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Bitcoin: Evidence of spoofing, wash trading, and a scheme known as ‘Tether’ (medium.com)
224 points by Artemis2 11 months ago | hide | past | web | favorite | 78 comments



The title and the sensationalist wording of the article is complete nonsense.

Yes, placing a large order might be interpreted as a signal by some traders and it might be possible to take advantage of that.

But that does not mean somebody dominates the price of Bitcoin. By the same logic you could say that HN posts dominate the price of Bitcoin because some traders might use them as a signal.


Not only that, he has zero evidence that it's one entity. He has zero evidence that he doesn't let these orders execute.

Bitfinex is the second largest bitcoin exchange, their daily volume is $130 million [1]. $2-4M trades are not anything out of the ordinary.

[1] https://coinmarketcap.com/exchanges/volume/24-hour/


Why exactly is spoofing illegal? How do you differentiate legitimate order canceling from spoofing? Trading is very emotional process. You place order, 5 minutes later you decide to cancel it, 10 minutes later you decide to place another order.

I think it doesn't make any sense for this kind of activity to be illegal, and I don't see much wrong with it. It would be impossible for exchanges to differentiate between spoofing or legitimate trading anyway.


Matt Levine wrote about possible reasons, and whether they're actually beneficial, here: https://www.bloomberg.com/view/articles/2015-04-22/why-is-sp...


I would assume 5 minutes is ok; do it within seconds or fractions of seconds and it becomes an issue. Bots (and a few eagle eyed traders) see the signal and start buying, you withdraw the order with very little of it having been filled, and have potentially jump-started a price spike. You then sell, wait a bit, repeat. You're conning people into thinking you're about to buy and when they get excited, you turn around and start selling.


Perhaps people should stop speculating if they can't even think of this.


Intent. How do you differentiate hacking from legitimate access? You're just sending byte streams to the server and it decided to give you access to something, after all.

The reason it's illegal or banned on normal exchanges is because it drives out legitimate customers and you end up with a den of thieves. Everybody looks at the order book to gauge liquidity and make decisions, not just bots. Users want prices to be relatively stable and tied to fundamental values. An exchange where manipulators spoof or wipe the order book in a high stakes game of chicken is unstable. Imagine an eBay with no protections against counterfeit goods, or a StubHub full of fraudulent tickets.

And spoofing is very easy for regulators to detect. The behaviors of market makers, who also cancel many orders, and spoofers, could not be more different. Market makers place orders for small symmetric size on both sides of the book. If they quote asymmetric sizes, they quote smaller bids when they're long, or smaller offers when short. They cancel bids after they buy, offers after they sell. Spoofers do the exact opposite. They place asymmetric sizes where one side makes up a large amount of liquidity. They place big size on the same side when long or short to press their trades favorably. They cancel buys after they sell, and sells after they buy.


TLDR: Whale trader traps trading bots, bootstraps 'spoofed' market dynamics which fool average Joes into predictable behaviour.


Missed the part about Bitfinex not being able to bank anymore and then creating Tether, a non redeemable cryptocurrency.


Yup, that's the big deal here... not the spoofing...


Flagged because the title is sensationalist and doesn't reflect the content of the article (even if you believe the article itself). Seems much more like FUD against Bitfinex.

Even if "Spoofy" was able to dominate Bitfinex (which they couldn't with the described tactics) that would be a far cry from dominating the price of Bitcoin. There are so many more exchanges.

I started doing doing some trading for fun and profit a few months ago, and "fake walls" were very well known to all users of Poloniex (there used to be a public chat there, so I learned about those almost immediately). It's a sure thing that there are whales manipulating the market, but that's for sure not a single entity, it's not limited to bitfinex, and if you want to gamble on this bubble you have to deal with it.

* edited for clarity


If you control one large exchange you can exert control over all the exchanges. Arbitrage bots quickly buy and sell any differences between the exchanges.


It goes the other way around mostly, IMHO. Those arbitraging bots will dampen any attempt to control just one exchange.


This entry explains how spoofing caused the 2010 flash crash in the stock market.

https://en.wikipedia.org/wiki/2010_Flash_Crash


Surely the real cause was systems actually selling shares at a penny. Seems dishonest for people to write buggy platforms then blame someone else for their own incompetence.


With the constant stream of negativity surrounding blockchain coins it's a wonder that anybody chooses to use them as an investment vehicle. There are so many parallels to penny stock trading in the 80's that it's uncanny.


the hype machine on the other side is massive though. you have tens of thousands of "investors" flooding every communication channel with bitcoin talking points and saying how much money they have made.


The article is a bit dramatic, but the funny part is that he spent so much time trying to prove that whales install buy and sell walls to manipulate the price. This is not news and happens with every cryptocurrency on every exchange. It is especially common and easy to spot with altcoins. The typical life cycle of an altcoin is similar to this:

1) Bitcoin code forked and slightly modified.

