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Systemic Risks of Rampant Price Manipulation in Crypto Markets

Looking at charts you can get a strong sense of price action based on the understanding of healthy market behavior. But what if the market behavior is fundamentally unhealthy? No amount of technical analysis would have predicted that Enron would have gone to zero. And this is why it's critically important to understand the presence of systemic risks, that is, fundamental problems in the market that could lead to something going to nothing. When systemic risks hit a critical point very little can be done to reverse the price action as the market simultaneously realizes they're standing on air (like in a cartoon there's a pause before the freefall happens) and prices come crashing well below previous expectations of a "bottom." See Enron, Lehman Bros.

Various pundits have weighed in on Bitcoin and cryptocurrency being variously a "pyramid", a "ponzi," a "fraud," etc. and I have previously felt like those commentators just didn't understand this new technology. I still think that blockchain and cryptocurrencies could be invaluable, but at this moment, we're on the verge of what could be a serious problem due to the fundamental risk of a market that could be wildly overvalued while the "charts" and "TA" suggest a technical level for a reversal. If nothing bad happens then perhaps this will happen. If the other shoe falls with Bitfinex and Tethers then the ground will open up and swallow us all.

We know from well documented analysis, that Bitcoin prices were heavily manipulated in 2013 and this is discussed in this paper:

weis2017.econinfosec.org/wp-content/uploads/sites/3/2017/05/WEIS_2017_paper_21.pdf

as well as here (by the same authors) in less formal terms:

voxeu.org/article/price-manipulation-bitcoin-ecosystem

and a more TL;dr version here:

inverse.com/article/40229-bitcoin-price-manipulation-skyrocket

And we know now in 2017 that Bitcoin prices have been heavily manipulated in China and all across exchanges globally. The systemic risks apparently were bad enough in China that they shut down all exchanges. The data on this isn't so great, but we do know that China inspected exchanges for price manipulation prior to shutting them all down.

This piece summarizes the China problem:

thebitcoinnews.com/bitcoin-price-manipulation-now-and-then/

which boils down to this: Chinese exchanges are using wash trades and algo bots to pump up volume and price to attract more users/traders.

And this Redditor cites here one Chinese exchange owner calling out two others as inflating volume through wash trades:
reddit.com/r/BitcoinMarkets/comments/4cavoj/reminder_chinese_bitcoin_spot_exchanges_okcoin/

Naturally, this widespread scheme led to the banning of cryptocurrency in China. Should we see more revelations of such practices the regulatory risk will be extreme. But that's really only the tip of the iceberg.

The problem now is Bitfinex and the degree to which they may have inflated market prices for Bitcoin and due to extreme correlation in the crypto market, everything else including ICOs which were already extremely inflated from speculation.

(more below)

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I should restate that last sentence:

The problem now is Bitfinex and to what degree they may have inflated market prices. And due to the extreme correlation in the crypto market with Bitcoin, to what extent will all of those cryptoassets be affected by a potential negative sentiment/regulatory risk trigger?

Bitfinex loses funds and creates a ponzi scheme

Bitfinex we know lost $72 M in customer funds in a hack and resorted to seizing 36% of their users balances to continue operating. Then they promised to pay back those funds by creating a token for repayment which they then had their users sell to investors for equity. So essentially new investors in Bitfinex bailed out the old ones when they did not have the funds to repay the old ones (i.e. their customers). This is the exact definition of a ponzi scheme.

In order for Bitfinex to make up the $72 M that they did not have for investors to begin with, they would need to regain trust in their users and the platform by making money which means attracting as much trading activity as possible.

However, what we've seen is many extremely questionable practices that will lead you to question the way the market has valued ALL cryptos.

1) Bitfinex has been aggressive about allowing trading of questionable cryptos, notably Bitcoin Gold. Given that a large Bitcoin holder can very effectively dictate the price on a thinly traded new coin such as BTG that trades only on a handful of exchanges through wash trades with algo bots to attract more traders and inflate volatility, it's highly likely that the main reason Bitfinex chooses to list various altcoins is to inflate their value and attract trading activity without concern for their traders/investors risks.

Given that inflating market valuations for various altcoins appears to be a primary strategy for Bitfinex, that leads us to the problem of Tether.

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The discussion of Bitfinex and Tether has been documented extensively elsewhere, most recently in the New York Times:

nytimes.com/2018/01/31/technology/bitfinex-bitcoin-price.html

and the CFTC has subpoenaed Bitfinex and Tether to explain themselves while appearing to evade an audit by firing their auditor.

This all LOOKS VERY BAD. If Bitfinex had any sense of optics, then they would not have fired their auditor. But if the worse outcome would be the revealing of an elaborate scheme to conceal a lack of funds to back Tethers and/or a scheme to use Tethers as a way of inflating various coin values and/or attract volume, then firing the auditor would be a natural and necessary decision.

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I don't want to go into excessive detail about what's going on with Bitfinex as it is somewhat circumstantial evidence but the evidence is strong that something bad could happen with Bitfinex/Tether and the fallout from this could be catastrophic for the ENTIRE crypto market.

This article sums up a lot of what's going on with Bitfinex and how they could be orchestrating a very large and complex ponzi scheme:

medium.com/@bitfinexed/the-bitfinex-dilemma-blow-up-now-or-try-a-hail-mary-to-retain-in-business-10b9d989359f

That being said, it is also possible that they have generated enough income through the massive global crypto bubble to have repaid their debts.

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Man, all this talk is making me super paranoid to the point of going and reading over Kraken's policy pages. they say they have full reserves, but in terms of their "audit" process they only have a Bitcoin process outlined.

And since I moved a bunch of USDT and XMR over to them recently I still haven't been verified. Maybe I should have just stuck with Bittrex but at this point I think trading only the most liquid pairs makes sense. If we see some adverse market action unpredicted by charts then the coins with the thinnest volume and/or most speculative purpose will have their value sucked out just as quickly as they were pumped up ( for example Ripple, DASH, XLM, NEO).

