from Cboe, VanEck and SolidX.
These manipulation attempts would in fact also take place in traditional financial markets, where in theory they would be more controlled and punished. On the cryptocurrency exchange markets, however, this is still not the case.
Andy Bromberg, co-founder and president of CoinList, called this type of activity “rampant” at the moment, as confirmed by Stefan Qin, managing partner of Virgil Capital, an $80 million hedge fund that manages bots on dozens of exchanges worldwide.
Qin said: “We’ve had to build in error-handling functions to check for hostile and potentially illegal activities. Such is the Wild West of crypto,” adding that earlier this year the Virgil fund lost money on some ETH transactions because of a “harassing bot” that targeted the very same fund.
These bots often use the technique of “spoofing”, or a practice in which false orders are placed on the exchanges only to induce in buyers or sellers particular actions, and then these orders are removed before they are executed.
This practice on the US stock markets was banned in 2010, but in the crypto sector, unfortunately, it is still used.
Another case is that of Kjetil Eilertsen, a Norwegian who started trading on bitcoin already in 2011, and has created a program called Quatloo Trader which claims to be “the best market-manipulation tool in the world of crypto”.
In this sector, according to Eilertsen, it would be useless to try to prevent the manipulation of digital currencies, but you could equip all of them with sophisticated manipulation tools so as to make competition less unbalanced.
He said: “If everybody can manipulate, then nobody is manipulating”.
Andy Bromberg of CoinList added that this manipulation “hurts the market’s reputation, and it hurts individual investors”.
In fact, the victims of these manipulations are those who don’t have suitable tools to defend themselves, or even counterattack, as claimed by Eilertsen. In this way, the disparity of forces in the field is enormous and unbridgeable, with the large players who are able to manipulate the market at the expense of the small.
Another manipulation is the so-called pump-and-dump, which is facilitated by the use of special bots that allow you to pump the price of the targeted cryptocurrencies.
For example, the tool called “ping-pong” allows you to make simultaneous purchases and orders creating the impression that there is intense activity on a particular cryptocurrency: this can trigger an excess of interest that can lead to several new purchase orders and a consequent increase in price.
The authors of the article concluded by saying that it is not clear how long this “Wild West” can still last. The US Department of Justice and the Commodities Futures Trading Commission (CFTD) are investigating these manipulations, but to date, there are no concrete actions aimed at reducing them.