2) New coin announced on Bitcoin talk and the creators premine enough to control the price

3) attempt to hype the coin and gain interest

4) coin is added to exchanges and people begin buying it

5) buy walls are installed by the coin creator to prevent the price from crashing and they continue to hype the coin in trading chatrooms

6) price raises high enough and enough demand exists for the coin creator to remove the buy walls and sell off premined coins

7) the price crashes and the coin is abandoned

This is called pump and dump and it happens all the time. With more successful coins...the effect isn't as dramatic bc there are investors that believe in the value of the project, but the mechanics of the price manipulation is the same.


1. It's illegal

2. It undermines the credibility of one of the largest bitcoin exchanges and thus the currency itself.

3. It undermines claims of Bitcoin value which are based on prices set on this exchange.

4. He's claiming that Bitfinex are engaging in legally dubious schemes to appear solvent, which is important.

If you use any cryptocurrency like this you should be very worried about reports that it can so easily be gamed and the market manipulated with no consequences, and that larger players in the 'market' are dishonest and failing to regulate manipulation. For every obvious and crass attempt like this there will be a lot more insidious market manipulation by big players like exchanges or large exchange customers who operate with no oversight and can set the price and profit from it.


1. It's not regulated, so it's not illegal. This is not your mom's exchange.

2. So be it. This is what traders in this particular field chose. If you want boxing, go box, if you want no holds barred, go do that.

3. To the detriment of that particular exchange. So be it.

4. Dubious, but still, if you want centrally regulated assets, there are plenty of opportunities. Cryptocoin exchanges are what they are. The response to shenanigans is not "This is unfair. The government should step in!" but "We need a bigger bot."


I wonder if it would be possible to "piggyback" on that, and when you see a spoofing attempt, issue a certain order. Your advantage would be to know that their order is fake and will likely be canceled.

Furthermore, would that be legal? You are just using publicly available information.


Because the spoofing party already knows what is going to happen as soon as you react to such an order, even by using a bot, you are already too late. Most bitcoin exchanges are not very quick, so you can expect a latency of about several seconds which is too long to even anticipate on this.


The transaction fees will eat the little guy up if you don't buy or sell in large amounts.


transaction fees are almost always a percentage of traded amount, hence it does not matter if you trade $10 or $100000


Personally, I wonder if this is affecting long-term holders or merely extracting value from short-term traders.

Of course, if there is value in short-term trading (eg. adding liquidity) then this is unhealthy for Bitcoin/Ethereum.


It would be no more illegal than the original spoofy order.


Issueing orders you intend to fill would not be illegal, even if in response to spoofed orders.


What's the big deal? Now that we know these price manipulation tactics, it should be straightforward for traders to ignore these false signals.


If it was on a single exchange sure one might then the evidence holds a lot of weight. Across exchanges, it could simply be a whale trader or a market making type algo to move the prices along.

That said, I wish bitcoin related articles get to the point quickly and tell the story succinctly. This comes off a long 13-minute rant. I gave up in between to read the TL;DR version here and then scan through the article.


This happens on all of the big exchanges. It seems to be able to generate small oscillations more than sustained price movements. Traders recognize the manipulation before it moves too far if it moves at all.


I know in the USA, placing bid/ask offers you have no intention of completing is illegal, but IMO this rule makes no sense.

It's like advertising a $1,000 plastic keyring. Sure, I as the store keeper think it's very unlikely I'll sell it, but it is still for sale, and if someone tries to buy it, I really will sell for that amount.

The fact that other keyring buyers see my $1000 advertisement and that affects their buying habits (for example buying more $3 keyrings now they look like a bargain) is their problem.


Placing 1 million offers to sell at 1000 is akin to shouting fire in a movie theatre. It is going to start a panic and a big price swing. Which then means you can buy in the dip, pull your fake orders, and make some easy cash.

Trust me you don't want a market like this. Bullies with deep pockets will destroy you. Your comment looks like you have never traded outside of Scottrade.


But why do the other market participants panic? It seems like it's their own fault for panicking -- they should stop using the order book to make value judgments.


Does it matter why?

The fact of the matter is that they do panic, and it's not actually useful for market stability. Some might say "too bad so sad, don't be tools". But a market where people can actually trust the intent behind buy/sell orders is going to be better for everyone involved.

The objective isn't to have the least regulation possible, but to try to have the "best" market possible


This is a self-correcting problem. Traders who fall for fake walls lose their capital, and thus influence on the price, to those who do not. The feedback loops and incentives of the market cause it to evolve toward a more price-stable configuration.


I think this happens when a great percentage of participants of an exchange are merely traders, speculators, and bots than actually using the currency for transactions in every day life.


