In the midst of this year’s Bitcoin revival, officials are clamping down on price manipulation accusations in the largely unregulated cryptocurrency marketplaces. While the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) have begun their own investigations and crackdowns, according to Bloomberg, U.S. Treasury Secretary Steven Mnuchin recently announced new rules are likely to be imposed to ensure that cryptocurrencies do not negatively impact the financial system.
Mnuchin said on television, “We’re looking at all of the crypto assets.” “We’re trying to make sure we have a coordinated strategy, and my assumption is that new rules will be issued by all of these agencies.”
What It Means for Investors
Bitcoin price charts are starting to resemble a camel’s back, as the world’s most popular cryptocurrency is creating a second hump. The first hump crested in 2017, the year of the “crypto frenzy,” when anybody who dared to enter the fledgling digital currency market could, and did, earn money. That bubble burst, and not without a lot of forewarning. Crypto enthusiasts, on the other hand, remain and are beginning to feel justified by Bitcoin’s recent increase. Others are less convinced.
According to John Griffin, a finance professor at the University of Texas in Austin, such large price fluctuations in short periods of time are typically a clear sign of market manipulation. Because cryptocurrency markets are unregulated, the possibility of someone intentionally increasing or deflating the price of a certain digital currency for personal advantage is high. Investors should be wary when the values of certain assets fluctuate dramatically and often. Griffin told Bloomberg, “the extraordinary volatility shows that manipulation is pervasive.”
Despite the fact that many cryptocurrency trades take place on a public blockchain, a decentralized digital ledger that verifies and records previous transactions, some trades take place on cryptocurrency exchanges. There are now around 200 similar exchanges taking place throughout the globe. Unlike conventional stock exchanges, these cryptocurrency exchanges are unregulated, and traders have no way of knowing if the trading volumes and prices disclosed represent genuine trading activity or market manipulation.
Wash trading, in which a trader buys and sells a security to create the perception of more market activity than there is; pump-and-dump, in which a trader enters a position and then makes misleading and exaggerated recommendations to convince others to buy, pumping the price up, and then dumping the position, causing the price to fall; and whale trading, in which a small number of individuals, such as so-called whales, buy and sell securities to create the perception of
According to Hunter Horsley, CEO of San Francisco-based Bitwise Asset Management, which manages crypto index funds, a number of exchanges are in the habit of misrepresenting their trade volumes in order to attract additional currencies and customers. Coin promoters have recruited firms to wash trade for them, boosting the trading volumes of their currencies on exchanges. According to a May Bitwise research, up to 95% of Bitcoin exchange trade volume published on CoinMarketCap.com is manipulated. “The danger in crypto is crypto exchanges,” said Jeff Dorman, CIO of crypto asset management company Arca, to Bloomberg.
While conventional markets are not immune to manipulation, as shown by the Libor crisis in 2012, regulation tends to make such markets and their exchanges more visible and gives grounds for taking legal action against the culprits.
Cryptocurrencies seem to be more than a fleeting financial trend, as Facebook prepares to introduce its own digital currency, prompting authorities to devise new laws to safeguard investors and preserve the financial system’s stability.
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