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I'm going to wrap this up but want to point out also that there is a lot of suspicion regarding Charlie Lee's very public decision to sell all of his Litecoin and how that seems like a blatant conflict of interest that should have been resolved BEFORE he worked at Coinbase.

medium.com/@bitfinexed/coinbase-insider-trading-litecoin-edition-be64ead3facc

All across crypto are blatant conflicts of interest that scream red flags... after the Bitcoin Cash fiasco even Coinbase has been tainted by impropriety.

And given how lacking in responsiveness EVERY exchange I've used has been, you literally have no options. I applied for an institutional account with GDAX in September and still have not heard anything. I CANNOT get "re-verified" with Poloniex because either their system doesn't work or they have some serious problem that requires them to restrict withdrawals through a ruse. Let's say I'm getting my coins out of there one day at a time. And then Kraken says their tier 3 verification takes "a few days" but it's been a few days and still nothing.

Bittrex was actually the best at verifying me. And HitBTC was pretty sketchy so I never got verified. But the point is these are all SO immature that one falling domino could wipe out the whole ecosystem.

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SUMMARY:

Given that rampant algo bot price manipulation still appears to be affecting crypto markets as of this past week the systemic risk is this:

1) Bitcoin and subsequently ALL crypto markets have been severely overvalued due to rampant manipulation in exchanges. The study of the 2013 trading bots showed a cost of $1000 per $1 M in volume traded. I haven't done the math but you could freely manipulate prices with most coins on most exchanges.

2) These exchanges collude tacitly since a crackdown on algo bots, wash trading, and other bad practices could significantly affect their income. So most exchanges are likely contributing to this problem and allowing it to fester.

3) While current charts APPEAR to reflect a "bottom", the strong likelihood of manipulation in the exchanges suggests that the market could be reasonably 4X overvalued (or more).

If we take out the price manipulation in the market and consider a market top of 5k then current valuations seem less and less like a "bottom" than another level of a downward trending market that is reversing a trend of algo bot price manipulation that goes back to at least early 2017 if not sometime in 2016 when Bitfinex lost their funds.

The systemic risk is this:

1) Bitfinex and/or Tether fails or gets a serious regulatory assessment/inquiry that panics the market.

2) A mad rush for the exits in Bitcoin alone would trigger a global collapse in crypto valuations due to extreme correlation. While some coins can withstand correlation for a period of time after a Bitcoin price move, eventually the large arbitrage opportunity forces the market to "catch up" since some coins become relatively cheaper (i.e. more coins for less Bitcoin/ETH)

3) While we could see a lot of volatility much like we did between Nov. 2013 and 2016 the risk is that crypto users lose trust in the system and it all falls apart as pyramic / ponzi schemes do.

If a large number of market participants leave the market, then large coin holders could become even more concentrated in their leverage over the network since they can buy back in at lower prices and manipulate it even more.

Essentially, this game could last a VERY long time until some individual or group controls so many coins that every "pump" results in a collapse to zero.

As described in this great piece that talks also about how a group of self-described math geniuses strongly resemble the story of Isaac Newton, discoverer of gravity and victim of the South Sea Bubble:

ftalphaville.ft.com/2015/01/16/2091482/how-to-corner-markets-bitcoin-style/

This last piece was written 3 years ago so that tells you how "conservative" a 4X multiple overvaluation might be.

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The sell volume is so thin now this Picasso bot appears to have started working.

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I can see this busting through 9k with a little fake buy wall spoofing...

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Then again I'm not seeing any of the spoofing like I've seen recently. Maybe this is just thin volume but it's highly unusual for very small orders to be placed for arbitrary number values throughout the order book.

You don't think of a price like $8845.90 to sell 0.001 Bitcoin.

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It's more like I see a lot of volume around $9000 so I will use that as the main sell price and distribute my orders at some percentile interval around that main level. Maybe there is an algo bot that breaks it up into a progressive distribution, which would be very efficient and optimizes your sale over a probability distribution that the price target gets hit. But I'm skeptical that's what is happening because a trader with enough funds to use a skilled algo bot isn't likely to be dealing with such small amounts unless they serve a strategic purpose.

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Volume noticeably picked up around $8600 when the price began to take off at 7:20 PM EST on a Friday so this definitely looks suspicious.

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If this move breaks 9k and a bunch of buyers appear out of nowhere to start buying on a Friday I'm going to be shocked. It seems like weekend price action is largely driven by algo bots so this should be interesting if it breaks 9k. There appears to be more resistance below 9.5k than between 9.5k and 10k in the order book.

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I can't say that I've seen the market this orderly and quiet in a long time. Unless some miracle volume comes out of nowhere this market isn't getting past 9k anytime soon but sell volume is pretty thin so in theory a wash trading strategy could keep the price afloat long enough for some spoofing action later in the evening...

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If this 6700ish trendline holds on the next dip then the market could be showing some real strength, but if this current move up to $9500 turns into a break back to $10600 then the market could really start buying into this reversal as the 50 EMA approaches. Breaking the 50 EMA could be challenging after such a recent correction as 10k definitely feels like the top of the market for the short term. With on-chain transaction volume so low I just don't really see real "growth" in the market to justify the price.

So far volume has stayed relatively higher than after the last several dips, but I would be surprised to see a definitive reversal so soon. We're still likely to see another big dip unless we get a breakout above $9500.

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Cointelegraph TA guy says:
This is changing the way the cryptocurrencies perform. In the past 90-days, the correlation between the S&P 500 and cryptocurrencies has risen sharply to 33 percent, which is way above the previous high reading of 19 percent, according to Nick Colas, co-founder of DataTrek Research. The long-term average is way lower at 1 percent.

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This would seem to validate my feeling that a sharp decrease in risk appetite will hurt the crypto market and potentially trigger a bear market as more conservative investors will not have incentives to throw their money into highly speculative investments like crypto.

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Given that the 50 EMA is starting to trend down it seems more like we'll see another sharp reversal as the price gets closer to that line.

