
U.S. Launches Criminal Probe into Bitcoin Price Manipulation - sdfx
https://www.bloomberg.com/news/articles/2018-05-24/bitcoin-manipulation-is-said-to-be-focus-of-u-s-criminal-probe
======
sine
For anyone who hasn't been following, the prevailing theory is that the
largest Cryptocoin exchange "Bitfinex" also runs an altcoin called "Teather"
which was marketed as being backed 1:1 by USD. So far they've created 2.8
BILLION USDT and coincidently the times they create millions of these happens
to be in the middle of extreme market crashes.

See this chart:
[https://i.imgur.com/Uo07d1d.jpg](https://i.imgur.com/Uo07d1d.jpg)

More details here:

[https://medium.com/cryptomedication/uncovering-the-real-
cart...](https://medium.com/cryptomedication/uncovering-the-real-cartel-in-
bitcoin-65b56a7a00a2)

[https://medium.com/@bitfinexed/latest](https://medium.com/@bitfinexed/latest)

[https://medium.com/@mattcollburner/bitmex-insiders-caught-
in...](https://medium.com/@mattcollburner/bitmex-insiders-caught-in-a-web-of-
lies-6d9b90baa693)

~~~
DINKDINK
If there was a problem redeeming Tether for USD, you'd expect that the market
price distortion of Tether. But it hasn't[1]

[https://www.tradingview.com/chart/?symbol=POLONIEX:USDTUSD](https://www.tradingview.com/chart/?symbol=POLONIEX:USDTUSD)

>they've created 2.8 BILLION USDT

Absolute numbers are meaningless and less eye catching when they're compared
to the entire market. 2.8 ~ _~_ Billion _~_ ~ USDT is only 0.5%-0.8% of the
market. Do you really think that a 300-500 billion dollar market is being
propped up by less than pennies on the dollar?

What can be said about Tether: it's a trusted third party that's vulnerable to
fractional reserve (like all other exchanges). I wouldn't recommend people use
it but to point to the tether creation as proof positive of manipulation
rather than discussion fractional reserve issues I think is people confusing
lurid facts with silent evidence threats.

Other reading: [https://medium.com/crypto-punks/tether-
misconceptions-298443...](https://medium.com/crypto-punks/tether-
misconceptions-2984430e7e48)

~~~
dzdt
The mechanics are probably this: suppose someone goes to Bitfinex to redeem
10million USDT into USD. Since Bitfinex is behaving fraudulently, they don't
actually have the 10million USD they promised they would hold to back the
USDT. But they do have the ability to issue new unbacked USDT.

So they issue 11million unbacked USDT and use it to buy bitcoin. They sell the
bitcoin for 10million USD on one of the exchanges that allows bitcoin to hard
currency exchange. The 10% loss is because you have to pay a premium to
exchange bitcoin to real currency. Bitfinex then pays the 10million USD to the
customer in exchange for the 10million USDT which is retired.

The net results are 1million new unbacked USDT have been printed, and the
illusion that USDT is backed by USD has been maintained.

Possibly the "Bitfinex issues unbacked USDT to buy bitcoin" step is being done
not based purely on customer demand, but on a periodic basis when bitcoin
price is falling.

Maybe Bitfinex has a hope to preserve their fraud by propping up bitcoin, or
to dig out from under the fraud by building a big long bitcoin position and
hoping it will rise in value.

Or maybe the timing of USDT issues with market drops is just that bitcoin
price falls when there are more sellers than buyers, which is the same time
there are more USDT redemptions. So to carry out the mechanics above, Bitfinex
has to print tether to fund the redemptions at the time of the drops.

~~~
mancerayder
That's a very interesting and plausible hypothesis.

One wonders whether the prolonged slump might lead to some sort of bursting of
outfits like Tether/Bitfinex. It seems like a downward spiral of people
selling BTC and Bitfinex doing the dance you described, and a bigger hole
being created.

~~~
evilDagmar
The other allegation (which is pretty viable) was with large reserves to play
with, they could cause crashes or spikes in order to gobble up their users
risky shorts. Shorts they would know the exact number and values of.

