One of the earlier examples of Bitcoin’s volatility took place at the end of 2013, when prices dramatically spiked from around $US150 to more than $US1,000.
However, new research has found that the price action was likely driven by fake trades initiated by one or two big players.
TechCrunch reports that the fraudulent activity was identified in a research report called Price Manipulation in the Bitcoin Ecosystem, published in the Journal of Monetary Economics.
The report’s authors — Neil Gandal, JT Hamrick, Tyler Moore, and Tali Oberman — focused on trades that took place on the infamous Mt Gox exchange.
Back in late-2013, Mt Gox handled more than 70% of bitcoin transactions. By April 2014 it had gone into liquidation, amid allegations of hacking and thousands of stolen bitcoin.
“This paper identifies and analyzes the impact of suspicious trading activity on the Mt. Gox Bitcoin currency exchange, in which approximately 600,000 bitcoins (BTC) valued at $188 million were fraudulently acquired,” they wrote.
The researchers said two bots — named Markus and Willy — were responsible for driving transaction activity, although they didn’t actually own the bitcoins they were trading in.
And the increased transaction volume appeared to have a significant effect on bitcoin’s market value, according to the researchers (emphasis ours):
“Based on rigorous analysis with extensive robustness checks, the paper demonstrates that the suspicious trading activity likely caused the unprecedented spike in the USD-BTC exchange rate in late 2013, when the rate jumped from around $150 to more than $1,000 in two months.“
Having driven up the transaction volume, the bots were able to minipulate the bitcoin price — recouping millions of dollars in the process.
The Mt Gox exchange itself wasn’t concerned, as it still made a profit from the increased transaction fees.
In light of their findings, the researchers sounded a word of warning on present-day cryptocurrency markets, given the explosion of new coins which trade in thin, illiquid markets.
“The number of cryptocurrencies has increased from approximately 80 during the period examined to 843 today. Many of these markets are thin and subject to price manipulation,” they said.
In view of all that, “it is important to understand how susceptible cryptocurrency markets are to manipulation. Our study provides a first examination.”
The findings demonstrate that a lack of regulation on cryptocurrency trading exchanges can lead to unwanted outcomes.
And it’s a concept that lies in opposition to the view of many cryptocurrency advocates, who largely espouse the benefits of money based on blockchain technology which isn’t reliant on a central authority.
In that sense, the research paper adds more weight to a key question facing cryptos.
That is, how the market engages with global regulators — from tax authorities to traditional exchanges — will form a central part of the long-term crypto value proposition.