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Wow. And I totally got spoofed. I saw decent volume lined up at $8800 and thought ok, this looks like a sure thing if the market will sell at this price and of course, all of the buy volume at $8800.01 and $8800 disappeared RIGHT as the price hit $8800.01 and the thin volume below it meant price just dropped off immediately to $8750 so I closed out instead of taking more risk.

WHAT A FUCKING JOKE.

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I see yet more unusual order volume around $8700 so I'm going to see if these get filled or if they just disappear suddenly.

Just as I predicted "Spoofy" has come out to trade on Saturday morning in the middle of the night...

There's almost no buy volume above $8700 except for a suspicious group of orders between $8700 and $8705.

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I almost think there are fake orders clustered every $50 so as not to be too conspicuous and then a larger order around the larger volume at $8500. If the buy volume at $8500 is fake too then this sell side volume might chase the price below $8500 assuming these bots aren't spoofing opposite sides of the market.

It seems like quite a bit of spoofing is happening right now just from unusual fluctuations in order volume at price levels nowhere near the market price.

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Watching a group of orders at $8708.70 of 60+ BTC it started being filled and 20 BTC cancelled off of it. The rest of the orders at that price level started filling but then appeared to get cancelled and price dipped below $8690.

Given that so much of the order book consists of fake volume you either need to place bets based on TA or use a higher probability price target.

Looking at TA I would presume we're more likely to see $6700 again than $9000 if this order book is filled with fake orders, but I can see the price bouncing off $8500 unless a lot of stops are getting triggered.

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While patterns aren't particularly reliable at short intervals the obvious pattern now is a descending triangle as buyers are getting exhausted so this move below 8k could be a big stop trigger / panic trigger.

The order volume above $7900 looks fake to me.

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What appears to be real sell volume is starting to pickup at $7950 so we'll know soon enough if these buy orders around $7900 actually get filled.

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Big rush to chase the price lower so $7900 should either be strong support or not so much if Spoofy is working.

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Sell volume has thinned out so if these orders at $7900 get filled we should see a sharp bump up otherwise we'll know it's just some spoofing strategy.

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The thing about a "buy wall" is that a lot of buyers can jump in front of it trying to "get in" and hold prices up before the price level where orders are clustered gets hit. What I've seen now is that this fake order volume or strategy of cancelling it based on some algorithm I can't explain makes identifying entry price targets much trickier as the last time around I thought I had identified where the bottom would be and the market ended up overshooting by another 10% or so.

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If there were a fully transparent P2P exchange that showed what user accounts were trading and placing orders that would be an incredible step towards eliminating cheaters.

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And this spoofing strategy appears to have failed to keep the price above $7900 and some magical order volume just appeared at $7800. Not sure how long this is going to last. I can see a bounce at $7500 but I could also see the bottom falling out of this market...

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What's bizarre is that the GDAX site crashes if I click twice to cancel my order.

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Now that price has bounced back to $7900 this magical buy volume has popped up to $7850...

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With all the buy orders positioned above $7750 one would think this market was about to take off... But if it's fake... a sophisticated operator would know they couldn't accurately determine how much of the order book is fake given the number of other bots using the same tactics. It seems that the game theory of bots competing against each other would see them trying to collude or tacitly colluding but since there's an incentive to cheat then one cheater could drive the market down very quickly as they all start unloading as much as possible.

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The problem with a bearwhale theory is that if one side is working to push the market lower for "cheap coinz" and another group is trying to keep price up to unload more coins before the market hits exhaustion then this should cancel out if both groups have equal funding. But if one group has more funding then they will generally win overall and there will be an incentive for the loser to switch sides so they can collude. As long as they can enforce some punishment for cheating on that agreement or tacit agreement then they should be working on the same side of the trade. I'm just not sure what kind of punishment mechanism would be used here.

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If the overall order book is large enough volume then it would be reasonable to expect that price manipulators don't have enough funds to control more than the order volume that is somewhat closer to market price and that outside of that window of uncertainty you gain more certainty about how the rest of the market is authentically signaling intentions. This would suggest that overall market signals are still somewhat reliable. I'm not really sure how to calculate or determine a "realistic" understanding of the order book based on fake volume since that fake volume will still trigger a certain amount of buying. So if you're to take:

A as order volume showing

and assume

order volume of A will generate 0.X*A of actual orders based on how effective the market regards order volume A in affecting price.

X would be the percentage of the actual order book that is "real".

Using a distribution of realistic probabilities (making some guesses basically) based on some assumptions about the economic power of the groups that are influencing the market you could could up with a reasonable guess to the "real" size of the order book at some specified percentage below or above the market price.

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Spoofing = fake orders meant to drive price higher or lower depending on which side of the trade you're trying to influence that are meant to attract more buyers or sellers to "join the party" before rudely taking off and leaving those buyers or sellers wondering what just happened.

Given sufficient volume this tactic can generate large price movements that build up over time as some network effects start to kick in...

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Assuming these sophisticated bots have powerful data/performance collection and analysis strategies you could really fine tune a lot of variables to minimize cost and maximize return.

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My intuitive understanding would be that the most powerful bot can assume that there won't be competition otherwise both bots would function inefficiently so one side of the book can be assumed to be mostly "true". So if big orders are lining up in the bid and even if they are fake, there can be assumed to be a certain effectiveness of these big orders relative to what's showing in the ask order book.

So then as long as the bots have a cumulative size of some ratio between what they throw up and what's showing in the "ask" then the market will be have some high probability of moving in the intended direction.

If higher sell volume comes along then this strategy would require more funds to throw up more volume. At some point if there's too much volume then the bots can't dictate price as effectively.

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This could explain why my previous trades on downward trending price action were fairly effective as I was following the order book. Until they weren't as volume started to pick up the more the price fell.

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Generally, a strategy would not be to see excessive volatility, but just enough to have inside knowledge on the probability of price movements within a certain range.

I could see sell walls being an effective way of controlling upwards price movements from getting too out of control as both panic and mania could result in less efficient trading outcomes based on a price manipulation game strategy since the bots would have less control over outcomes if the market grows too big.