Isn't this a way to prevent traders from anticipating and profiting from arbitrage opportunities? In some sense, I see this as a sign of a healthy market, no? If traders are looking for signals like average the price of sell orders, they should remove outliers like this, or not do arbitrage.


Bullies with deep pockets can attempt to destroy a market, but value investors with sensible limit-buy orders tend to get paid.

(Accurately valuing bitcoin is fraught with risk, but a limit-buy at $1000 today is likely to be a net win. Let the bully sell, and let the limit order soak it up.)


This article is a boldface warning about Bitcoin, but not necessarily in the sense intended. If we're scandalized by the very mild trading behavior described, we are in way over our heads in any kind of market at all.


I don't really strong sense as to the fate of bitcoin but I think about the fact that it survived the Mt. Gox disaster. This is something far less scandalous.


I agree that the Mt Gox failure was much worse than what's described here. But as a possible sign of things to come it gave me the same feeling this does. (The feeling that a lot of people are in way over their heads.)

To anyone who's been involved in normal financial markets, Mt Gox had pretty clearly gone belly up months before the Bitcoin community seemed to accept that seriously as a possibility.

I'm not saying Bitcoin dies. I'm saying possibly there are a lot of Bitcoin enthusiasts who have no idea how tough the 'safe' real world of regulated markets is. Let alone this kind of thing.


Somewhat dismayed by all the "I don't see the problem" posts.

Anyway. I wouldn't be surprised if this is linked to the BTC ETF. Seems like a very clean way to get shady money out of the BTC economy into the real world.


This person(or people) could also just sell the bitcoin and get their money out of BTC. How would that be any less effective. I guess I'm really not even sure what you mean by "clean" or "shady."


>I guess I'm really not even sure what you mean by "clean" or "shady."

Shades of grey I suppose - clean in the money laundering sense. Whoever is doing this is obviously up to no good. Maybe they can get their money out of the BTC system maybe they can't.

The point I was trying to get across is that there is a BTC linked ETF on the Swedish stock market. Meaning if you can push BTC up & down like this entity you can cause/predict movements in a "real" stock market. That can easily be leveraged into profit that is 100% clean regardless of how sketchy this entity, their actions and their BTC are (or not are).


It's the Wild West, which admittedly does look pretty fun at times. Interesting at the least. But I can't believe anyone really thinks that any day now, normal people are going to start using this currency.


At what point would people start using Bitcoin as currency? When it hits 5k, 10k, 100k, 1m?


I mean, you already can. I have purchased things from Newegg and Steam, used it with Expedia to book hotels and flights...

You can treat Bitcoin the same way you treat USD, there are a lot of places that accept BTC directly. Phone apps make transactions easy.


You mean people use their financial positions in order to trigger sells and buys in order to capitalize on sentiment changes? Tell me it ain't so!


I have observed very similar behavior on Kraken. I cannot say if it's as significant as "Spoofy", but there's definitely some algo placing and canceling orders in direct response to legitimate limit orders.


98% of orders are canceled limit orders. The average duration an order is open ranges from 1.5 to 20 or 30 seconds, depending on the time frame you look at. The entire market is "spoofing." It's crypto not NYSE.


Can someone tell me how is current price of bitcoin or any other crypto currency calculated, or point me in direction where I can learn more about market mechanics. Say I want to develop a toy stock market, what do I need to know ? Any good book resources ? I found this while writing my comment http://www.dummies.com/education/economics/how-to-determine-...


You have a database where people can say "I want to buy x amount item of type y for at most price z" and "I want to sell x' amount item of type y' for at least price z'". And if the database finds a match then a contract is made (doesn't necessarily mean that immediately money or product will change locations, just legal ownership changes).

For instance I say I want to buy 100 bananas for at most $500. You say you want to sell 50 bananas for at least $450. Then both our demands match and I buy 50 bananas from you for $450.

Since often there are different kind of offers from both sides not all can match and you have two lists of open buy and sell offers.

A practical detail is that if you either want to buy or sell right now you will of course create a counter offer to the corresponding top of the list of the other type and a trade happens immediately. I'm no expert but I think this is the most common kind of trade. It's a little like in a shop. You just take whatever the price tag says.

Smart people will also try to make offers close to the top of their list even if they don't want to buy immediately. But if they are too far away the trade may never happen and they pay the offer fee for nothing.

I think most of these trade platforms make money by fees. You make an offer, you pay a fee (probably a percentage of your offering price). And there's also a second kind of fee for trades that actually happened.

There are other kind of trades that basically simulate bets. And most of these terms have different names. Both of these things mostly are created to make it look more complicated and make you feel stupid.

