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Bitcoin Plummets On Price Manipulation Investigation

BTC

Reports that the U.S. Department of Justice (DoJ) has launched a criminal probe into potential illegal manipulation of cryptocurrency prices has seen bitcoin lose 3 percent this morning, down to just over $7,300 in the early morning hours.

The DoJ, as reported by Bloomberg, is investigating illegal tactics of traders, including the issuing of fake orders for cryptocurrencies, causing their prices to go up and down artificially.

In cooperation with the Commodity Futures Trading Commission (CFTC), the DoJ is specifically probing what is commonly known in the trading world as “spoofing” and “washing”.

Spoofing in an illegal move by traders to place large numbers of false orders on exchanges and then withdraw them to control prices by luring in other buyers. “Washing”, on the other hand, is a tactic whereby traders trade with themselves in a coordinated act to make it appear as if there is a lot of trading activity going on, thus also luring in other buyers.

While the crypto market remains unregulated, both spoofing and washing are illegal in mainstream markets.

While the investigation is in its early days, mainstream reports of the launch have dragged crypto prices down. Not only did bitcoin lose 3 percent this morning, but ethereum was trading down 3.15 percent by 8:14a.m. EST:

The DoJ investigation comes on the heels of a campaign launched by State of New York Attorney General Eric Schneiderman, which sent letters in April to 13 exchanges, requesting detailed information on their operations.

“Representing a technological advance, a medium of exchange, and an investment opportunity all at once, virtual currencies are inspiring innovators, entrepreneurs, and investors—and are fueling an increasingly diverse ecosystem of companies and applications,” the AG’s office wrote in the letter. “But virtual currency is also a highly speculative sector, featuring significant volatility, instability, and risk. Moreover, published reports indicate the sector has attracted fraudsters, market manipulators, and thieves.” Related: Consumers Lost $1.6M To Crypto Fraud In Australia

Among the 13 exchanges were the well-known Kraken, Poloniex, Binance and one that should be gaining a fair amount of attention right now—Gemini, the brainchild of the Winklevoss brothers.

Gemini is operating without New York State’s “BitLicense”, but it has also recently thrown in with Nasdaq to monitor crypto markets for illicit trading using the same technology used by traditional markets to look for things like spoofing and washing.

Cameron and Tyler Winklevoss have been scrambling to get in front of crypto regulation, counterintuitively proposing the creation of a national self-regulatory body to govern the digital token sector.

So is the latest news of the DoJ investigation propitious for Gemini? Ultimately, it very well could because Gemini will use Nasdaq technology to monitor trading patterns even in closing auctions where prices are most vulnerable to manipulation, according to Quartz. It’s a process called “banging the close”.

In the meantime, bitcoin isn’t going to catch a clear break as long as regulatory questions remain unanswered; nor is it ever likely to reach its $20,000 high of last December in this environment. Holding on to gains from 4 May when it topped $9,000 again will also be difficult.

A recent Federal Reserve report said that bitcoin’s “hypothetical value” is $1,800.

“Although Bitcoins do not possess any real intrinsic value, from a commodity valuation perspective, we can estimate a hypothetical value based on its production costs. Recent estimates regarding the energy involved in mining a single Bitcoin by professional energy-efficient mining rigs put it at about $1,800 when mined in China (where 80% of the currently mined Bitcoins originate),” Joost van der Burgt, fintech policy advisor at the Federal Reserve’s San Francisco branch wrote in the May 18 report.

By Michael Kern for Safehaven.com

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