Manipulation in Bitcoin

Mar 15, 2019 · 4 min read

Is the price of Bitcoin manipulated?

That the answer to that question must be yes is one of the few things that most people, from crypto maximalists to blockchain skeptics, agree on. And not just the typical kinds of market irregularities that one expects from a young asset class, but manipulation that has a material impact on price for more than a fleeting second — and makes one question the integrity of the whole shebang. Here is famous crypto critic Nouriel Roubini:

As a general rule thumb, any declaration that something is the most [insert adjective] of all time is not very credible. Is crypto really more manipulated than 14th Century Wampum money? or 21st century Venezuelan? (The repeated use of ALL CAPS, by anyone other than a teenage Instagram influencer, is also suspect). Since Mr Roubini is a favorite foil of mine, I’m going to take up the opposite side of this argument, and attempt to show that once the digital asset trading ecosystem is built out a bit more, Bitcoin will be one of the highest integrity assets on the planet, for two reasons: fast-fungibility on a global basis, and the relative lack of insider information.

Here’s something fascinating: Bitcoin might be the first investable asset that you can quickly buy or sell the same distinct unit of almost anywhere. This ability doesn’t exist for assets like stocks or bonds, which often trade in a few (if not just one) siloed markets. Even things that seem to trade globally, like gold or fiat currency, are not easily fungible from one market to the next. You can buy dollars in New York and immediately sell dollars in Hong Kong, but not the same exact ones. With Bitcoin however you can buy or sell the same coin across the globe as quickly as the next few block confirmations.

Couple that unique feature with the growing list of global markets where BTC trades against different kinds of fiat money as well as other cryptocoins, not to mention the rapidly growing crypto derivative market. What you end up with is a market infrastructure that can absorb almost any localized attempt at price manipulation, because a pump and dump scheme in any jurisdiction is nothing more than an arbitrage opportunity at hundreds more, facilitated by the ease with which the asset can be moved on chain.

A skeptic might hear this argument and say “yeah but what if someone tries to buy lots of Bitcoin everywhere to manipulate the price?” To which I respond: “welcome to the year 2019.” In case you missed it, Central Banks all over the world have printed over $10T for the stated purpose of manipulating financial markets. The hypothetical manipulation scenario that has so many people in a tizzy about Bitcoin is actually true for almost everything else. There is a double standard against crypto, on account of its newness and the challenge it poses to traditional power structures. Every central bank out to peg its currency, or every public company buying back its own shares is practicing a form of manipulation, yet nary a tweet from Nouriel.

Which brings me to my second point. Markets that lack integrity are often ripe with insider abuse. Trading on material insider information has been the scourge of financial regulators for almost a century. Although most governments dedicate massive resources to fighting it — and Martha Stewart went to jail for it (while Bobby Axelrod, nee Stevie Cohen, did not) seldom is a major corporate event not accompanied by suspicious trading activity. Bitcoin has no insider trading, because there is no insider information.

Its decentralized governance and fixed production schedule mean that there is literally nothing to know. With stocks and bonds, every corporate action or earnings report is an opportunity for wrongdoing. Even commodity markets have some asymmetric information, because advance knowledge of a pipeline problem or cartel production cut provide an unfair edge. Bitcoin on the other hand produces 12.5 new coins every ten minutes or so, come hell or high volatility.

The only possibility of asymmetric information in Bitcoin is knowing the plans of a major investor, like Satoshi deciding to sell his coins, but that kind of asymmetry exists in every market. What doesn’t exist in any other market however is a transparent ledger that shows asset movements before the sale. The transparency of the Bitcoin blockchain gives us something akin to the opposite of material insider information.

I’ve made variations of these two arguments to some of the smartest people out there, including die hard believers in crypto, and the response I usually get is “yeah, but…” Most people seem to want to believe the manipulation angle, then go looking for a reason why. This knee-jerk tendency is why we as a community tolerate nonsensical academic research like this or government reports like this. If people regularly buying an asset whenever it’s down proves market manipulation — as argued by the UT researchers — then the historic “Buy The F’ing Dip” fueled equity rally of the past decade is also a scam. If the presence of trading Bots at popular exchanges proves shady behavior, all electronic trading is damned.

None of this means that there aren’t pump and dump schemes with illiquid shitcoins or that shady exchanges don’t allow wash trading. But given the factors discussed above, none of that has a material long-term impact on price. So why do so many insist on believing the manipulation angle? Probably because of the extreme volatility.

Fortunately, there is a much simpler explanation as to why crypto prices fluctuate so much, and it has to do with the most symmetric piece of info that there is: At the end of the day, nobody knows what a Bitcoin is worth, so the market jumps around violently in a self-reinforcing fashion to process the latest news flow or change in sentiment. As the old saying goes, let us not attribute to malice that which is adequately described by ignorance.

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