Are Bots Controlling the Cryptocurrency Market and Affecting Your Returns?
Most of you probably know what a bot is. They are the reason that every once in a while you’ll have to look at a hard to read series of letters and numbers, type in what you think you see, and only when you get it right can you get access to whatever you’re trying to get access to.
For those that don’t know, bots are automated entities that are programmed to identify things within the parameters of their programming, and execute actions based on factors that trigger their programming. In the case of trading bots, they are programmed to identify market trends and make trades automatically using algorithms to make similar decisions as would a human trader, given the same set of circumstances.
Bots can make decisions much faster than humans though, and their speed and proficiency are only increasing as time goes by. Today, bots are used across many trading platforms to identify and take advantage of even the smallest of pricing changes. In the world of trading, automation is fastly becoming the standard practice, and bots have become a staple in most trading platforms.
Now, what we might tell you next could be a bit scary for those seeking to make their fortune in the cryptocurrency markets. It might also lend credence to the notion that markets are being manipulated by bots. Recently, the Journal of Monetary Economics published findings about the manipulation of the cryptocurrency ecosystem that generally confirmed the suspicions about what was happening with Bitcoin prices back in 2014.
The paper claims that there were various trading bots on the Mt. Gox exchange, which back in 2014 was the biggest exchange trading in Bitcoins, making trades, and producing trade volume information that wasn’t factual. The Mt. Gox exchange had even credited these bots with Bitcoin that wasn’t their own. The bots were able to trade and buy up Bitcoin, and caused the price to artificially increase due to their activity.
To most, that is a really scary scenario that should not be allowed to happen because this is an example of full-on price manipulation, and what’s worse is that it was made to happen with Bitcoin that those accounts didn’t really even have possession of in the first place. These bots were trading for a substantial period of time, and might have been a substantial part of the reason an attempt was made to cover up the fact that Mt. Gox had Bitcoin stolen from their exchange.
The paper claims that the trading volumes were greatly increased on the days that the bots were active, and they based this on reports that were leaked to them from the exchange. Mt. Gox is no longer an exchange because they claimed to have been hacked and have Bitcoins stolen. They are still in legal proceedings to try and recover the missing funds, and attempting to find out exactly what happened.
Why does this matter to us today you ask? It is entirely possible that current exchanges might have similar things happening now as what was happening in 2014. Suspicions about this are high, and that is because exchanges have so much power and there is nothing regulating them.
Exchanges, which are centralized authorities in the cryptocurrency world, rely on trust to operate. This, of course, goes against the whole idea of decentralization, and will in time be solved by decentralized exchanges, which will ensure that there won’t be a centralized power that can add or subtract balances from users accounts.
So, in 2014, these bots were targeting days when trading volumes were low, or there was a perceived drop in Bitcoin’s value, and would line up trade orders so that it artificially seemed like there was a high interest in the Bitcoin market that didn’t really exist and establish a price increase based on this artificial activity level.
This is something that could potentially still be happening to this day, and there is the possibility that excitement in the market that drives up the price of cryptocurrency could be coming from these artificial hikes in volume due to bot activities within the exchanges. Since there is little to no regulation to prevent such things, who can say for sure.
For this reason, investors really should take all information on trading volume with a grain of salt. We have no idea at this juncture whether platforms themselves are running bots with the specific goal of driving up the prices of their cryptocurrency. The smart cryptocurrency investor would be prudent in assuming the worst in every situation so that smart decisions can be made about where to place their assets.
About the author:
Chris Douthit is a stock and cryptocurrency analyst who’s worked in both finance and technology for nearly 20 years. With his insight and technical analysis, he achieved over a 2000% return in the cryptocurrency space in 2017. Today his training and research center, CryptoInvestingInsider.com is quickly becoming the go-to website for investors looking to fast-track their success.