In this week’s edition, we examine some of the drivers behind bitcoin’s continued downward momentum, discuss why traditional financial analysts aren’t swayed in their opinion that this trend is soon to be reversed, and provide a summary of an academic article which used statistics and the public nature of the blockchain to help prove that price manipulation in bitcoin has indeed been occurring.

BTC Continues Slide, News Isn’t Helping

The price of bitcoin touched the $6,400 mark and furthered its descent by roughly 5% over the course of the last week, with seemingly no good news to help prop it back up. Bad news, on the other hand, seems to be more than plentiful, with the latest blow to confidence in BTC coming from a report released by the Bank for International Settlements (BIS), an international financial institution owned by central banks which aims to “foster international monetary and financial cooperation.” Among the cryptocurrency’s “shortcomings” cited in the BIS annual report were bitcoin’s elevated level of volatility, its overbearing consumption of electricity, and it being subject to too much price manipulation, which is also a subject of increasingly heated debate as of recently.

While cryptocurrencies that are designed by bankers and subject to regulation by central banks and government oversight might meet their criteria for approval, the BIS contends that bitcoin’s decentralized consensus mechanisms through which transactions are verified might actually do more to undermine trust in the system than promote it, and as such, cryptocurrencies ironically need a centralized authority in order to be truly beneficial to society. For every success story about a merchant growing their business through the aid of cryptocurrency or an individual improving their life via blockchain technology, there seems to be a negative story about an investor being swindled or somebody losing a portion of their life savings by making a risky, ill-timed investment. Regardless, the idea of a centralized cryptocurrency undoubtedly goes against the libertarian principles of bitcoin as espoused by Satoshi Nakamoto throughout his brief period of open dialogue with the world.

Hedge Funds Still in Love with Crypto

Meanwhile in America, clamoring voices from within the traditional finance industry continue to “HODL” firm in their belief that bitcoin is just in a low period, brought down by naysayers and negative attention from large players such as federal governments and the likes of the BIS. Phillip Nunn, CEO of The Blackmore Group and Wealth Chain Group made the news in January of this year with predictions that bitcoin would reach both $6,000 and $60,000 before the end of the year, and again re-iterated his beliefs last week, assured that blockchain technology would be the revolutionary, transformative idea that many enthusiasts have long believed that it was.

“The reality is we’re moving from an internet of information to an internet of value. It’s going to disrupt everything; money, record-keeping, legal,” said Nunn, who is a highly respected hedge fund manager, in an interview with Business Cloud. “The prediction was based on, first of all, market volatility which we’re experiencing at the moment; I think that’s really apparent… I absolutely stand by my prediction,” he added. Nunn also remarked that realistically speaking, many cryptocurrency projects will indeed fail, but that bitcoin – as a tried-and-true method of digital value exchange for the past nine and a half years – was not going to be one of them.

Somewhat ironically, hedge funds can be counted in for the first time ever as among those to lose money during a down crypto market. Global hedge funds investing cryptocurrencies and the technologies surrounding them reported losses for four months out of the first five of 2018 after gaining an average of 2,700% across 2017. The one month in which hedge funds saw green was that of April, in which funds reported an average gain of 45%. Before attempting to compare personal progress against hedge funds, its important to remember that they employ trading tactics not necessarily available to the average trader, including leveraging, short-selling and acting as market makers thanks to their possession of enormous amounts of capital.

Bitcoin Whales and Price Fixing

Much like how hedge funds have the power to make or break stock markets, bitcoin whales are dominating cryptocurrency markets at an even higher degree, with the 100 biggest bitcoin transactions (out of a total of 200,000) in a 24-hour period accounting for approximately 24% of the total volume of activity. This level of domination of a currency is actually something that could only be dreamed of by hedge fund-sized market makers, as fiat currency markets are too big to be dominated by a single player. The cornering of crypto markets by whales is what makes price fixing a conceivable reality, as was recently suggested by the U.S. Department of Justice and Commodity Futures Trading Commission. Because there are relatively few ways to convert bitcoin and other cryptos into cash, it also becomes much easier to identify trading activity that potentially signals price fixing as the nature of the blockchain makes tracking coin movement an inherently straightforward process.

