In a move that was bound to happen eventually, it was recently announced that the United States Department of Justice (USDOJ) has launched a criminal investigation geared towards cryptocurrencies. The news was first reported by Bloomberg. It is believed that the investigation will focus on methods of manipulation traditionally seen in the stock market years ago. Working in conjunction with the United States Commodities and Futures Trading Commission (USCFTC), it is believed the markets being looked into are primarily Bitcoin and Ethereum.
The first method of manipulation that they are looking for is something called known as spoofing. Spoofing refers to a practice where illegitimate traders place bulk buy/sell orders on a coin of their choice. The goal is to create an artificial upwards or downwards pressure to the current price of that coin. When looking at the charts for the coin, it skews the perceived market sentiment towards where the price is going. When unaware investors begin to push the price in the direction that the manipulator intended, they will then rapidly cancel all of their fake orders, and either purchase or sell the coin now that it is at a price they like.
The second main method of manipulation is known as washing. Washing occurs when illegitimate traders skew the volume traded of particular coins. This is achieved by either a single investor, or a group working as a team. The offenders will proceed to buy and sell from themselves. In doing so, they create artificial demand for the coin they are manipulating. To outsiders, it would appear as though market demand is high for the coin, as a huge volume has been moved within a given time frame. This often results in uninformed investors paying premiums on coins they think are in demand, only to find out after purchase that no one really wants the coin.
Each of these methods of manipulation were prevalent in the traditional stock market for years before regulatory committees like the SEC and CFTC came into fruition. Clear regulations being established, and accountability for the central services facilitating the market were key in eliminating fraud. It does still happen however – in early 2017 Citibank was fined $25 million for market manipulation. There are exchanges that want to be legitimate and void of fraud, however. Just last month, utilizing their experience in regulation of the stock market, NASDAQ was hired by the Gemini exchange to oversee market behaviour on their exchange.
Naturally the market has reacted to these revelations of a criminal investigation negatively. In the past day we have seen BTC dip below $7500 USD. With most of the market being hit even harder. Although these investigations may have a short term negative effect on the market, they will most likely help in the long run. They will inevitably lead to clearer regulations – ideally ousting frauds and manipulators – and create a level playing field for those interested in the blockchain industry.