The problem with using the word 'manipulation' is that idiots get this confused with actual problems like 'insider trading'.
The word 'manipulation' is most frequently used on these forums to reference ordinary traders that simply have lots of money, i.e. 'whales'. These people are the exact same as everyone else in that they're just trading and trying to make a profit. Calling this 'manipulation' is stupid because this makes everyone a manipulator. But, erecting huge buy/sell walls or pumping and dumping isn't manipulation -- it's called being wealthy.
Save the term 'manipulation' for devious practice like insider trading and otherwise.
+1
i have outlined in the past the basic idea here, but in more rigorous terms using concepts from game theory applied to the concept of market efficiency. the reasoning behind why even individuals with large amounts of capital in proportion to the average market participant would find it difficult to manipulate the market in any profitable way goes as follows:
Market efficiencythe market moves to minimize traders' profits -- this is a consequence of efficiency. in a market that is perfectly efficient, there would be zero excess profits. by my own experience and the collective experience of this subforum, i think we can safely assume that the bitcoin price function does not exhibit this kind of perfect efficiency (and i would argue that no market does, but that's another topic).
Profit-minimization in (mostly) efficient marketseach time profit is extracted from the market, it causes the price to converge on its "true" price. that is, the process of correctly anticipating market behavior and extracting profits makes the market more efficient. for instance, speculators who can guess where a natural price support is (which is determined by the emergent behavior of the sum total market participants) will exert buying pressure below this support, thereby strengthening it. a mostly efficient market quickly recovers from flash crashes like the one on 24 Feb by this exact process. if the bitcoin price remains undervalued for too long, excess profits can be made by buying low and selling high (and vice versa), so speculators enforce efficiency by buying sudden dips that have a disproportionately large effect on price due to slippage. this is also the mechanism for "corrections" due to profit-taking during periods of rapid price gains.
The cost of market manipulationnow, in this way, the market rewards successful speculators with the few spare profits available from lapses in efficiency like in the examples above. following from this relationship between the theoretical "true" value and the actual stochastic price function which approximates this value, the most profitable move is always the one which enforces efficiency, that is, the move which converges the ticker price to this underlying "true" value. in other words, generally speaking,
the most profitable move is one which anticipates trends, not contradicts them. in fact, it also follows from the above relationship that direct price manipulation would be
costly, not profitable, because any true manipulation would move the price
further away from the "true" price, which is equivalent to creating
more inefficiency. this correlates to more excess profits, and the game is zero-sum! it follows that the profits created come from the pocket of the manipulator.
The trading metagamei do feel i must address the idea that certain clever manipulators may be able to beat a metagame of inducing signals in indicators upon which other traders rely (e.g. creating a "false" crossover). in this situation, the manipulator tricks
other market participants into inducing inefficiency through their actions, and then scoops up the excess profits thereby created for themselves! this is a nuanced kind of manipulation that relies on the metagame revolving around anticipating the strategies of other traders. however, this meta-strategy is subject to the same pressures it exploits, as any other market participant may be able to consistently anticipate it and scoop up the profits before the original manipulator does. in this way, the manipulator is still bound by the rules of the "game", and cannot use this meta-strategy to consistently extract excess profits. once the manipulator's own behavior becomes predictable, it is no longer profitable.
in closing:
the market incentivizes all participants to enforce trends (by means of profits), and deters them from violating them (by means of costs),
and the corollary:
any manipulative meta-strategy that can consistently extract profits can and will be exploited by other participants and thereby neutralized by the same principle.
i hope this issue can now be solidly put to rest. however, i have a sinking feeling i'll be making the same post in another six months or so
--arepo