The current price of bitcoin for instance is just the amount of $ per BTC that the last trade contained. In theory it's totally possible that the prices of two trades are totally far away, one selling BTC for $1, the other selling for $2million. But in reality due to market dynamics they often are close together and go up or down in steps.


>> There are other kind of trades that basically simulate bets. And most of these terms have different names. Both of these things mostly are created to make it look more complicated and make you feel stupid.

I had a feeling about that too :)


There is a Jim Cramer interview on Youtube (https://www.youtube.com/watch?v=VMuEis3byY4) where he talks about how hedge fund managers routinely manipulate stock prices on traditional exchanges in various ways. It would be nice if electronic currencies really offered a level playing field for its participants. The notion of fair-market is crucial for the long term health of any currency mechanism.


Wouldn't the best strategy be to pull two exchanges apart, pushing them opposite directions, and then arbitraging the gap as it closes?


Aren't those opportunities instantly exploited by traders?


I don't think it's that easy. There's a time and currency cost to transferring coins between wallets so that's not a good idea.

Instead you'd need to keep large balances in multiple exchanges and then sell coins on the more expensive, buy on the cheaper, and then through the power of algebra, you may make a profit? maybe. Since the direction/stability of the market isn't known you don't know who's the dog and who's the tail. Does it matter? Yes. If the market is genuinely trending and you have the insights to exploit arbitrage, there's better strategies than arbitrage available to you.

But here's a different, more exploitable model. Pretend two exchanges had price X. And you know for a fact you can make one X-1 temporarily and you can make the other X+1 temporarily ... and then they will elastically close back to X in a predictable time Y.

So you "stretch" the exchanges, do the scheme described above, in volume, and all things being equal and nothing else dramatically affecting the market, they will eventually snap back like a rubberband. Since you aren't pushing everything the same direction, you probably won't trigger a trend.

Now you have USD in the +1 account and BTC in the -1 account so you stretch it the other way and repeat.

This is a much better strategy since you are essentially bending the delta back and forth and exploiting it each time.

Also this strategy, which I'll call twanging, is generally strongly knowable. A reliable, repeatable, predictable, strategy with a profit>0 is almost always worthwhile independent of the profit amount because the other factors, risk and predictability, have been reduced to effectively zero.

Also the time to twang is probably on the order of an hour.

So you permute around the markets all day long, picking new tuples in some shuffled sequence and you have a reliable profit machine at scale.

This is all theoretical of course - I'm not actually whaling around with $100mil USD in assets spoofing markets. Like most trading strategies, it's likely nonsense.


An exemplar of why !to day trade crypto. At least to me.


Why do we have then a similar price development of BTC/USD on a much larger exchange (Poloniex)?


arbitrage, especially arbitrage by bots.


It is the last big exchange with accessible shorts after BTC-e went down


I would posit that it's different people at different times trying to move the market in a direction favourable to them, but it's a case of caveat emptor, once people realise these things are happening they are safe against them.


What's the difference between Wash Trading of a company and money printing + fake (e.g. construction) projects by a government?

A little sad to see that all the banking problems are still existing with Bitcoin as well.


Its human nature to create similar behaviours in similar conditions. Early Bitcoin anarchists who thought that they will be able to avoid "banks and governments manipulating with the money" must be really bitter to find out that manipulation is always going on, the entities in the Bitcoin world are just named different from "banks" and "governments".

If there's a competitive advantage for screwing someone over, there will be screwing over.


How I see the basic difference is, you have a choice to use Bitfinex or not. If there is an exchange that really finds a way to reduce this behavior then it would be very attractive to consumers. If the federal government and their regulators are the ones that are corrupt and doing the manipulations, there is no other choice.


Why decentralisation is a bad idea, take 340828493.


I would even argue that you have a point here. But the example is one where centralization through exchanges is the actual problem, not decentralization. Maybe find another example?


Completely agree. This is the story of one exchange. Having more exchanges helps the goal.


I'd rather say that at least the main issue of the author - that Bitfinex are abusing their position - would not be an issue with decentralized exchanges.


Everything gets gamed. You game a centralized system with regulatory capture or control of it's information sources.

All financial systems are a Red Queen's race.


Decentralisation isn't the problem here though.


I'm glad we could get federal regulators and banks out of financial markets so that scammers can manipulate markets and build Ponzi schemes in peace.


Of course it is. No regulation = one entity ends up controlling the whole cake.


I would agree if the existing regulators were doing a decent job of avoiding major anti-consumer blowups. But they really aren't.


"They" aren't because the "players" give them very lucrative jobs when "they" quit their govt jobs. Its the classic you rub my back and I rub yours.


Then the issue is no regulation not decentralisation.


Bitcoin is decentralised, thus it cannot be regulated. And this is the result. So decentralisation is the issue.


In other words, trading currency is a disgrace.




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