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It seems like if bots are explicitly colluding then a cheater that sells or buys more than they should given their contribution to the overall "fund" would then be punished by the rest with higher than normal volatility that would punish that cheater's attempts at gaining an advantage by moving price more than the cartel's "optimal" range.

This is totally speculative and requires some math to confirm so I'm not so sure about this.

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A study of cartels and the kinds of cycles they experience with cheating and the kinds of punishment mechanisms they use could shed some light on this.

Given that game theory has documented this as a prisoner's dilemma outcome that can only be resolved with information symmetry the natural solution would be full transparency. So if all members of a cartel can very clearly see that no one is cheating or is cheating and can respond swiftly then the incentive to cheat will be low. Or there will perhaps be an incentive to rig the transparency or cheat on the system used to show transparency by creating some false information that could then be used by the perpetrator to make some arbitrage trade prior to the event (i.e. insider trading).

This would seem to be a potentially revolutionary blockchain "solution" to a big problem. Assuming blockchain doesn't have some systemic defect that we've yet to understand.

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Just based on visual comparison using cryptocompare every coin is extremely correlated with the exception of Ripple, Bitcoin Cash, Ethereum Classic, and Zcash, which while still strongly correlated, have had some deviations.

Zcash showed resilience in a recent decline because some ridiculous pump analysis came out projecting Zcash to have some hypothetical valuation that was completely absurd.

Zcash very strongly has the organizational structure of a security with distributions to investors so I can see their leadership getting in trouble for fraud should crypto start to attract lawyers that smell blood.

Ripple had a huge gain and loss prior to Bitcoin's rapid decline and that seems to have given them some support since they had already lost the equivalent degree of value prior to Bitcoin's big decline.

Bitcoin Cash more or less has been highly correlated except they experienced a strong gain earlier than the other coins. This was likely the result of easy price manipulation due to the relatively high concentration of wealth in the network.

I'm not sure why ETC didn't dip as hard as the others but otherwise they've been highly correlated. Perhaps there was some positive news.

When looking at these 7 day charts all lined up together it's comical how little distinction there is in value between one cryptocurrency and the next. If Bitcoin goes down they all lose value until the market can determine another meaningful gauge of relative value which apparently isn't that persistent if Bitcoin is failing.

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The bid spoofing is nuts right now. I see a number jumping by 100+ bitcoin at a time...

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That would be an order for $831,000 so if we presume Spoofy has $60 M or more on several exchanges then this is a tiny percentage of that portfolio.

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Even if we consider this order posting and cancelling as some kind of competition between bots trying to position themselves it wouldn't really change the fact that these bots are trying to force other bots to position themselves ahead so they can get the benefits of a price increase without having to buy. The overall effect is spoofing as what a market observer would think of as a "buy order" is in reality just a game to induce buying from others.

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This is an interesting paper on various parameters that can affect how an insider trading on private information might trade, which could arguably be applied to a market in which certain traders have market insights based on their understanding of mechanisms (i.e. bots / real-fake order volume) in the marketplace not understood by non-insiders.

dspace.mit.edu/bitstream/handle/1721.1/47831/429508689-MIT.pdf?sequence=2

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Well someone has already taken this GDAX price manipulation to the next level, that is, the SEC:

reddit.com/r/CoinBase/comments/77ruuq/coinbase_price_manipulation_spam_trading/

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This guy wrote in late December about what he thought was a bot's price manipulation strategy using GDAX:

shahmeeramir.com/introducing-gujjar-the-bot-responsible-for-bitcoin-price-fluctuation-in-coinbase-97a6725f91a8

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BTC price just shot up $90 in 3 minutes despite previous volume being non-existent.

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And it keeps on going with this thin sell volume. Based on my understanding of the arbitrage trade between two exchanges, if you're seeing "buy walls" then you should be looking for a sell target as selling at a higher price will be optimal. If you're seeing "sell walls" then you should be looking for a buy target as the arbitrage will be reversed and bots will be looking to buy at lower prices to reverse the trade.

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The success of this trade will depend quite a bit on how many "real" buyers and sellers there are in the market. Given poor / fake liquidity and an order size that's too big you could end up having a hard time entering or exiting the trade.

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The big sell wall at 8400 has split between 8450 with a lot of real selling at $8400. Now we're seeing a bigger wall at $8500. The buy wall has bumped to $8380 so there seems to be two-way arbitrage between competitors here. The ideal scenario would be to collude to go both ways on each exchange to maximize arbitrage but if incentives to cheat or organizational unity is poor then you should end up with spreads closer to zero.

So maybe picking the "winner" between bot strategies reveals more about optimal trades than trying to understand the order book. But based on what I'm seeing there is more "real" sell volume than buy volume where spoofy looking fluctuations are happening.

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This most recent price move was around 3% in 5 minutes.

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Given the resistance above $8400 I would think this market should collapse back fairly quickly but on low volume a heavily spoofed order book could see this inflated volume continue for a while.

Notably, Coinbase has yet to make any announcements about the "insider trading" that happened when Bitcoin Cash came out. Obviously, those were algo bots going wild, and they don't know exactly how to handle the PR fiasco that will be.

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There seems to be enough volume positioned above 8k for this price action to continue for a while and then quite a lot of volume between 7k and 8k too.

The bulk of the market seems to be betting around 6k but assuming these orders between 7k and 8k are too far away from the market price to influence the price then this would suggest strong support between 8k and 7k.

Given a lack of major price triggers we could see a symmetrical triangle forming that would suggest a near term bottom of $6700 with the heaviest support/resistance around 7.5k Taking small positions to minimize risk between 6.7k and 7.5k should generate a return unless there is a major negative sentiment trigger.

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Omkar Godbole (Cointelegraph) TA:

The above chart (prices as per Coinbase) shows:

The retreat from $9,090 to $8,750 has established the Jan. 17 low of $9,017.41 as strong resistance (marked by a circle).
Further, the descending trendline is intact.
View
A daily close (as per UTC) above the trendline would confirm bearish-to-bullish trend change and could yield rally to $11,695 (Jan. 28 high). A violation there would expose resistance at $12,500 (Dec. 30 low).
Bearish scenario: Rejection at trendline followed by a 4-hour close below $7,540 (Feb. 2 low) would shift attention to $5,873 (Feb. 6 low).

