How the Bitcoin Price Manipulation puts Cryptocurrencies’ Trust at Risk?
A few years back when cryptocurrency was first introduced to the market, only a handful of invests took the plunge and invest in it.
At that time no one knew what is it and business potential of cryptocurrency. The few who took advantage of it even forgot about their investments.
Why would they?…
Because at that time the market capitalization value was nothing to take home – it had no value.
Fast forward today, that one crypto coin that had no value has become the cornerstone of all cryptocurrencies in the marketplace.
The coin in question is no other than Bitcoin.
Bitcoin is the powerhouse of cryptocurrencies, the largest digital currency by market capitalization.
However, in as much as this mega coin rose to prominence, it has also encountered some setbacks.
Just a few months ago (28 December 2017), Bitcoin was at its highest market value of almost $20,000 per coin, according to the CoinDesk Bitcoin Price Index (BPI).
Source: Coin Desk
The value at that time helped many investors become billionaires and millionaires. But in just about two weeks later (22 December 2017), Bitcoin’s price dropped to $13,800.
Source: Coin Desk
And today, Bitcoin market capitalization is valued at just over $6,000 from $20,000 in December 2017.
Source: Coin Desk
The Rise and Fall of Bitcoin Price
The sharp rise of Bitcoin and the sudden drop in price raised some questions…
The one question many marketers, startups, investors, including the US Justice Department and the CFTC are asking is, was the price of Bitcoin manipulated?
That question remains unanswered…
What you should understand is that the cryptocurrency market is such that you can buy and sell your coins without a middle-man, or a third-party involvement, such as the government or banks.
However, the downside of not having the involvement of a middleman in the transactions of cryptocurrencies is that it is difficult to expose fraud and price manipulation in the system.
In fact, the US Justice Department and Prosecutors who are working with the Commodity Futures Trading Commission (CFTC) are trying to uncover what actually happen, what went wrong to trigger the sudden rise and fall in Bitcoin price.
The Commodity Futuree Trading Commission (CFTC) is a regulatory body in the United States overseeing trading contracts and protects traders from manipulation.
Thus, to help uncover fraud or price manipulation, the Justice Department opened a criminal investigation in May to study the system and find out if the has been some sort of price manipulation.
Bitcoin is not the first cryptocurrency to experience a sudden rise and fall. Bitconnect, for instance, was the 7th in line as the biggest cryptocurrency in the market.
But in just a few hours in January this year, the 7the biggest coin in the cryptocurrency market was reduced to nothing and finally shut down, with investors losing $ millions.
Image credit: Metro
The graph above shows what happened to Bitconnect – the sudden plunge and closure of Bitconnect.
The Bitconnect saga and the recent Bitcoins dilemma puts the trust and legitimacy of cryptocurrencies at risk.
But many wonder whether this could gradually wear away the trust in cryptocurrencies, which has resulted in many investors holding back from investing their money.
Let us look at why…
Fear of Losing Money
Ever since the launch of bitcoin, which eventually became the most successful digital currency in the market, over 800 other digital coins have been introduced to the market.
And these coins are active in the market, so much that the competition has become intense.
Although some countries have already accepted cryptocurrencies as a way to buy and sell goods and services, it has not yet been accepted by the majority of consumers and merchants around the world.
As a result, investors are investing in cryptocurrencies just the same way as you would invest in the stock market – buying cryptocurrencies as financial assets.
They buy digits currencies in the hopes that after some time the value of their investments will appreciate.
However, if you’re in the stock market or any other financial assets market, you know first-hand that these assets are always fluctuating.
This simply means that the market value of your investment might go up today with remarkable profits, and tomorrow it goes down, costing you losses.
Ironically, some investors do not have any experience in financial assets investment, including cryptocurrencies.
Hence, they are at risk of losing money whenever there is a sharp drop in prices, which might be a result of fraud and price manipulation.
Thus, there are less investors in the crypto market.
Consequently, what happened to Bitconnect, bitcoin, and other similar experiences puts the trust of cryptocurrencies at risk, as many such investors and startups are too reluctant to invest in cryptocurrencies for fear of losing money.
The Traders Conspiring Scheme
The investigation being conducted by US Justice Department is focused on things like spoofing and wash trading in the cryptocurrency system, with a concentration on Bitcoin and Ethereum.
Spoofing and wash trading are illegal trading techniques that are meant to cheat to a specific purpose.
How Does Spoofing and Wash Trading Work?
- Spoofing: This is a strategy some crypto traders are using to trick the market. How? They submit a large number of order and then wait for the price to either go up, for example. Once the price has gone to their desired direction, they will immediately cancel the orders.
- Wash trading: This technique is a system by which a trader trades digital currencies with himself, but pretending to be trading with others. In this way, just like in spoofing, he gives a false impression of the market demands, making unsuspecting investors believe that there is a high market demand. In other words, they ask investors to jump in and make investments they shouldn’t have.
Although prosecutors have refused to comment so far if their probe or investigation turns out to be true, that there have been some sort of fraud or manipulation in Bitcoin and other digital currencies like Ethereum, what would be the future of cryptocurrencies?
Obviously it would be a big risk for the cryptocurrency market, because many investors will be afraid to invest their money where they do not feel safe and secure.
Limited Oversight of Cryptocurrency Trading
It is a known fact that cryptocurrency trading has limited oversight, this alone puts it in a tight corner, making it a target for fraud and manipulation.
Here’s what John Griffin, a professor of Finance at the University of Texas said;
What is My John Griffin saying?…
He simply meant that there is little oversight in the crypto market, which makes it vulnerable to fraud and manipulation.
As a result, there are signs indicating that some cryptocurrency exchanges have realized the growth of the crypto market could be impeded if large numbers of investors finally conclude that there is fraud and manipulation in crypto trading.
In accordance, the social media giant, Facebook and search engine powerhouse, Google, both declared that they will ban ads promoting Bitcoin or Initial coin offerings (ICOs).
Therefore, with limited oversight of manipulation and fraud in bitcoin trading and the cryptocurrency market at large, you can clearly see that the Bitcoin price manipulation puts cryptocurrencies’ trust at risk.
Presently, no one from the international bodies, such as the US Justice Department and the Commodity Futures Trading Commission (CFTC) is saying anything about the investigation so far.
Thus, it goes to show that there is a huge challenge for investigators and prosecutors working with them to identify price manipulation and fraud in the system, which means there is no transparency in cryptocurrency market trading patterns.
This obviously puts the trust of cryptocurrencies at risk, as investors will be less eager to make investments for fear of losing money beyond imagination.
However, if cryptocurrency marketers can come together and create a cooperative body between financial regulators and trading platforms to improve transparency in the marketplace, they will certain gain the trust of cryptocurrencies.
How can they do this?
Simply by sharing data of trading patterns and behavior of traders. The inability to establish transparency in the system has put cryptocurrencies’ trust at risk.
Feature Image Credit: shutterstock.com
Inpost Image Credit: shutterstock.com, coindesk.com
DisclaimerThe writer’s views are expressed as a personal opinion and are for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
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