Once you step into the bitcoin market, you’ll have to deal with volatility; everyday buyers and sellers meet on markets worldwide, buying and selling the asset. Every day, supply and demand meet one another, and they settle on a current trading price because there are so many different actors involved, all with different motivations, and those decisions are reflected in the price.
Many natural factors influence the price of bitcoin, but these don’t make the headlines or get engagement on social media. What does, are the artificial influences or the accusations of artificial movements in the price?
While some might see it as conspiracy theories, we have to accept that bitcoin is still a small market that can have certain actors move it around. Bitcoin is also an unregulated market, with no uniformity as each country treats it differently and in this grey zone where laws are not yet established. You will have players looking to take advantage of such an environment.
There are several ways in which the bitcoin price can be nudged and a couple of reasons why, so let’s look at price manipulation, how certain entities can move the bitcoin price and why it matters.
What is price manipulation?
In many ways, bitcoin market manipulation resembles manipulation on traditional exchanges — pump and dumps, wash trading, spoofing, stop hunting and simply spreading FUD such as false rumours (which can be fairly easy to do in bitcoin with the help of social media).
Then there are tactics more distinctive to bitcoin, notably buy and sell walls created by “whales,” or owners of huge blocks of bitcoin or bitcoin derivatives. But just as bitcoin market manipulation has several similar characteristics to traditional markets, there are unique traits that make it easier to do and harder to stop than in the stock and commodity markets.
First, bitcoin are pseudonymous — not entirely anonymous, as all transactions can be viewed on a publicly accessible blockchain — so the identity of a manipulative trader is hidden by the ability to keep public addresses and real-world identities separate.
Now that we’ve established the ground rules let’s take a look at how big players normally try to move the market.
Pump and dump
The bitcoin market is often called a pump and dump scheme, which involves a group working together to inflate a coin’s value artificially. The group’s insiders will buy an asset, in this case, bitcoin and dump it once there is enough attention from traders and investors buying in. In recent years, pumps and dumps have become more accessible via social media communities like Reddit, Telegram and Discord.
Since the barrier to pump and dump bitcoin has become rather expensive, smaller pump-and-dump schemes have moved on to low-cap altcoins instead. But that doesn’t mean there aren’t big players willing to run up the float and then unload their reserves on the market in a strategic fashion.
Whale wall spoofing
Spoofing was a common tactic used during bitcoin’s early days and still happens on less-regulated exchanges. This strategy involves a whale placing large orders to create a fake buy or sell walls in the order books, hence the name spoofing.
An example of a spoofing strategy is if an entity wanted to create a bearish sentiment and drive bitcoin’s price down, a whale would set large sell orders to trick investors into panic selling. Once the selloff occurs, the whale removes their sell orders and proceeds to buy more at a discounted price.
Wash trading is similar to whale wall spoofing because they both feed misleading information to the market. This strategy involves a person or group rapidly buying and selling the same cryptocurrency to inflate the volume artificially.
The asset’s increased activity gains attention from traders and investors, which distorts the price even more. Smaller, unregulated exchanges will typically perform wash trades to inflate trading volume, generate more commission and entice more users.
Creating bitcoin IOUs
Bitcoin is a hard-capped asset, it’s common knowledge in bitcoin circles that there can be only 21 million coins, but there are far fewer due to how many have been lost over the years. While the bitcoin hard cap is enforced by the blockchain ruleset and the consensus of the nodes, these rules only apply to the assets on-chain and have nothing to do with centralised entities.
The modern centralised exchange can act as a fractional reserve system and claim to have more bitcoin than actually on the books. Since you’re not interacting directly with the exchange but with a user interface they control, you have no insight into how much of the bitcoin is backed by an actual UXTO held by the exchange.
In theory, exchanges can create as many bitcoin IOUs as they like if customers don’t redeem them and pull their funds into an on-chain wallet. This allows exchanges to promise customers bitcoin in the future while using that bitcoin somewhere else.
While this can be a profitable exercise for the company, if they ever called on their bluff, it can end badly. Since we don’t know how many exchanges have bitcoin IOUs and to what extent they’ve leveraged their balance sheet, there could be 10s or even thousands of paper claims on bitcoin that never existed, artificially inflating supply on those exchanges.
Derivatives markets on top of bitcoin
Prior to bitcoin, gold was seen as the “safe haven” asset, a way to call governments on their debts and pull money out of the credit system. Gold was seen as a warning sign of instability in the market and needed to be euthanised if governments were to maintain order in their fiat markets.