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And BTC direct volume just fell off a cliff again to below $1 B in the last 24 hours. This would reflect a continuation trend where previous declines in volume following a large price move suggest the market is wearing out and another trigger will be needed to increase market activity.

Combined with seriously declining on-chain transaction volume the market appears to be contracting very sharply. This doesn't seem like something that will magically reverse without some organic factors such as a large new market (aka China) re-opening its doors.

I'm just going to say that I don't see price getting very far above 10k anytime soon without some very big changes. That might mean some kind of adverse scenario where some bad actors are outed and punished. This will scare people off for a while but if it improves competitive conditions in the market then people will come back eventually.

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If we make some adjustments to 1 year market upside being realistically more like 11.5k than 20k then all entry levels above 5.75k will likely have poor risk:reward for long duration trades and entries between 5.75k and 7.5k will have slightly positive risk:reward for short duration trades (less than a day) if we assume downside max to be between 30-40% (~) and upside max to be between 10-40% (short duration exit price target of $8250).

This suggests optimizing entries for 5k-5.75k but allows for smaller trades up to 7.5k.

Preferably trading should happen during non-business hours (or weekends) when negative news/sentiment is less likely to significantly affect prices. While you might get regulatory risk out of Asia it might not be heavily traded upon until early hours in America/Europe. For example, when India had some public official commenting on cryptocurrency in a negative way the fears from India banning crypto did not snowball for quite some time because the news came out in the middle of the night.

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This isn't well thought out, but it seems to me that rather than these bots competing on both side of the trade, it would make sense that they are on both sides of the trade with a buy wall and a sell wall. With both in place you could effectively dictate where people or other bots place orders.

The goal of the buy wall is to create an illusion of demand, which would result in more buy volume to increase support / keep the price from falling.

The goal of the sell wall could be to suggest a target for others to place their sale orders given the existing order book. By repeatedly moving the sell wall higher you encourage sale orders to consistently stay above market price even as the market shifts higher. This creates thinner sale volume and makes it easier for the whalebots to exit in front of the sale wall or limit actual selling volume to allow the price to be manipulated higher with the bid spoofing and layering strategy. At some point, it becomes necessary to reverse the arbitrage to unwind positions.

Presumably, the ideal scenario would not be high volatility as that level of volume would lead to challenges in controlling the market. One would think having these whalebots participating in the market does increase liquidity and tends to attract more market participants looking to profit off of the volatility. So maybe there's some Goldilocks type of equilibrium where these bots stir the market on nights and weekends when there's relatively low probability of things spiraling out of control.

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Of course at 3:00 AM EST trading magically picks up and price soars $200 in 2 minutes.

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One strategy to disrupt the bots would be to place large market orders. That could "break" the bot if it unexpectedly uses up too much of its fund but then you would know for sure that the bot has changed its strategy if it has to push price in the opposite direction or if volume/bot activity suddenly drops off. This could be a really expensive experiment.

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At current prices that would be around 250 BTC for a large enough SELL market order to clear out the bids $50-$60 deep assuming it fills immediately.

And around $2.6 M to clear out the ask orders $50-$60 deep. I don't see how this could be profitable so nobody would ever do it.

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I just want to say that I don't see Bitcoin and cryptocurrency as an asset class going to zero because the network is still sufficiently large that there will be people trying to hoard it to gain economic leverage over the network. So there seems to be enough competition for some kind of value. It's just problematic when the wealth inequality results in distortions due to poor transparency into certain participants/groups' behavior.

coindesk.com/sec-denies-foia-request-controversial-tezos-ico/

If the SEC announced enforcement action against Tezos that will be bad for Ethereum.

Here is a letter issued Feb. 7, 2018 from the New York Department of Financial Services detailing "Guidance on Prevention of Market Manipulation and Other Wrongful Activity". It would seem that a GRAMA request could potentially uncover details about market manipulation that Coinbase and Gemini have discovered and reported (as required in this letter) to the New York DFS.

cdn.crowdfundinsider.com/wp-content/uploads/2018/02/New-York-Department-of-Financial-Services-Virtual-Currency-2.7.18.pdf

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This letter by Dalia Blass, Director Division of Investment Management at the SEC, also covers some of Jay Clayton and Giancarlo Forte's recent letter in which there was discussion of price manipulation:

crowdfundinsider.com/2018/01/127324-sec-letter-dalia-blass-director-division-investment-management-expressing-concern-cryptocurrency-related-holdings/

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In regards to Ripple (XRP) token the SEC has pretty blatantly said on at least a few occasions now that just because you call something a "cryptocurrency" doesn't meant that it isn't a security. Here is the very specific language:

On cryptocurrencies, I want to emphasize two points. First, while there are cryptocurrencies that do not appear to be securities, simply calling something a “currency” or a currency-based product does not mean that it is not a security. Before launching a cryptocurrency or a product with its value tied to one or more cryptocurrencies, its promoters must either (1) be able to demonstrate that the currency or product is not a security or (2) comply with applicable registration and other requirements under our securities laws.

sec.gov/news/public-statement/statement-clayton-2017-12-11

Due to Ripple's highly centralized nature and what appears to be insider trading and/or knowledge this is a coin that I consider extremely dangerous to hold, not much different from say Bitconnect tokens.

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JP Morgan published their "Bitcoin Bible", which is really good. A summary on zerohedge (groan) here:

zerohedge.com/news/2018-02-11/jpmorgan-publishes-bitcoin-bible

I found this part very interesting:

If CCs survive the next few years and remain part of the global market, then they will likely have exited their current speculative phase and would then have more normal returns, volatilities (both much lower) and correlations (more like that of other zero-return assets such as gold and JPY). Based on its historical performance, CCs can be 10 times more volatile than core assets like stocks, or than portfolio hedges, like commodities. Liquidity is also well below most other potential hedges. Extraordinary returns can be generated in the price discovery phase, only to be followed by several years of mean-reversion toward the eventual, long-term average level. In the current market conditions, we do not believe that an allocation to Cryptocurrencies as insurance should be a portfolio’s main or only hedge. Note that even though CCs have improved risk-adjusted returns over the past several years, they have not prevented portfolio drawdown during periods of acute market stress, like the equity flash crashes of August 2015 and February 2018.

