Market manipulation fun

Cryptocoins tend to have small markets, making those markets much easier to manipulate than a medium sized country’s currency or a stock on the fiat stock market. Another advantage the cryptocoin market manipulators have is that at this point, government regulation prohibiting deliberate market manipulation does not yet apply to cryptocurrencies.

I remember a couple years ago (wow, it’s amazing that I am now counting my involvement in the cryptosphere in years rather than weeks or months!), back when there were far fewer Devcoins around, traders would occasionally pump the price way up. The most recent instance of this was done presumably by a guy on Twitter called Wolong, who bragged about how he could move markets. His tag line read: “Faith can move mountains and Wolong can move markets.” And he did. He pumped the price of Devcoin all the way up to 126 sat, and that’s the highest I’ve ever seen Devcoin since. I must admit to having some nostalgia about that day considering the going rate for Devcoins is now 3 sat each. No one seems interested in pumping the Devcoin price anymore because the sheer number of coins out there means that it would take tremendous resources for a trader to do so.

However, market manipulation is alive and well when it comes to many of the newer cryptocoins, particularly ones which do not trade at a huge volume.

Enter Diamond (DMD), the coin which has been promoted as the best cryptocoin to hold for store of value, the one with one of the most stable prices, the one which currently mints at a rate of twenty-five percent annually. It also happens to have a fairly small market, with only 4.38 million coins to ever exist, and just a little over 1.6 million currently in circulation and a trading volume on BitTrex of under a quarter of a Bitcoin’s worth.

Apparently it has all the right features to attract the market manipulators. According to the Diamond thread on the Bitcoin Forum, there are three different trading bots running on the Diamond market on BitTrex most, if not all, of the time. Earlier this week I observed one of those bots in action.

I hadn’t been planning to buy Diamonds that day, but I have this neat app on my tablet which tracks the real time market price of cryptocoins I select from most of the exchanges. I happened to notice the price of Diamonds was at an all time low of just over 53,000 satoshis. Normally the price of Diamond hangs out around 70,000 satoshis but I have seen it as high as 100,000 satoshis on more than one occasion. When I saw it at 53,000 sat I had to learn more.

I logged onto BitTrex, one of two exchanges I know of which trades in Diamond, and was delighted to see that not only was the ask price really as low as 53,000 sat, there were actually a few hundred DMD for sale at that price. This means phenomenal buying opportunity, so I started sending my Bitcoin over. While waiting for my Bitcoin deposits to clear I watched the market, and that’s when I discovered something rather peculiar. The ask price kept decreasing every ten to thirty seconds by one satoshi. I also noticed a distinct pattern with the amount of DMD being offered at the top five ask prices. Each time the ask price decreased, the amount of DMD would be the exact same amount that it had been at a higher ask price just a few minutes ago. I also noticed that every so often, exactly 0.05 DMD would be purchased, each time at a price lower than the previous time. This made it look like the price was in free fall. My app only tells me the last price of a coin, but it doesn’t tell me how much of the coin was purchased or if it was a buy or a sell. This lack of complete information can make it look like the price is just falling like a rock, when in reality, only miniscule amounts of coin are actually moving. This is why I always log into the actual exchange site when I spot something interesting via the smartphone app.

I watched the ask price gradually decreasing (incrementally by one satoshi) for nearly an hour. It didn’t take me long to figure out that this was not the work of an actual human being (or group of human beings) placing sell orders, then cancelling them and placing them even lower. It was the work of a preprogrammed trading robot, or bot. I was also reading the DMD thread on the Bitcoin Forum, and at that same time there was some kind of troll bragging about how he was going to gradually bring the price down to 10,000 satoshis. When I saw the bot in action I wondered if the troll owned the bot. That was hard to tell, because there were a few other posters on the forum who were kind of joking about it as well. Regardless, the actual buying and selling that day was pretty slow so the bot had managed to drive the price down quite substantially. Not only that, there were plenty of cheap diamonds for sale.

After watching the bot for around fifteen minutes I started making small purchases every ten satoshis, to see if my interference would affect the bot’s behavior. It didn’t seem to, so I started making larger purchases. Then I asked myself what would happen if I just bought all the DMD which were included in the bot’s incremental lowering of the ask price. Would more DMD be added, or would that cheap supply dry up? After watching the bot for another fifteen minutes or so, I bought up its entire supply. Then I started to buy some of the other cheap diamonds which weren’t obviously included in the bot program.

To my disappointment the bot didn’t refill its supply of diamonds and the gradual price dropping stopped.  At that point the desire to share my discovery on the Diamond thread got stronger than my desire to quietly pick up even more cheap coins. I posted my discovery on the forum, and that resulted in one or more large Diamond buys which very quickly brought the price back up to its current level of around 70,000 satoshis. I ended up paying more for the remaining coins I wanted to buy as a result. But it was fun to see a couple of DMD community members post something about defeating that price depressing bot and then see those large buys quickly drive the price back up to its normal value.