Since gold isn’t practical to settle physically, derivatives markets were the naturally more efficient clearing option. While it brought faster settlement, it did open the door to manipulation of the asset. Instead of holding gold, traders opted for paper claims, and more money flowed into paper claims than physical settlements.
In addition to spot paper settlement, a futures market could then trade on top of it with ease. The government knew that by promoting the gold futures market, gold would experience a significant increase in price volatility, diminishing its desirability and reducing long-term hoarding. More importantly, this document was dated 21 days before they reinstated the ability for individuals to own gold again.
While bitcoin doesn’t have settlement issues of gold, but it does have a growing futures market, where capital flows into paper claims in a secondary market rather than the asset itself. Since futures aren’t settled in bitcoin but in cash, it is far easier to manipulate because you’re never under the constraints of bitcoins fixed supply.
Fear, Uncertainty, and Doubt are one of the most effective manipulation techniques to move bitcoin prices without even buying or selling a coin. Inexperienced investors and day traders have low conviction and can get shaken up by negative news and run for exit doors quickly. Traders are very sensitive to taking losses, even small losses, and hence if half-truths or fake narratives are created around a specific project or asset, then you can see a large price impact, i.e. sell the rumour and buy the news.
In today’s landscape, where news can go viral across social media without much effort, and in a world where many media sites are captured by corporations with a myriad of interests and positions in the market.
While governments are always keen to leverage the press for political points, by lambasting bitcoin, it’s easy to see why certain entities would create FUD and how it can move prices.
Why manipulate the price of bitcoin?
Now that you know how bitcoin markets can be manipulated let’s consider why someone would want to influence the price in any direction.
It’s a profitable trade
If you’re in the bitcoin market purely for short-term profit, and you have the means to influence the conviction of the market that would benefit you, why would you not?
If you had certain positions going long or short that are dangerously close to liquidation and would leave you ruined, would you not try your best to try and manipulate the market in hopes that you can avoid a margin call?
If you had a certain amount of bitcoin obligations that need to be repaid, but you don’t have the capital to acquire that bitcoin at current prices? Would you not be motivated to manipulate the price down so you could make yourself whole?
Of course, you would!
Slow down the exit of capital
If you’re in a country with a failing currency, the last thing you want to have is an exit valve that, as more people pile into it, their wealth increases and only encourages others to follow. By manipulating the bitcoin market and using price-suppressing strategies in your local market, you discourage people from removing their capital from your country and can maintain your capital controls.
Slow down bitcoin adoption
If people are disincentivised from purchasing bitcoin to store their hard-earned savings in something governments cannot control, they can be pushed back into regulated assets. Encouraging consumers to choose from real estate, equities and corporate bonds, all exposing the investor to greater risk and volatility, retail investors have two options: government bonds or U.S. dollars.
This keeps a larger base of retail investors holding government obligations which they can continue to produce without limit, providing an additional runway for these governments.
Build conviction, and don’t play games
Investing in bitcoin comes with risks, like any other investment As more regulations are introduced, market manipulation will become harder to pull off for some parties, while larger entities like governments might have more sway over the bitcoin to fiat market. There will always be someone incentivised to manipulate the price of bitcoin.
In some cases, it might have been traders with positions that required the price to be manipulated in others, it might be governments keen to reduce capital outflow from their local currency. Regardless of the reason or the entity, it would be best if you made peace with the fact that actors with political and financial power will try to push the bitcoin market around in their favour.
If actors are manipulating the price of bitcoin as a fiat miner, it is only to your benefit. As market actors suppress the price, you get to secure bitcoin at a cheaper price and haul it out of centralised hands and into cold storage. The larger the market for bitcoin gets, the deeper the liquidity, the harder it becomes to push around, and eventually, it breaks.
This can be in the form of large players going insolvent or through massive premiums showing up in other markets.
Artificial or natural volatility is volatility.
If you are considering gaining some exposure to bitcoin, you’re best served to take your time learning more about bitcoin, the network and the asset. Once you understand its fundamentals and how the fixed supply works, and you feel confident in the thesis, then go ahead and take a position. This could be through a lump sum or, better yet, channelling the volatility in your favour through dollar cost averaging.
Bitcoin is a savings technology, and its NGU properties only benefit those who have real convictions, while those that don’t get their funds stripped from them. Bitcoin allows you to secure your wealth in a brand-new asset that doesn’t require active participation to ensure returns. When your betting on the growth of the network, you don’t need to look for entrances and exits to catch waves of capital flow.
There is no need to make rash decisions on the one-minute chart, hoping to get rich quickly, so in the end, price manipulation doesn’t matter to those who have their coins in self-custody.