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This would suggest that if we continue to see increasing volatility in equities markets and general risk aversion then crypto will likely see correlation and it would not be a great hedge against anything. It would be interesting to see if crypto loses market share while gold gains during an equities bear market.

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That being said, they say this:

Cryptocorrelation with other asset classes: virtually nil, i.e., a perfect diversifier.

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What's extremely disturbing is that 0.6% of total addresses control over 60% of total Bitcoin while 97.5% of wallets have less than 1 BTC.

This doesn't say a lot about Bitcoin liquidity or network value. Clearly, the valuation is being held up by a very small concentration of colluders.

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It's really interesting how the volume seems to increase between 5 AM EST and 7:30 AM EST and then just drop right off as "normal" markets open.

I think it's going to take a miracle to get past 9k, but it totally makes sense to pump the market overnight so it doesn't look so terrible if it sells off a bit during the day.

Maybe this will become a prominent strategy. We're now going on a one week rally now though volume has been declining every day, which makes this all look even more suspicious.

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Jay Clayton talked crypto in the WSJ and said this:

Recently, two of the largest CFTC-regulated exchanges listed bitcoin futures products. Although the exchanges are permitted to “self-certify” and commence trading futures products without CFTC approval, for bitcoin futures they spent significant time engaging with CFTC staff and agreed to implement risk-mitigation and oversight measures, including heightened margin requirements and a requirement that the exchanges have information-sharing agreements in place with underlying bitcoin trading platforms. As a result, the CFTC gained oversight over the U.S. bitcoin futures market and access to data that can facilitate the detection and pursuit of bad actors in underlying spot markets.

So they supposedly have data to detect bad actors and they've subpoened Bitfinex/Tether. These investigations don't happen that quickly, but presumably bad actors know they're being scrutinized and likely want to minimize exposure, another reason to trade during "off-peak" hours. Going into the market open there's noticeably no buy walls, spoofing, or any of the stuff that you see on weekends and overnight. If the market can push towards 9k that should clear out a lot of sell volume and open the door to another magical "overnight rally" despite what appears to be very low demand and huge resistance at 9k and 10k.

wsj.com/articles/regulators-are-looking-at-cryptocurrency-1516836363

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Demand above $7900 is now about $17.5 M (at $8771.99) at 8 AM EST on Monday. I didn't pay attention to this overnight, but this seems to be about right.

Sell volume is heavily biased below 10k so we'll see where this goes but it's hard to see a move up from here without some magical buying that comes out of nowhere.

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If the market goes nowhere today I can see the price trading in a tight range on declining volume. If 24 hr volume declines below $900 M by the end of the day then it will be interesting to see what happens overnight.

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Well that was predictable. No one was executing market orders so nothing was happening yet buyers were fleeing and sell volume was building up so they chased the price down...

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Bitcoin volume has stayed higher than what I expected but only slightly while altcoin volume other than ETC has fallen off the map with LTC at under $100 M, BCH at under $50 M, and the smaller coins like DASH, XMR, and ZCASH at about $8 M, 8M, and $11 M.

Maybe this is just a boring Tuesday, but to me it seems like the novelty of crypto has worn off and rather than the "inverse head and shoulders" some TA people are talking about we could be seeing more of a descending triangle where the $5900 level will serve as the bottom.

Last time we had a very noticeable H&S pattern it broke the neckline but reversed and broke out the other way. So in terms of being a reliable signal of anything, it's basically meaningless if a much bigger trigger pushes demand the other way.

I would give this current pattern a less than 50% probability of making the market do anything considering its very weak formation but the market seems surprisingly bullish above 8k but I think a lot of buyers are positioning themselves expecting a bounce off that level but given the weak momentum I would project the upside toward the upper channel line at about $8500, or 6.25%, which doesn't provide great risk:reward given the current suspicions about market transparency.

But if we see heavy support around 7.8k-7.9k I could see a small descending triangle forming that bounces back to $8500. At about 9% that improves the risk:reward quite a bit more unless there's some negative sentiment trigger and you could target $7900 entry and $8200 exit depending on market conditions with a small position.

We're only about 7% off that price level but if the market starts moving down there could be quite a bit more volatility since this bear flag seems to suggest another dip back to under 6k.

Overall the market seems pretty positive but I would definitely not call it "anti-fragile" as someone recently said. Most social media and mainstream media seem aware of the potential for major problems due to exchanges being untrustworthy so I'm sure a lot of those potential panic sellers not reflected in the order book are tracking sentiment and news on a daily basis.

Bot action is still there, but it seems like there's more sell pressure than buying pressure based on the activity that I'm seeing and volume is much lower than over the weekend.

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One interesting thing that probably no one has talked about because it would be an atypical application of an esoteric economic concept is whether there is a strong "elasticity of substitution" between different cryptocurrencies. Normally, this concept is applied to inputs for production, but I think it's reasonable to consider in the form of inputs into a portfolio. You want to generate the highest return for your portfolio so the optimization scenario is similar.

Now that Bitcoin isn't even the biggest network in terms of on-chain transactions, how do potential buyers or users of cryptocurrencies choose what coin to use or invest in? With the idea of elasticity of substitution a buyer/user of crypto will consider the marginal returns of a coin purchase at a given price for a specific duration. So if you're comparing Bitcoin versus Ethereum, the marginal return for Ethereum might be expected to be higher given that Ethereum is newer, bigger, growing faster, generating more users through ICOs, etc. etc. So this would be in real numbers like saying (as an example): Bitcoin has an expected marginal return of 2%/mo. over the next 6 months but Ethereum has an expected marginal return of 4%/mo. over the next 6 months. Given this perception Bitcoin will lose overall crypto market share to Ethereum. And this appears to be what has happened over the last year or so as Bitcoin has lost market share to other coins.

