A cryptocurrency like Bitcoin can trade without an intervening government or another third party that oversees everything. As a result, this kind of cryptocurrency gained broad popularity globally. But there will always be a flipside, which is a complicated and almost impossible way to get a hold of when it comes to price manipulation or fraud.
The Justice Department is planning to make a move on the latter statement. A criminal investigation will launch to determine whether there was price manipulation in the cryptocurrency world. There is no specific period when the investigators will start looking at it, but for some, they might focus on the sharp rise and fall that happened at the end of 2017 and early 2018.
For the record, bitconnect was once the seventh-biggest digital coin that destroy in just a couple of hours dating back to January. This situation costs investors hundreds of millions of dollars, and their trust in the legitimacy of cryptocurrencies is questioned. For this reason, the impact of illicit cryptocurrency exchanges could affect many.
For the last several years, researching digital currencies has been our top priority. In fact, our newest paper was published in the Journal of Monetary Economics earlier this year. This paper establishes some evidence of fraudulent behavior in 2013 and 2014; this time the prices went up and down for a couple of months.
It is still a question for many if its failure can remove and avoid the kind of eroded trust when it comes to digital currencies.
Is Cryptocurrency Fraud Significant?
One of the most important reasons for people to be concerned about digital currencies is their value. A total market capitalization of approximately $350 billion, for example, is only a fraction of the actual size of the global stock market, which has a final value of approximately $100 trillion.
Even with this given reason, cryptocurrency values went up in just a short period of time, rising from just $14 billion in January 2014. Since Bitcoin established its name as being the first digital currency in 2009, a couple hundred have launched, with roughly 800 actives at this time.
In theory, cryptocurrencies can also use to purchase goods and services. With all that, they must focus on attracting a large number of users—something that never happened before. Currently, cryptocurrencies are purchased as financial assets like stocks and bonds, on which buyers hope for their value to rise over time.
Financial assets are more vulnerable to global fluctuations in comparison to currencies.
Investors without much experience with assets on edge are increasingly investing in cryptocurrencies. This might result in them being more at risk given that these kinds of investments are highly volatile.
Bitcoin’s Thrill Ride
Bitcoin’s value experienced a roller-coaster ride in 2013, rising from $150 in October to nearly $1,000 in December before plummeting by half a week later. Some people who traded on MT. Gox, which was the leading bitcoin currency exchange at the time, uncovered what they thought was suspicious activity on the exchange that led them to extensively talk about it.
The skeptical nature of the trading activity discusses in an existing paper titled “Price Manipulation in the Bitcoin Ecosystem.”
This analysis conducts when Mt. Gox’s downfall in early 2014 transaction records data leaked. This incident gave the researchers access to almost 18 million transactions dating from April 2011 to November 2013. This was possible because the data linked transactions to user accounts did not have their true information. The aforementioned was the reason for our being able to link suspicious trades to accounts.
The analysis of the data authenticates much of what states in the anonymous documents. In the paper’s appendix, this writing will focus on the details of why trading mechanisms should treat as suspicious. First on the list is the Markus bot, which reports trades that are existent. The second lists as Willy Bot. Its records show Mt. Gox itself bought bitcoin from its users but failed to let many of them withdraw the value from their accounts.
In the trial that took place in Japan in 2017, former Mt. Gox CEO Mark Karpeles verified that the Willy accounts operate by the exchange and that traders issue automatically.
The trading activity of these bots has led to a significant increase in trading at Mt. Gox and other exchanges. With that, when the bot activates, the price went up.
Investors New Adventure
Cryptocurrency, particularly bitcoin, was last year’s banner. It went up from $1,000 in late 2016 to over $19,000 in December.
However, its real spike happened in November, when its value tripled in just a couple of months. But this frenzy ended quickly as bitcoin began to plunge to $7000 by February.
An SSRN working paper publishes in June by John M. Griffin and Amin Shams, both finance professors from the University of Texas. This paper concludes that price manipulation will be responsible for more than half of bitcoin’s meteoric rise in 2017.According to an article published in The New York Times, Bitfinex is one of the largest and least managed trades in the market, making them focus on bitcoins in and out of Bitfinex.
In addition to Bitcoin, the likelihood of price manipulation is much higher in digital currencies with much lower trading volumes.
Taking the Next Step
In an interview with Security and Exchange Commission Commissioner Robert Jackson, he pointed out that it is difficult for investors to distinguish between investing and fraud in the digital coin offering market where cryptocurrencies are publicly available.
The problem with researchers and others who detect price manipulation today is that there is not enough transparency when it comes to the trading patterns of individuals. This means there are more trace assets like stocks and bonds traded on stock exchanges like Dow Jones and Nasdaq.
The main lesson is that the cryptocurrency market should intensify cooperation when it comes to financial regulators and trading platforms. Individuals having a high position should require to publicly share information about the trade. This will really help to ensure that the trades that are happening or will happen are legitimate and reflect real sales. Without following this step, cryptocurrencies might reach their end.