------
nonbel
>"The Justice Department has opened a criminal probe into whether traders are
manipulating the price of Bitcoin and other digital currencies, dramatically
ratcheting up U.S. scrutiny of red-hot markets that critics say are rife with
misconduct, _according to four people familiar with the matter._ [...] Federal
prosecutors are working with the Commodity Futures Trading Commission, a
financial regulator that oversees derivatives tied to Bitcoin, _the people_
said."

Why isn't there a better source for this than "four people"? I didn't see
anything on the DOJ site. Perhaps they are talking about this:
[https://www.cftc.gov/PressRoom/PressReleases/7731-18](https://www.cftc.gov/PressRoom/PressReleases/7731-18)

However, that doesn't mention the DOJ so maybe not. Is it normal for the DOJ
to anonymously report its activities to journalists like this?

~~~
ceejayoz
> Why isn't there a better source for this than "four people"?

Because they're leaking. "Four people" is how a media organization says "it's
not just one whackjob making shit up".

> I didn't see anything on the DOJ site.

Why would you? They don't appear to have publicly announced anything yet.

> Is it normal for the DOJ to anonymously report its activities to journalists
> like this?

It's normal for _people at the DOJ_ to do so, yes. Some leaks are done on a
semi-official basis ([https://boingboing.net/2017/02/22/the-leaky-
leviathan.html](https://boingboing.net/2017/02/22/the-leaky-leviathan.html)),
others are just individuals doing it on their own.

~~~
nonbel
So it sounds like we are dealing with a rumor here. What reason do we have to
believe these four people? I guess it is the reputation of the journalist on
the line if the rumors turn out to be false.

~~~
ceejayoz
> So it sounds like we are dealing with a rumor here.

Media organizations get _pretty_ good at distinguishing between rumor and
leak. Any major one will have all sorts of policies on how a story gets
verified, and they _tend_ to work. Mistakes do get made, as with anything
involving humans.

> What reason do we have to believe these four people?

The media organization involved deems them credible enough to use as sources.
It's left mostly up to you whether you trust that media organization.

> I guess it is the reputation of the journalist on the line if the rumors
> turn out to be false.

Yes, essentially (and their editors, and the publication, and the media as a
whole...). This is why reporters cultivate sources, vet their information,
keep track over time of their reliability, and generally require multiple
independent sources if those sources are leaking anonymously.

------
thisisit
This going to be interesting. They will ask all the US based exchanges -
Coinbase, Circle etc for their trade and order data for analysis. Coinbase has
already fought and lost a case when it came to sharing the data for tax
purposes. And one of the touted features of cryptocurrency has always been
anonymity.

~~~
krageon
Bitcoin is traceable by nature. Anyone who makes claims of anonymity either
doesn't understand how it works or has a system in place that provides
uncertainty (ie tumbling).

~~~
Cthulhu_
Traceable yes, but also anonymous since a BTC address is just a number without
any personally identifiable information attached to it. It's at the edges -
e.g. exchanges - where it becomes traceable.

~~~
adrianN
Good luck using bitcoin in a way where you can't connect the BTC address to a
real person after a small number of transactions. Anonymizing data is very
hard, pseudonyms are almost never anonymous.

~~~
dkersten
I know people who have exchanged bitcoins and cash anonymously on the street.
Sounds pretty risky to me and I certainly don’t think it’s feasible for large
volumes of either currency, but it’s possible and has happened, at least.

~~~
ceejayoz
> I know people who have exchanged bitcoins and cash anonymously on the
> street.

If I were a narcotics undercover agent, I'd be working to become _The Guy_
locally to trade Bitcoins with in this manner.

Have a partner snap a photo or follow them home to compile a list of people
transacting like this.