Around the same time Bitcoin started to increase by huge percentages Ethereum, the second largest coin, was increasing at an even faster rate. This would strongly suggest that the market preferences were fairly elastic in substituting Ethereum for Bitcoin given the relative expectations for growth between the two.

It seems with the recent boom and bust with XRP that this elasticity of substitution was again in effect as traders flocked to XRP with expectations of higher marginal returns than BTC or ETH.

Given a longer duration timeframe for investment and evaluation of cryptocurrencies I think you will see this effect continuously as a distribution of risk preferences will show a strong substitution effect between larger coins and less developed coins (XLM, ADA, and NEO being other good examples) due to expectations of relative growth.

However, perhaps because the overall crypto market is so small and almost nothing of "real" economic value has yet to be created, the ultimate substitution effect could be with fiat currency or a less volatile asset class depending on various macro considerations.

Given this basic concept I can see Bitcoin stabilizing in value over time as it matures with better policed institutions and less volatility. However, this will likely take a long time and a lot of things can go wrong in between. And given quantum computing and other new technologies it's highly probable another system will emerge that will prove to be superior to Bitcoin.

This generally deflates the idea that Bitcoin will be $1 M a coin some day. Given the strong elasticity of substitution and the ease in creating competing coins/networks I think the overall crypto market would have to grow to a level that doesn't seem realistic given problematic utilty and centralization concerns.

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What Bitcoin ironically needs is a benevolent dictator that punishes market participants who behave badly much like a cartel functions.

This could be Satoshi Nakamoto or the Winklevoss Twins. But by adopting this role there would be an implied failure of the idea of Bitcoin, which is that it is decentralized, permissionless, and censorship-resistant. Also, the government essentially plays this role but they are essentially the very institutions cryptocurrencies were designed to avoid being controlled by.

Unfortunately, computer scientists aren't better trained in economic concepts otherwise many of these things would have already been discussed and considered.

One strategy for coin investment could be targeting less developed coins with relatively higher expected marginal rate of return. But given the total immaturity in the market, extreme correlation, and possible price manipulation all across the board, one would need to take a conservative approach and wait for ideal conditions to enter the market (which could be soon) and be wary of the many coins and ICOs that will be the wreckage left behind by the bursting of the crypto bubble.

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I noted recently that ETC (Ethereum Classic) hasn't shown positive correlation with Bitcoin and today it more or less is demonstrating what seems like negative correlation. ETC is only down about 15% off of its high after dipping to 60% off of the high of around $40. Not sure what's driving this recovery as volume has been steadily increasing. If BTC crashes though ETC will likely follow. But it's notable how well ETC has performed since the last big dip. Probably worth looking into.

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I was thinking how strange it was that volume hadn't dropped off but now it's showing 24 hour Direct Volume of less than $900 M now on Cryptocompare. And the 1 min. candles are taking a big dive. Clearly, buyers in the market are losing interest at this price.

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Some economists have considered whether Bitcoin could be a Giffen Good, that is, something that shows increasing demand with increasing price.

blog.bham.ac.uk/cityredi/is-bitcoin-a-giffen-good-or-a-speculative-bubble/

forbes.com/sites/petertchir/2017/10/22/is-bitcoin-a-giffen-good/

but now, reconsidering what I was going on about recently about elasticity of substitution it seems more reasonable to think of Bitcoin as having income effects that drive substitution.

I'm going to come back to this when I'm more awake.

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Not sure what's going on with Litecoin but if it can stay up this might be an interesting trend where Bitcoin isn't leading the market and the price action isn't purely speculative. If it is purely speculative then this might not last...

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NEO appears to have had the opposite trend as everything else in the market recently. That makes sense given their parabolic increase while everyone else was down. NEO's total lack of volume make them a prime candidate for a pump & dump.

Pretty much any of the coins in the top 20 are pumpable, even Bitcoin.

Looking at these volume numbers I would expect Bitcoin Cash to get pumped again soon. But a lot of this will likely depend on Bitcoin breaking 9k and making it back to the 50 EMA which will have to continue declining sharply to even hit 10k so this probably won't happen anytime soon because of massive resistance above 9k. But maybe if overall crypto sentiment is improving this won't play out.

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I just want to say that I'm all about prices going to the moon because I have significant mining investments so if prices go up I win more than if prices go down, but I 'm just not seeing net inflows to the crypto markets and the Google Search Trends trick seems to confirm this as Google interest is dying down very dramatically from the peak and hasn't really bounced much. I'm not super confident some magical money will want to jump out and be left holding the bag right before the next big FUD bomb hits.

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Now if Chinese and South Korean exchanges cleaned up their act and were under regulatory scrutiny and reopened then that would be a huge positive sign and I could see a ton of money rushing back into the market and driving prices higher. But considering that China practically has one foot in Canada in the process of kicking their miners out and countries like Iceland are talking about crypto taxes and Quebec Hydro is saying they actually won't have enough surplus electricity for miners I see a general backlash growing on multiple fronts. Nobody in crypto "gets" what convenience is or what usablity means. Until this clique of crypto nerds with no clue about how to design something that real people want to use then they're just going to be left with their own version of MySpace where they can feel cool and be surrounded by a bunch of equally indoctrinated people until the next wave of tech entrepreneurs comes through and sends them packing, aka Blockchain 2.0...

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And as we know from the Dot Com Bubble there was a lot of hype about nothing for 3-4 years and then it took a solid 4-5 more years of real product innovation before tech regained its footing in the markets with first Google's IPO, and then later, Facebook.

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Considering all the crap in the ICO market it's going to take a LONG time to flush this toilet and for most observers that have a clue about how businesses operate and what constitutes "growth" the entire ICO market is basically a giant turd that's going to take a long time to plunge out before we see some "real" companies in the market. So far all I see are billions of dollars that will go to a handful of scammers and a vast period of continuous negative media about cryptocurrency scammers getting sued, arrested, or having their assets seized.

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So while Ethereum is "censorship-resistant", regulatory action can unwind the market just as quickly as it blew up but once this snowball starts rolling it could be a series of several good short duration trade opportunites like when ETH dipped below $600.

