As the office of New York Attorney General Barbara D. Underwood said in September, bots on large-scale crypto ecxhanges have been manipulating the price of Bitcoin for many years.The report released by Attorney General Barbara D. Underwood read:“When any venue tolerates manipulative or abusive conduct, the integrity of the entire market is at risk.”But, with the Commodities and Futures Trading Commission (CFTC) cracking down on market manipulation through the usage of illegal software and the US Securities and Exchange Commission (SEC) punishing exchanges that engage in unregistered distribution of securities, experts believe the usage of illegal bots across global crypto exchanges will eventually subside.
Scale of Impact on Crypto
Speaking to The Wall Street Journal, CoinList co-founder and president Andy Bromberg stated that illicit bot trading and market manipulation is rampant in the cryptocurrency exchange market.
Although major markets like Japan and South Korea have newly imposed strict regulations to govern crypto trading platforms, most of the policies pertain to money laundering and security. The government of South Korea has said that it will oversee digital asset trading platforms as strictly regulated financial institutions potentially by the end of 2018, but the legislation still needs to be reviewed by the National Assembly of South Korea.
As of current, the vast majority of exchanges remain lightly regulated, even in developed cryptocurrency markets like the US, Japan, and South Korea. No regulations punish or discourage the usage of abusive strategies and take advantage of the poorly regulated crypto market.
“This sort of activity is rampant in the market right now,” Bromberg said, emphasizing that bot trading is difficult to restrict and prohibit.
Stefan Qin, the managing partner of $80 million cryptocurrency hedge fund Virgil Capital, told WSJ that it uses legitimate bots on 12 exchanges but was forced to build various functions to combat illegal activities and illegitimate bots.
“We’ve had to build in error-handling functions to check for hostile and potentially illegal activities. Such is the Wild West of crypto,” he said.
Norwegean crypto trader Kjetil Eilertsen said that his program called Quatloo Trader is the best market-manipulation tool in the space and that since the market cannot restrict usage of bots, it should allow bot creators to distribute the software to casual traders to create a level playing field
“If everybody can manipulate, then nobody is manipulating. You can’t ban anything from people who are dedicated to doing something,” Eilertsen said.
Some Exchanges are Even Encouraging it
Last month, cryptocurrency trader and analyst Alex Kruger exposed a promotion on Bithumb, South Korea’s second largest cryptocurrency exchange behind Upbit, which encouraged traders to engage in wash trading and inflate the volume of Bithumb.
“There currently are $250 million [in] fake volume traded at [the] Korean crypto exchange Bithumb, every day at 11 a.m. Korean Time, since Aug. 25. Bithumb offers 120 percent payback of trading fees as an airdrop. Trading fees are 0.15 percent taker. To collect the full KRW 1 billion rebate, a wash trader must thus trade KRW 278 billion. That is $250 million in daily fake volume. Notice how 31K Bitcoin are traded at exactly 11 a.m,” Kruger explained.
Ultimately, it was a win-win situation for both traders and the exchange because investors were able to generate profit off of creating fake daily trading volume and Bithumb benefited from it as cryptocurrency market data providers listed the volume as real volume, which encouraged traders in the space to use the exchange.