Chances are good this is already happening in some cities.

~~~
dkersten
Sure, as I said it sounds pretty risky (for many reasons), I’m just saying
that it does happen and st least has a possibility of anonymity.

------
shiado
The mechanics of manipulating price are just too easy not to do it. The wash
trading is clearly so bad on many exchanges that I bet there are agreements
with the miners to recuperate losses to trading fees. It is in all parties
interest to prop the price up this way so why wouldn't they do it. So many
sketchy things get ignored because they prop the price up.

The USDT situation will get interesting eventually. Somebody made a
spreadsheet of non-fiat volume of cryptocurrencies.

[https://docs.google.com/spreadsheets/d/1pIrTYpJZrGbeI9QTIWGw...](https://docs.google.com/spreadsheets/d/1pIrTYpJZrGbeI9QTIWGwYdRmz9FFY_KRpXOcZbjwYu8/edit#gid=0)

Basically the fate of many shitcoins are tied together. My thought is that
when USDT finally gets revealed as totally fraudulent the whole crypto house
of cards crashes.

~~~
chrisco255
Tether will just be replaced by other stable coins if it turns out that
Bitfinex can't back them if there were a run on Tethers (the only scenario we
would find if this were actually true). There are alternative stable coins
which will rise to compete with Tether and balance out the market, including
Circle's USDC ([https://blog.circle.com/2018/05/15/circle-announces-usd-
coin...](https://blog.circle.com/2018/05/15/circle-announces-usd-coin-bitmain-
partnership-and-new-strategic-financing/)) and the ETH/Gold-backed MakerDAI:
([https://makerdao.com/](https://makerdao.com/)).

------
brownbat
Funny how the cryptocurrency values were crashing in advance of this news...

------
jasonmorton
Here
[https://drive.google.com/file/d/0Bzu6iGPza2s9amFURTFzenRWVGg...](https://drive.google.com/file/d/0Bzu6iGPza2s9amFURTFzenRWVGgxbzNWMUVsQ2pTLTUzc1Nv/view?usp=sharing)
are some slides from a talk I gave last year at Strata about what spoofing and
layering is, and how a trading firm or exchange might detect or prevent them.

~~~
jcfrei
Thanks for sharing!

------
lumberjack
Despite all predictions to the contrary, the US government is doing quite a
lot to legitimize Bitcoin.

~~~
tptacek
Or, Bitcoin finally got to a place where enough normal retail financial
customers are exposed to it that the DOJ can't ignore scams, and by the time
the ecosystem is locked down and the get-lambos-quick schemes are foreclosed
on, Bitcoin will look about as attractive as it did in 2010.

~~~
awt
Btc value increased not due to scams - neither the scammers nor the scammed
ever hold the stuff (that is, off an exchange in a secure wallet), but due to
long term holders, to whom it will continue to be attractive until some state
goes back on the gold standard, which is not happening.

EDIT:

Also, the _number_ of people to whom btc is attractive is less important than
the _type_ of people. It may be that there is _never_ mass adoption of Bitcoin
- it is also the case that throughout history _most_ people never had any
money at all. And even though most people never had any money, sound money has
been extremely valuable _nonetheless_ because most people don't know what to
do with money anyway.

~~~
spookthesunset
Nobody knows why the value of BTC decided to spike like it did last year. Just
like nobody knows why it is sliding back down to earth.

It is one of the many reasons it makes a piss-poor store of value.

(Of course the answer to the spike could very well be “somebody fired up the
tether printer” plus “super shady exchanges did tons of wash trading/oughright
made up fake transactions”.

~~~
awt
It is indeed a piss-poor store of value for people who have high time
preference, but unmatched for those with low time preference.

~~~
tptacek
There is no insane investment you can't say that about. Those metallic-cover
special issue Marvel X-Men comics they used to "limited collector release" in
the early 90s will eventually be of enormous value to archaeologists in the
future, too.

~~~
awt
Although this is a true statement it is not persuasive in that Bitcoin (unlike
a special issue comic, or any other rare thing) has specific, meaningful
properties (fungibility, divisibility, durability, etc.) that interact with
the world according to well known principles (Gresham's Law, Lindy Effect,
Theory of Computation, Network Effect, etc.) that must be shown not to apply
in order to disqualify it as the best available store of value.

~~~
tptacek
[https://tinyurl.com/Special-Pleading](https://tinyurl.com/Special-Pleading)

~~~
awt
What principle is not being universally applied? Or do I misunderstand?

