The tail end of 2017 was marked by many things, but nothing went from fringe to mainstream faster or with more vigor than cryptocurrency. Once heralded as a questionable replacement for modern currency, forever destined to exist on the darker corners of the deep web, cryptocurrency became, in the final weeks of last year, the buzzword on everyone’s lips. News that cryptocurrency—from Bitcoin to Ethereum and others—were rising in value each day, sometimes by up as much as $1000 in 24 hours, had many running to their phones to download Coinbase.
While the volatility of the crypto-market means that there is no definitive answer on what the future holds, many are trying to figure out just how unstable we should expect the market to stay. When the worth of a USD-BTC exchange jumps from $150 to $1,000 in just over two months—built on the back of word of mouth, media coverage and a sudden interest in all things crypto—one can’t help but question this. Now, in a recent paper published in the Journal of Monetary Economics, researchers Neil Gandal, JT Hamrick, Tali Oberman and Tyler Moore have focused their attention on the reality of bitcoin price manipulation.
The research states some obvious points: the bitcoin market, as anti-establishment as it is, remains controlled or manipulated by one or two major players. The research was born out of the suspicious trading activity that correlated on days in which the exchange rate of US dollars (USD) to bitcoin rose by an average of 4%. The suspicious trading seems to have caused a never-before-seen spike in the exchange rate, inflating the value of bitcoin for the first time since the market began to be periodically examined in 2013.
The price manipulation was made possible by the sudden increase in available cryptocurrencies in the market, a number which increased from approximately 80 to 843. And while market capitalization (the market value for a company’s outstanding shares) for bitcoin increased, the market for the other less popular cryptocurrencies—one whose name had yet to become shorthand for the market as a whole—remained very thin, making them susceptible to price manipulation. Two bots, named Markus and Willy, were making what the researchers cited as valid trades, but neither bot actually owned any of the bitcoin they were trading. A simple hack of the Mt. Gox bitcoin currency exchange, which handles 70% of all bitcoin transactions in the world, would allow these bots to make fake trades and run off with millions, all while manipulating the price of bitcoin, or BTC, for the market at large.
As a result, speculation over a manipulated market drove the worth of bitcoin and other cryptos up, even while the actual available currency remained stagnant. The widely reported trading volume caused a stir; everywhere you turned, talk of bitcoin became commonplace, from CNN to the New York Times—even American business magnate and philanthropist Warren Buffett threw his two cents in, though his considerations were far from positive. Still, when Warren Buffett talks money, you listen.
Missing Mainstream Adoption
The future of cryptocurrencies remains murky, though not exclusively as a result of this latest issue. Still, cryptos like bitcoin and ambitious projects like the blockchain preach the gospel of decentralized banking as a means to undo regulation. But the manipulation of the market is both a sign of growing pains and perhaps something greater. Mainstream finance is sure to continue to reject cryptos, both out of historical hubris (nobody likes something new) and a sense that the volatile market is a sign of things to come. But countries like Japan, which legalized bitcoin in April of 2017, are attempting to at least legitimize the currency as a global possibility. If countries are going to follow suit, it’s important to do an in-depth examination of not only the risks but of the costs of undoing a century-plus of economics. However, for many that disruption might be entirely the point.