We're only seeing the tip of the iceberg right now and from what I've seen of the market, this is going to blow up in a lot of peoples faces.

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While I've talked a lot about price manipulation I think many strategies, such as arbitraging between exchanges, can only work for so long before other players catch on and drive that arbitrage to zero.

It seems like more recently there has been hardly any spread at all between major exchanges so it's entirely possible that as soon as one bot operator realized what was going on they modified their algorithm to better capitalize on this activity. Given bot competition for arbitrage opportunities maybe this strategy isn't "winning" anymore.

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Really great summary of the Bitfinex/Tether situation:

bitcoinmagazine.com/articles/warning-signs-timeline-tether-and-bitfinex-events/

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Well this is disturbing:
During the annual Puerto Rico Investment Summit, Prouty confirmed the truth of the claim about the lack of a bank reserve, noting the bank Tether officials were working with opted to back out of the deal to avoid liability.
He said Tether officials needed to purchase a bank to obtain “the capital infusion from a sovereign wealth fund to create the initial reserve. It will begin banking crypto soon. After speaking with these guys, it should take about a year before this bank can replace some lenders as a large financing entity for the Puerto Rican market.”

archive.is/ITnZp

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This is the modified version of that article that doesn't even make any sense grammatically:

caribbeanbusiness.com/puerto-rico-to-have-first-cryptocurrency-bank/

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pretty hilarious Twitter crypto troll: cryptoprick

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It's incredibly ironic that cryptocurrency businesses are now trying to get involved in banking so they can facilitate traditional banking functions such as lending.

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looks like LTC is mooning. volume now 6X what it was yesterday before this rally.

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What's strange is that I see all these tiny trades for BTC so it's not really that much volume. Huge sell order volume but hardly any market orders to push this down.

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Some bigger buys coming through now but still a lot of sell volume... I should've said hardly any large market orders. Looks like sellers are dictating the price here even though there's hardly any buy volume. And as soon as I said that these market sell orders flooded in but it not enough people wanted to chase the price down...

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There's some really weird orders in the ASK with A TON of tiny orders. Seems like mostly bots are selling...

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The ADX still shows we're still a ways from a trend reversal but today could be pretty interesting...hopefully this brings some new money back into the market but so far it's still too early to tell.

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GDAX is leading this Litecoin rally with $175 M to $105 M for Bitfinex volume-wise.

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We hit $9200 and none of this big buy volume went through and instead price popped before hardly any big market sells could clear that. So I'm suspicious of this buying activity because these are all tiny orders.

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Literally one order per minute that's over 1 BTC

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So we got this huge price jump out of nowhere on very little volume. It's going to be interesting to see if sellers start to get nervous and just hit market sell because the buy volume is really thin.

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The volume at $9200 that I thought of as a "buy wall" has spread out quite a bit now but still keeps bouncing back to 100+ BTC so demand seems to be strong even if some of it is fake.

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I really don't see any big players entering this rally so I think this is going to take some time. Litecoin is really taking off now so maybe BTC will piggyback off of that momentum.

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It's like my L3 returns just doubled overnight... If Litecoin hits $500 M in 24 hr direct volume and can sustain that for more than a day then perhaps we're seeing a more fundamental shift in marketshare but judging by the < $50 M volume from yesterday I doubt that.

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Based on total 24 hour volume LTC has moved into second place behind Bitcoin at $1.31 B to $3.96 B. If LTC keeps this up then $1000 might be a realistic PT.

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When you consider that the actual "value" of a crypto is how often it is used in real transactions then a lot will depend on how many users actually adopt "Litepay" as opposed to just using a Coinbase wallet... like I don't really get what "Litepay" is supposed to do because businesses already have numerous options. I use Coinpayments and I can pretty much accept whatever crypto I feel like and convert to fiat or another crypto immediately. So the idea that Litepay is somehow going to change demand for Litecoin any more than yesterday is crazy.

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Rakesh Upadhyay of CoinTelegraph:
Traders who follow us are carrying long positions that triggered on Feb. 15. We had recommended booking 50 percent profits at the 50-day SMA, and most traders should have sold when Bitcoin rallied to an intraday high of $11,348.99, yesterday, Feb.18.

We had also recommended trailing the remaining positions with a suitable stop loss. As every trader has a different trading strategy, we did not provide any specific trailing stop loss.

BTC/USDThe BTC/USD pair is trading inside an ascending channel. As long as it trades above the support line of the channel, it can reach $12,000 levels.

In case of a fall, the support line of the ascending channel and the 20-day EMA will be acting as strong support. If these two levels break, the price might fall to $8,400. Therefore, traders who are still left with 50 percent positions should keep the stop loss at $9,800.

We did not recommend closing the complete position because Bitcoin will become positive once it sustains above the descending channel.

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It's notable that quite a lot of gains appear anecdotally to have started at odd hours of the night, such as the LTC rally that seems to have been sparked around 11:30 PM CST the evening of Monday Feb. 19

This could be due to either 1) some trigger in Asian markets or 2) price manipulation bots becoming active.

I'm still not sold on an overall market reversal due to 1) Google Search Trends for "cryptocurrency" and "Bitcoin" have reached relative lows and have not reversed 2) on-chain transactions for Bitcoin have yet to clear 200k after hitting a low not seen since March 2016 3) equities markets haven't fully "settled" down 4) regulatory risk remains extremely high

Overnight and weekend trades remain a very viable strategy as a trade entered into LTC last night at $220 with a $240 exit would have generated 9% gains...

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I predicted that Wyoming could become a kind of "crypto" state last year when we were looking to invest in a mining facility there, but I had nothing to do with the politicians there pushing their agenda forward so quickly.

Wyoming now is looking to be the first state to 1) deregulate ICO utility tokens from being classified as a security (as opposed to non-utility tokens) and 2) have zero state income taxes on virtual currency gains (which doesn't really mean as much due to federal tax events)

Overall, this is a positive sign for crypto.

powderpc

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powderpc