~~~
tptacek
Many of the ostensible characteristics of Bitcoin you've provided also apply
to special-edition 1990s Marvel comics. The idea that a good needs to be
"divisible" to be valuable is nowhere supported by evidence and easily
rebutted by counterexample. Your argument is essentially handwaving: all sorts
of terrible investments are "great for people with low time preference", in
that they will have no value in the immediacy, and their only hope of
profitable redemption is to hold until some unspecified, unpredictable future
date.

Illiquidity is a bad thing, not an generally an indicator that something is an
especially good investment.

~~~
awt
How could Gresham's Law apply to Bitcoin if it were not divisible? Or are you
suggesting that comic books could be considered money (one property of which
is divisibility) to the same degree as Bitcoin? Hopefully we agree that
divisibility is not an "ostensible" characteristic of Bitcoin, but a "factual"
characteristic of it?

Also your tendency to define things in binary terms (liquid/illiquid, value/no
value) is troubling.

Why the struggle to pretend not to be able to tell the difference between
Bitcoin and limited edition comic books?

~~~
tptacek
I'm not "pretending" anything. I think the difference is illusory, except for
the fact that you can actually read the comic book, so it has some marginal
real utility.

------
mancerayder
What grates my nerves isn't primarily Bitfinex/Tether, it's the other
exchanges. Why did they accept Tether? Of all the 'altcoins', one backed by an
asset like cash is the easiest to verify (or be skeptical of if verification
requests are dismissed or ignored). When I signed onto Bittrex, USDT was one
of the prominent trading pairs. It was a useful trading pair, because instead
of seeing numbers like ".000000314121 : 1 BTC", you'd get a dollar figure you
could mentally parse. Of course, the damned software could have done that
automatically with a currency of the user's choice. That's kind of a tangent,
though. Why weren't the other exchanges more critical of Tether and kept it
after months of controversy and skepticism?

~~~
DenisM
Coin price is determined by (amount of $ chasing coins) / (number of those
coins). Tether is effectively inflating the $$ side by pumping USDT into the
system and making people believe USD and USDT are virtually the same. As long
as the game continues the prices go up, which benefits everyone in the coin
scene, hence everyone is playing along.

Also I imagine that major exchanges could get discounts on volume USDT
purchases - this would allow them to paper over their own cash shortfalls in
exchange for lending legitimacy to the scheme.

------
fwdpropaganda
Some context from a non-expert.

From what I understand, things like spoofing in financial markets (where you
submit orders which you don't plan to have filled for the purpose that the
market sees "interest" in a certain direction and in hope that moves the
market), are regulated but still a grey area. The reason for this is that it's
an activity that involves intent. Placing certain orders is perfectly ok if
you're hoping that they get filled and you take a position, but placing the
same orders could be spoofing if your goal is to cancel them once the market
starts moving as a consequence.

~~~
sine
This is an execelent flowchart detailing the regulatory policy on spoofing on
US stock markets:
[https://pbs.twimg.com/media/DXD3RlQVoAALYLa.jpg](https://pbs.twimg.com/media/DXD3RlQVoAALYLa.jpg)

~~~
bhouston
Is this serious?

~~~
asfasgasg
The person who wrote it was probably serious, but it is not correct.

~~~
perl4ever
"Everybody" hates HFTs, but everybody also wants the illusion of a continuous
market that can be bought and sold into at any moment in any quantity. So a
lot of the arguments/discussions are really about how we can pretend that the
trading which is required isn't really happening.

------
fredgrott
What is the track on Winklevoss' proposal to a self regulation org for crypto
currency exchanges?

------
pandasun
Man I wish I could understand only 5% of the economics behind this. It seems
so interesting.

~~~
asdsa5325
Economics? Bitcoin has no intrinsic value and it's propped up by speculation.
It's ridiculous.

~~~
penkomeroy
Nothing has intrinsic value.

~~~
AnimalMuppet
Food? It certainly has some kind of value that dollar bills, gold, and bitcoin
don't. You may not like the word "intrinsic", but it's still in the right
direction.

