Are Bitcoin Bots Turning Wild West into Westworld?

A Wall Street Journal article proclaims rampant manipulation in the cryptocurrency market.

Robot Wars

It cites the experience of one Stefan Qin, managing partner of an $80 million digital hedge fund. Virgil Capital, as it is called, runs automatic trading programmes, known colloquially as 'bots'. These monitor for any cryptocurrency which is priced differently on different exchanges. The bots will then buy/sell appropriately, making a profit for their owner.

Qin complains that his bots must battle enemy bots, which trick his bots by 'spoofing'. This is the act of deliberately influencing prices by pretending to make transactions and cancelling them at the last second. This practice has been illegal in the US (in the traditional financial market) since 2010.

Said Qin: “We’ve had to build in error-handling functions to check for hostile and potentially illegal activities...Such is the Wild West of crypto."

With all this talk of bots, perhaps Westworld would have been a more appropriate metaphor.

Predicting dollar monetary policy: Thousands of PhD economists, politicians, bankers, and journalists pontificating, parsing tea leaves, and making demands. Predicting Bitcoin monetary policy: One Twitter bot https://t.co/BTho7jC459
— Saifedean Ammous (@saifedean) October 1, 2018

Victims of Manipulation

It is indeed saddening that the trading algorithms of a multi-million dollar hedge fund are struggling to make a profit for their owner. But this is just one of the victims of Bitcoin market manipulation.

This concern is one of the reasons that the Securities and Exchange Commission, one of the US' main regulatory bodies, has consistently rejected the numerous attempts of various companies to get their Bitcoin-based ETFs (exchange traded funds) approved.

Andy Bromberg, president of Blockchain startup CoinList, said to the Wall Street Journal: "This sort of activity is rampant in the market right now. It hurts the market’s reputation, and it hurts individual investors.”

In fact, the US Justice Department began an investigation into Bitcoin price manipulation in May, specifically focusing on the practice of spoofing.

Traditional Manipulation

There is an obvious parallel to the traditional finance market here that cannot be missed.

The 2008 financial crisis and subsequent economic depression are widely attributed to the fact that financial corporations heavily engaged in spoofing and other similar activities. Fines paid by these entities since that crisis had reached a total of $320 billion by early 2017.

The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in 2010 as a response to this crisis. It placed a number of restrictions on the activities of financial corporations and strengthened the powers of the state to supervise them. Naturally, financial corporations saw their profits suffer as a result and were unhappy.

Luckily for them, Donald Trump, who has referred to the law as a "disaster", has already repealed a number of these restrictions.

Now, this is exactly why cryptocurrency appeals to so many - it offers people a chance to manage their money without having to deal with financial giants and the politicians who serve them. In fact, rating agency Weiss published a report in May saying that more people would be drawn to cryptocurrency specifically because of the aforementioned changes to the law.

'...the Integrity of the Entire Market Is at Risk.'

Unfortunately, accusations of manipulation in the cryptocurrency market are not hard to find.

To give just a few examples (aside from the WSJ article which inspired this piece): Bloomberg published an article in June pointing the finger at a US exchange called Kraken (although its sources left much to be desired), an academic paper from the University of Texas pointed the finger at a Hong Kong exchange called Bitfinex, and an article in Medium pointed the finger at a Chinese exchange called OKEx.

Fearing that someone could have an eye out, the Commodities and Futures Trading Commission, the other US regulator, sent subpoenas to a number of exchanges in June 2018.

People are very aware of signs of manipulation/corruption infecting the cryptocurrency market. As New York Attorney General Barbara D. Underwood said last month, in reference to cryptocurrency: “When any venue tolerates manipulative or abusive conduct, the integrity of the entire market is at risk.”

But is government policing the answer?