Why Crypto Bot Trading Is Choking Mass Adoption

Regulators are not going to help the industry, until it helps itself.


To a crypto layperson, hearing about Bitcoin price manipulation via sophisticated yet easy-to-procure trading bots may conjure dime-a-dozen conspiracy theories.

The deeper one delves into the intricacies of this exciting and often treacherous crypto industry though, the more sense such talk makes.

Not only is price manipulation very real and – at a closer glance – quite blatantly obvious, it is yet another major hurdle in the path of regulation, institutional adoption, and by extension: mass adoption.

According to CoinList’s Andy Bromberg, such practices “hurt the market’s reputation and they hurt individual investors”.

How do crypto trading bots work and why do people use them?

Long story short: trading bots are algorithmic auto-traders, capable of opening and closing positions, mimicking the activities of several trading accounts and pulling off a number of other hair-raising stunts that squarely put a nail into the coffin of crypto trading legitimacy, every time they’re executed.

These bots can be programmed to push a number of abusive trading strategies long banned in other markets, such as “wash trading” (the artificial generation of seemingly massive trading volumes, through the simultaneous opening of buy and sell orders) and “spoofing” (the opening of fake orders to generate fake buy- or sell-volumes, thereby pumping or driving down the price of an asset) etc.

The goal of such shenanigans is always to make money at the expense of the ‘honest’ trader.

Price manipulation hurts individuals, and it hurts mass adoption

How price manipulation hurts individual traders is self-explanatory: the mini pump-and-dump schemes resulting from abusive trading activity net profits for the bot users at the expense of regular, well-intentioned traders who believe they’re playing on a level field.

The damage wrought upon the overall direction of the crypto industry by these short-term profit-chasers is truly massive. They de-legitimize the very mechanisms responsible for crypto asset price-discovery, compromising the integrity of the market and prompting regulators to squarely deny ETF proposals, citing these issues.

It’s the reason that the CBOE wouldn’t get anywhere with its ETF proposal – and therefore withdrew it from consideration just minutes before publication of this article.

Can the industry self-regulate and rid itself of this “disease”?

The short answer is yes. The Winklevoss twins are already involved in various efforts and initiativesaimed at self-regulation, and the community as a whole acknowledges the need for some sort of market regulation.

But the real problem is that instead of punishing such activities, exchanges often welcome them as means to pump their own volumes. Indeed, some exchanges are known to readily put bots programmed for abusive trading activity at the disposal of their users.

While all this goes on, crypto enthusiasts over at Reddit entertain themselves by dabbling in a bit of attempted price manipulation of their own: a thread aimed at tricking bots into gleaning positive crypto sentiment off internet chatter was launched, and it took off big time.

Unless of course, the bots upvoted it themselves… oh dear God, Skynet.

Author: James West
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Cryptocurrency Exchanges Have a Bot Problem

On Tuesday, Oct. 2, the WSJ released a report claiming that trading bots, a popular tool for both cryptocurrency and fiat investors, could be at the heart of the crypto market’s infamous volatility.

Bots are commonly used, and you can buy them yourself online or create them if you have the know-how. The problem, the WSJ report contends, is regulation.

More oversight needed to combat fraud, says report

The lack of or irregular regulation of cryptocurrency exchanges is an oft-cited reason for cryptocurrency’s lack of mainstream acceptance, and the leeriness of even savvy investors to take the plunge. Companies like Coinbase and Bakkt are definitely stepping up to help solve this problem—Bakkt is an arm of Intercontinental Exchange—but it does still exist. The WSJ claims:

“While established markets like the New York Stock Exchange monitor for illegal trading and punish rule-breakers, crypto exchanges vary widely in their surveillance efforts. Most crypto exchanges are regulated lightly, if at all. The result is that crypto bots can be used to execute abusive strategies on an industrial scale.”

When New York State Attorney General (AG) Barbara Underwood’s office released its Virtual Markets Integrity Initiative Report, it echoes these concerns. The report gathered information by sending letters to several cryptocurrency exchanges asking them to voluntarily disclose their practices, and while some did have policies in place to stop abusive practices like users opening multiple accounts, many still do not.


AG Underwood’s report also states that exchanges aren’t required to register with the federal government or the government of the state in which they do business, meaning they aren’t regulated by anyone but the users of the system and the developers of the exchange. This allows bots, says the WSJ, to “execute abusive strategies on an industrial scale.”

A lot of these shady market manipulation moves are already banned on the stock market. These strategies include executing buy and sell orders simultaneously from the same person in an effort to make it look like there’s more activity on a certain currency than there actually is, called “wash trading.”

Other bots are even more subtle. They’re programmed to manipulate price changes by posting sell orders at lower rates than other people, knowing that people watch the market for that kind of price dip as a signal to buy. Then, once someone tries to buy that currency, the bot cancels the sell order, boosting the price of a certain cryptocurrency like Ethereum. A similar tactic in the stock market called “spoofing,” where traders would use fake orders to trick their peers into buying and selling, was outlawed in 2010.

Working to change the system

There are forces working to change this behavior and bring more order to the crypto markets, however. Regulated cryptocurrency exchanges built on the backbone of the current futures trading system are in development. Over 40 state securities regulators have joined Operation Cryptosweep in an effort to crack down on shady investment and trading practices. Just this week, three such scammers were shut down in the state of North Dakota alone.

The U.S. Justice Department and the Commodities Futures Trading Commission (CFTC) are also investigating cryptocurrency manipulation, and the Securities and Exchange Commission (SEC) is helping to crack down on investment scams, sometimes with help from inside the crypto trading industry.

Author: John Bogna
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