The really amazing part was that it only took a few hundred DMD offered at incrementally lower prices to drive the price way down, but that this only worked until someone like me came along and bought those cheap coins. The whole point of pushing the price down as this bot was doing is to incite other Diaimond holders to panic sell, in which case the price decrease becomes real. I did notice some large sells so clearly the bot’s strategy was working to some extent. But I’m sure if those panic sellers had taken the time to just watch the market for a while they would have seen what I saw and realized the price drop was completely artificial. If a trader can sell off a few hundred coins at an artificially low price but then buy a few thousand at an even lower price, then all that bot work will have paid off.

A few minutes of watching the BitTrex Diamond order book tells me that this bot is still active. It’s working from a price of over 70,000 satoshis, but it keeps trying to incrementally lower it. The one difference is that there are fewer diamonds up for grabs. It seems to me that the amount of DMD for sale drops to near zero once the price resets or the supply is depleted, but then gradually increases over time. If no one buys the bot’s coins for several days, perhaps the price will drop all the way to 53,000 satoshis with a few hundred for sale ready to reward a patient buyer.

I think now that the community knows about this particular bot, that scenario is much more unlikely. There are probably several DMD accumulators with plenty of Bitcoin to spend who continue to watch the market, ready to pounce on the first opportunity to pick up some more Diamond at a discount. There are others who are happy to place low buy orders and hope to take advantage of the next panic sell that drops the price way down, even for just a few minutes. More importantly, people in the Diamond community want to keep the price stable and see it gradually increase. They seek to accomplish this not by the use of trading bots or market manipulation, but by buying coins on a regular basis and holding onto them. The truth is most of the time, there are only a few Diamonds for sale at any given price. To buy a large number of them (and by large, I mean more than fifty), you either have to place a buy order at your chosen price and then wait patiently for it to fill, or you run up the order book (and the price) until you have purchased the desired amount.

For the record I don’t believe the use of trading bots in and of itself is unethical. Many people use trading bots as a way to regularly buy or sell coin at what they consider to be optimal prices without having to watch the market all the time. I actually would like to learn how to program and use one… when I have some spare time. Market manipulation, on the other hand, including  using bots to accomplish it, is anothe ball of wax. Is it unethical? I think that if all traders, including the occasional buyer or seller of a given coin, approach the market with open eyes, understanding that there are games afoot, and that the price they see may be either inflated or deflated, then deliberate market manipulation may not be so bad. The problem is that many people, when they see the price of a coin they are holding drop precipitously, they really do get scared and they may sell holdings they wouldn’t otherwise sell given a natural price. One could argue that inciting someone else to sell at a loss under false pretenses is a form of theft. The other issue is that suppose someone wanted to sell off an asset because he or she felt it was a good time. But then he goes to do so and finds the price to be much lower than what he was hoping to get. In that case he can either sell at the lower price, or wait until the price goes back up. In that scenario, what is stolen from the investor is liquidity, the ability to buy or sell at a consistent price. Finally, market manipulators often have much more resources than those investors who just buy and sell honestly. It can be tough to counteract the manipulation, in which case the ordinary investors lose on either price or liquidity.

In general I would prefer it if people bought and sold cryptocoins based on the coin’s fundamentals, and the price fluctuations would be the result of each investor having a different opinion about how those fundamentals ought to translate into price. Speculation on coins and deliberate market manipulation annoy me. in part because it makes it hard to discern what a coin’s actual value is. I also don’t like people getting hurt by panic selling or its opposite, panic buying at an inflated price. But I have no problem taking advantage of the situation when someone else is trying to manipulate the market, especially when that involves putting up several hundred underpriced Diamonds for sale.

People trading in the cryptosphere need to be aware that market manipulation does happen, and because the markets are often small, it’s not difficult to trade in a way that greatly affects the price. I’ve run coin prices up or down at times just by doing my own shopping. The best way to ensure you won’t be negatively affected by market manipulation is to know your coin and know your market. If you plan to buy or sell a lot on a given market, it helps to just study that market, mainly take the time to observe what happens over a period of time. Also know your coin and know its community. If the coin’s fundamentals are good, do understand that they didn’t suddenly go bad just because the price dropped. Buy, rather than sell, on those price dips. Don’t make buying and selling decisions solely on what the market is doing on a given day. The main thing is to be patient. Place limit buy or sell orders based on the price you want to buy or sell at, rather than buying or selling at the going rate, especially if the going rate is not what you believe it should be. This means be willing to wait a few hours or days for your order to fill.

Market manipulation mostly hurts what people call weak hands. Weak hands are those traders who cannot handle holding onto an investment while its price is dropping. They often panic sell at the bottom of a dip. But I think the expression can also include investors who buy and sell randomly with no particular plan in mind. Having a good investment plan and sticking with it is the best recipe for having strong hands. Not having a plan makes you more vulnerable to the power of suggestion, and market movements, natural or manipulated, are ripe with all kinds of suggestion. Finally, if you know about the bots and the pump and dump schemes which affect your coin’s market, you can use those things to your advantage, and it always feels good to score by buying more coins at a discount or selling coins at an inflated price.

It’s the possibility of having some fun taking advantage of other people’s market manipulation schemes that makes me believe that while I would never encourage anyone to engage in deliberate market manipulation, nor would I do it myself, I don’t necessarily want it to be outlawed in the cryptospace. It’s just all that much more important to know what you’re dealing with. Cryptocoins should not be traded blindly. Buyers and sellers need to be informed and educated about their coins and their markets.

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