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June 14, 2014, 05:37:14 PM |
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We have all seen blatant examples of market manipulation by what are termed "whales" on crypto exchanges but I have growing suspicions that some of these "whales" may be the exchanges themselves engaging in activity which whilst not necessarily illegal is certainly unethical and representative of unfair market manipulation.
The most blatant examples of this are seen on the largest exchange (by volume) - I don't think I need to name them. Time and again we have seen coins rise and then when the coin has most going for it they reach said exchange and (after a short pump) they start a steady decline in value.
It should be noted that this exchange accepts paid votes (in BTC) for listing new coins. This is a practice that is suspicious at best and rife for abuse as it allows coins to be listed on the basis of wealth rather than actual popularity.
It also means that there is an incentive for the exchange to support new coins to the detriment of older more established ones. Here is what I think may be happening:-
1. The exchange accepts payment votes to list coin X.
2. As payments come in to list X, the exchange uses those BTC to slowly buy up X at cheap rates.
3. Over time the price of X starts to rise as demand and sales rise. This accelerates as X rises up the voting list on the exchange.
4. Once X is actually listed there is an inevitable rise in price and demand.
5. Once people start buying and selling at higher prices the exchange steps in and starts selling their large volume of coins (purchased very cheaply) at prices which significantly undercut regular sellers yet are still high enough to make them a significant profit.
6. The price starts to fall and people start panic selling leading to a downward spiral in price. Now the exchange either lets the coin die by keeping their BTC or they start buying up again from panic sells and repeat the process.
7. Once the exchange has milked the coin sufficiently they keep their BTC earnings, the volume on the coin dies, as a significant source of buys has been removed from the equation.
8. The number of free coins is significantly greater than demand. This leads to loss of confidence in X as the price continues it's downward trend. Human psychology then exaggerates this further leading to a dwindling "perceived value" for the currency.
9. The coin takes a long time to recover if it ever does from the artificial buy pressure generated by the exchange being removed - if it ever does recover.
10. By this time the exchange is hard at work on the next coin(s) - Y, Z, etc. for which the same process has begun.
Now I don't have any proof of any of this. Just hunches but it all fits the behaviour of coins on the exchange. I'm talking here about coins that one would expect to be certain to succeed with good developers, innovation, plenty of real demand and community support.
Yet their behaviour on this exchange seems to behave exactly in this manner. At times it might seem consistent and expected (bad news, poorly implemented hard forks etc) but there is an alarming counter intuitive yet consistent pattern where coins with improvements i.e. good news continue falling in value.
As soon as some good news appears a huge number of coins appear to get dumped on this exchange and lower the price. I have also noticed large amounts of buys and sells of the same value going up simultaneously and being taken down and moved simultaneously or at rates that would be impossible to do for an end user.
These issues suggest that there is some internal party behind these orders. Like I said I don't have proof but I would suggest we are all vigilant and look out for suspicious activities on all exchanges.
Whilst exchanges are vital to any currency the fact is it is far too easy for a bad actor to manipulate markets and act dishonestly.
One thing that would definitely help to reduce (but not eliminate) this behaviour would be for us as customers to insist that exchanges NOT take paid votes. They only benefit the exchanges and as I have suggested create a big opportunity for unscrupulous parties to manipulate the markets in their own favour.
Furthermore we should also insist on openness regarding why exchanges list coins when they haven't been voted for as well as proper external auditing of exchanges to weed out those that are taking part in unethical behaviour.
We should also know who this faceless people behind these exchanges are and what if any business history they have. Have they been involved in any fraud etc. What is there general track record.
I am open to other people's suggestions for how we can combat this kind of behaviour if it is happening and their general views on the matter. I believe an open and fair market benefits us all. Cryptocurrencies will only be hampered in their success if market manipulation remains endemic as I believe it may be.
Thanks and apologies for any spelling or grammatical errors I may have missed.
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