 

A cryptocurrency-centered statistical analysis article published by researchers at the University of Texas last week is lending evidence to the idea of a price manipulation conspiracy. The 66-page paper uses publicly-available trading data to prove the existence of a correlation between bitcoin’s “meteoric rise” to almost $20k at the end of 2017 / start of 2018 and heavy trading volume of Tether (USDT), the dollar-backed cryptocurrency (whose legitimacy has also been under scrutiny from time to time). The author of the study contends that the “bitcoin bubble” (which is arguably still in the midst of collapsing) is extremely similar to other historical bubbles in which there was found “substantial evidence of misinformation, false accounting, price manipulation, collusion, and fraud, often in sophisticated forms.” In this case, large “whale” traders at exchanges that offer a USDT/BTC trade market (specifically Bitfinex, Poloniex and Bittrex) used Tether to purchase copious quantities of bitcoin when it was falling, often all at the same time and under the same conditions, lending credence to the idea of collusion between traders to manipulate the price of BTC upwards.

The study concludes by suggesting that “external capital market surveillance and monitoring” are warranted in cryptocurrency if its users and traders want a market that is “truly free.” The downfall of MtGOX proved to be a warning of the dangers of perhaps too much freedom and deregulation; price manipulators (such as the trading bots that brought the price of BTC over $1,000 for the first time shortly before the collapse of GOX) may not be as closely monitored as they should, and thus the Japanese government’s trailblazing efforts to curb potential bitcoin fraud through regulation are not by any means surprising. Comparatively speaking, a flood of merchants already accept bitcoin as payment in Japan, making it one of the most bitcoin-friendly countries in the world.

Surprisingly, it is the traditional financial analysts – long wary of possible competition from cryptocurrencies – who are coming to bitcoin’s rescue from allegations of price manipulation. An article from Bloomberg last week offers readers a different view of the data presented in the Texas U. study, saying the author’s claims of price manipulation are “less than they seem” and that it would prove too cost ineffective to manipulate the price of BTC in the method outlined in the critiqued study. It would seem that the old guard of finance has reversed course in its opinion of cryptocurrency and are now among its heaviest advocates.

Also in the News

  • Is Steve Bannon one of the aforementioned “bitcoin whales?” We would never have guessed it, but the answer may be “yes.” Bannon, once chief strategist to president Donald Trump, has been extremely busy in the 10 months since he was ousted from his job, engaging in a whirlwind of media tours and forming an investment business that is heavily involved in Initial Coin Offerings (ICOs). He has stated that he owns “a good stake” in bitcoin and even hinted at creating his own “deplorables coin”, in a nod to the nickname given to him and other Trump supporters by defeated candidate Hillary Clinton.
  • After a long legal battle, the founder of TRON (TRX) – a coin on a mission to bring decentralization to the internet – purchased one of the first true DApps to ever gain mass popularity: BitTorrent. Though details of the purchase are unknown, Justin Sun’s Tron Foundation own approximately $1.65 billion worth of TRX coin, which skyrocketed in value in January and still remains in the top ten coins by market capitalization.
  • Veteran actor Kurt Russell is set to star in an independent film about cryptocurrency, aptly named Crypto, according to the Hollywood Reporter. The movie is being called a “thriller” by its director and is set to focus on the money laundering aspects of cryptocurrency. Of course, this won’t be the first film to mention bitcoin or cryptocurrency. There was 2015’s Dope, in which a group of inner-city youth stumble upon a large quantity of party drugs and use bitcoin to peddle them on the internet, 2016’s suspense thriller Bitcoin Heist by Vietnamese director Ham Tran, and 2018’s Superfly, a remake of the 1972 blaxploitation film. If you’re interested, there’s a whole host of other bitcoin-centric movies and television shows to be released in 2018, firmly cementing the cryptocurrency as a part of mainstream culture.