------
exabrial
Why? I like the wild west landscape that is Bitcoin! If anything it's going to
turn it to be an interesting experiment in macroeconomics!

------
rb808
I was surprised to read that the US regulators feel they have jurisdiction to
regulate bitcoin transactions. How can this be - is it just because there are
BTC futures now?

~~~
brazzy
How could they possibly _not_ have jurisdiction when a large percentage of
bitcoin traders and several large exchanges are in the US?

~~~
Taniwha
more than that - the blockchain is global, reconciliation happens everywhere -
and that doesn't mean that no country's laws apply to it, it means that ALL of
them potentially do

------
sureaboutthis
This is so strange to me because I was unaware bitcoin was a real financial
instrument any country would care about. I've had three financial advisors,
from Edward Jones, Stifel Nicolas and a little guy around the corner, all tell
me to stay away from bitcoins. One even told me that, in two years, bitcoin
would be dead.

So this is all strange to me.

~~~
celticninja
To be fair almost every financial advisor ever would have told you to stay
away from bitcoin because it was an unknown quantity and very high risk. In
hindsight everyone of them was wrong if you bought in at any point between
2009 and mid - 2017 and sold in the last 6 - 8 months.

Also they have been calling bitcoins death since about 2009 when it was
created so I would not put too much faith in those predictions. If anything
this sort of thing could help bitcoin, either price manipulation is
identified, the culprits prosecuted and bitcoin goes on as it is. Or no
manipulation (or not significant manipulation) is identified and bitcoin
carries on as it is but with a govt. seal of approval (up to that point).

~~~
Cthulhu_
They would've been right if it was the Zimbabwaean dollar if you bought it in
the 80's, or one of Bernie Madoff's financial products.

They could still be right, given time. They've been right for Bitcoin Gold,
for example. They were right when MtGox crashed.

~~~
celticninja
My point was more that as a regulated individual a financial advisor should
never have advised an investment in bitcoin. Even if the market proved them
wrong (as it has up to now) it doesn't make them wrong for not advising you to
invest in it.

~~~
bfuller
Not necessarily "should never have advised an investment in bitcoin", that
would depend on the investors risk profile.

------
TangoTrotFox
Markets are constantly manipulated and what we consider acceptable or not
seems at times quite arbitrary. For instance quantitative easing is a practice
we engage in whose entire purpose is to artificially inflate the value of
markets to help spur 'growth.'

Is the problem that people may be trying to manipulate the price of
decentralized commodity or that people are investing in a decentralized
commodity without realizing that there may be people trying to manipulate it?
I think there is a place for 'hard regulations' but I think there is also a
time when the focus should be more on information than trying to enforce
national rules on a global scale. Even more so when those rules are likely to
fall subject to all the failings of political systems including graft,
corruption, and the like.

~~~
bhouston
Central banks are in the business of market manipulation via interest rates,
and money supply. This is to control growth and inflation so that business
cycles are smoothed out to a degree.

~~~
mamon
The problem with that approach is that market cycles serve important purpose:
they faciliate best allocation of our resources by ensuring that inefficient
companies will go bankrupt. Smoothing those cycles out enables poorly managed
companies to stay in business for way too long. Then, since there's a limit to
a market manipulation that central banks can do we end up with one huge
crisis, like Great Depression, or 2008 housing buble, instead of series of
small ones.

~~~
ufo
This austrian-style economic thinking about market cycles lines up with
bitcoin ideology but is far from being accepted in mainstream economcs. It is
flimsy pseudoscience.

~~~
TangoTrotFox
Appeals to authority are generally not great, but this is made even more
bizarre given that our current economic systems seem to be teetering on a
precipice. Think about how truly desperate we are when we need to resort to
quantitative easing, zero interest rates, and even flirting with negative
interest rates - just to desperately try to maintain the status quo.

This doesn't mean any alternative is better, but rather that trying to refute
alternatives by appeals to authority is an even worse idea than it usually is.
And it's usually already an awful idea!

~~~
frockington
Europe did even more than flirt with negative interest rates and yesterdays
reports proved the negative outcome of that experiment

