WSJ: Cryptocurrency Trading Bots Are Manipulating Bitcoin Price
On Tuesday, October 2, Wall Street Journal released a report stating that purpose-built software’s aka the crypto trading bots are manipulating the price of Bitcoin. Crypto manipulation using trading bots is certainly not a new thing in the market.
Regulatory agencies like the Securities and Exchange Commission (SEC) has previously stated cryptocurrency exchanges are vulnerable to manipulation. The SEC also cited it has one of the major reasons to turn down several Bitcoin-ETF proposals in the past.
Several industry experts talked to WSJ explaining how do the bots function to create manipulation. Stefan Qin, the managing partner at cryptocurrency hedge fund Virgil Capital, told that his company uses its own bots to counter “enemy” bots on a number of global cryptocurrency exchanges. Referring the digital currency market as the “Wild West of Crypto”, his company has developed several error handling functions to identify illegal activities in the market.
Virgil specializes in the process of arbitrage. Qin told WSJ about an incident earlier this year where the company faced a “harassing bot” targeting their Ether trades. Virgil check the price every minute for arbitrage opportunity in the cryptocurrency prices.
What the harassing bot did was that it would post a selling order for Ether at a price lower than what other sellers offered, and thus prompted Virgil to put a buy order. Just before Virgil would put the buying order, the harassing bot cancelled its selling order. Qin said that Virgil was never able to complete the order and simultaneously it led to increase in the price on other exchanges.
This entire process of faking orders is called “spoofing”. This entire process of manipulation creates a virtual impression that the supply or demand for an asset is higher than the actual.
However, Bitcoin proponents and opposers of regulatory measures don’t consider price manipulation to be something that is wrong. Quatloo Trader is one such cryptocurrency market manipulation tool developed by trader Kjetil Eilersten. He told WSJ that it pointless to stop crypto manipulation. He rather believes that small traders should be provided with sophisticated tools to level the playing field.
There are certain trading bots which also promote the pump-and-dump scheme. However, all these activities certainly don’t go well with the regulators. The SEC and the CFTC have, at several occasions, warned people over the pump-and-dump schemes.