Bitcoin’s Attack Vectors: Price Manipulation
All sorts of heavily-regulated markets are prone to manipulation at a number of levels, so it would be extremely naive to dismiss claims of price manipulation in Bitcoin, given its nascency and relative lack of regulatory oversight. In this article, we’ll consider how an attacker might game this to damage the network.
You’ll get two schools of thought when it comes to determining the price of Bitcoin – those that price a coin in dollars, and those that price it in BTC. For all intents and purposes (until fiat collapses and maximalists end up owning 99.9% of the world’s wealth), the former is probably the more popular point of reference.
Much as we’d love to separate Bitcoin from the legacy infrastructure, the fact is that it’s hard to extricate it, for now, from fiat – miners need to pay for their electricity in dollars/pounds/euros/yen, and if Twitter is anything to go by, far too few investors take the adage don’t invest more than you can afford to lose as anything more than some kind of fairytale for bears. We’ll touch on the importance of Buyers/Hodlers of Last Resort shortly, but until then…
…Is Manipulation an Issue?
Look, as bullish as I am on Bitcoin in the long run, I think it’s absurd to assume that there wasn’t some degree of inteference insofar as the (relatively sudden) moonshot to 20k was concerned. You may disagree, but I can’t reconcile strong Schelling points with a 20x increase over the course of the year.
There are undoubtedly a couple of factors that pushed the price to $20,000 (FOMO — Fear Of Missing Out — and hopium being just a couple). According to some, there was a much stronger force at play — that of the elusive stablecoin, Tether. John Griffin, a professor specialising in the analysis of financial fraud, published an extensive paper in July that points to the strategic issuance of Tethers in order to prop up the price of Bitcoin in 2017. Of course, many actually doubt that the tokens in circulation are really backed 1:1 with USD in the first place.
There’s concern that other tactics can be used to manipulate or suppress the Bitcoin price (the Justice Department certainly seems to think so), like wash trading or spoofing. Some also worry that the availability of derivatives will further result in a vector for big players to game the markets.
We’re in It For the Tech, Right?
I’d say that these concerns are overblown – at least, if you’re not just here for the short-term gains. You’ll get entities like whales and panic sellers dumping their coins on the market fairly regularly, but this just ensures the transition of Bitcoin to stronger hands (the aforementioned buyers and hodlers of last resort quash the negative feedback loop of mass sell-offs). Those investing sensibly set their sights further than a single market cycle — what one may describe as a higher time preference, where immediate expenditure is offset for greater reward at a later date.
Concerns about miners abandoning their activities if it became unprofitable to mine (the ‘death spiral’) also assumes that everyone across the board is unwilling to mine at a loss for the time it takes for difficulty to readjust.
This isn’t an attack vector that has any impact on the technology itself, or on the mindset of a growing number of participants immune to capitulation (wherever you stand on the ‘digital gold’ narrative, you can’t dispute the fact that it’s good for adoption) – if that weren’t the case, we’d have buried Bitcoin in the plot next to that of Mt. Gox.
As with sociopolitical attacks, this is an inconvenience that will undoubtedly dwindle over time. It’s only a problem when discussing Bitcoin in terms of fiat currencies, which many proponents have very little faith in at all.
This is the fifth part in a series on Bitcoin attack vectors. If you haven’t already, check out parts one, two, three and four here.
Cover art by the author.
