The U.S. Department of Justice (DOJ), along with the U.S. Commodity Futures Trading Commission (CFTC), opened a criminal probe into traders allegedly manipulating the prices of Bitcoin and other digital currencies.
As commodities, virtual currency falls under the CFTC’s jurisdiction. The DOJ probe into cryptocurrency price manipulation is looking at traders who artificially influence the prices of Bitcoin and Ether for their own profit at the expense of the average investor, who isn’t aware the market is rigged.
Rumor has it that the DOJ is going after the smaller exchanges that fail to weed out illicit trading.
Bitcoin’s Fall after the Criminal Probe Announcement
After Bloomberg broke the news about the criminal probe, Bitcoin fell 14 percent; other digital currencies fell between 10 and 20 percent.
Cryptocurrency is an extremely volatile market anyway, and just a few institutional investors could change the price drastically.
The probe should lead to more secure financial custodians, which may encourage new cryptocurrency hedge funds. More institutional investors may lead to a long-term bounce back for Bitcoin.
Why Do Novice Investors Choose Cryptocurrencies?
In 2017, Bitcoin, in combination with all other virtual currencies, rose over 3,300 percent. Wall Street got in on the game as well, making Bitcoin look like a great investment to many people.
Celebrities and sports stars, including Floyd Mayweather, Mike Tyson and Mel B were on social media talking about Bitcoin, which some individuals felt validated their investment decision.
How Prices are Manipulated
The tricks used to manipulate digital currency prices are not new, but an individual who never invested in stocks may not recognize price manipulation.
Manipulating Bitcoin’s price is as easy as faking heightened activity.
Traders can place fake orders, only to withdraw them or buy a large amount of Bitcoins and then resell them in the same exchange, but through a different broker. Traders can buy and sell coins among themselves solely to fake increased activity as well.
Online pump-and-dump chat rooms draw large groups who agree to buy large amounts of altcoins and then sell them at the same time.
Investors see the artificially inflated price and buy, but the pump-and-dumpers all sell at an agreed-upon peak price, before the price tanks.
Typically, little-known altcoins are bought, then members talk them up on social media to draw in newbie investors, but there are groups that buy bitcoins.
Pump and dump group members get duped as well. It’s like a pyramid scheme; the more members a person brings in, the faster they’re alerted to sell. Only those at the top make money.
Shady traders and exchanges drove federal prosecutors to open their criminal probe.
Sylvain Ribes, who coined the term, fake volume, found a top Hong Kong exchange where more than 90 percent of all trades never taking place.
Improper trading typically occurs in smaller markets; major investors usually trade in the over-the-counter markets where large trades don’t usually influence prices.
Will Bitcoin Exchanges Survive?
Bitcoin has survived the 2014 Mt. Gox disaster; the $500 million Bitcoin loss that halved Bitcoin’s value. It also survived subsequent multi-million dollar hacks at Bitstamp and Bitfinex Bitcoin exchanges.
People still trade at exchanges; the lure of quick profits is hard to ignore. The public is learning to recognize reputable Bitcoin exchanges so I believe the value of the digital currency will rise again.
In my opinion, true Bitcoin fans are rejoicing in the price drop after the criminal probe announcement. They are likely to buy cheap bitcoins as a long-term investment and wait with eternal optimism.
However, this price-fixing scandal shows once more that crypto-currencies are highly risky assets and should only be traded by people who know what they are doing.