Cryptocurrencies: trading bots and market manipulation
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Cryptocurrencies: trading bots and market manipulation

By Matteo Gatti - 29 Jun 2019

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Trading bots are becoming more popular in cryptocurrency market, easier to use and more sophisticated every day. Auto-trading software (or bots) are complex programs, many of which are open-source and community supported, allowing traders to set up a strategy and have the bot manage the sale and purchase of an asset such as bitcoin.

Such software gives even inexperienced traders endless possibilities to approach the cryptocurrency market with the hope of making a profit. The use of bots on exchanges is, to date, allowed although it is not a very clean approach. 

Trading bots in cryptocurrency market

Bitcoin, but more generally the whole crypto market, is known for its huge price fluctuations, which are responsible for much of the interest in cryptocurrencies.

Most people are not aware of the fact that traders use special tools (software) that allow them to manipulate the price. These tools, called bots, follow a strategy predefined by users. Under certain market conditions, they automatically buy (or sell) an asset, even if the person who programmed them is doing something else.

The manipulation in cryptocurrency trading is one of the main reasons why there is not yet a bitcoin ETF in the United States. The Securities and Exchange Commission cited manipulation as one of the main reasons for rejecting ETFs in August 2018.

Attorney Barbara Underwood explained in a report that exchanges are highly susceptible to manipulation. 

Underwood stressed that market integrity cannot be guaranteed as long as exchanges allow users to engage in unlawful conduct. In the report, bots are defined as the main source of manipulation. In other markets, such as the New York Stock Exchange, for example, the behaviour of traders is monitored and those who use illicit programs are punished.

Andy Bromberg, co-founder and president of CoinList, a startup for the issuance of new cryptocurrencies, explained to the Wall Street Journal that almost no exchange is regulated from this point of view. They are therefore a real gold mine for bots that use very sophisticated strategies to generate huge profits for those who use them.

Manipulation: can it be stopped?

Kjetil Eilertsen, the creator of a software called Quatloo Trader, one of the best tools to manipulate the market believes that the ban of bots would be useless and difficult to implement. A better approach, according to him, is to provide all traders with the necessary tools to create and use a bot.

“If everybody can manipulate, then nobody is manipulating. You can’t ban anything from people who are dedicated to doing something”.

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