Please ensure Javascript is enabled for purposes of website accessibility

Are Traders Manipulating the Price of Bitcoin?

By Sean Williams - Updated May 30, 2018 at 2:48PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A Department of Justice criminal investigation into "spoofing" and "wash sales" is now underway.

In 2017, the cryptocurrency market simply couldn't be stopped. In just a 12-month period, the combined value of all virtual currencies added together rose from $17.7 billion to roughly $613 billion -- a gain of more than 3,300%. By comparison, it would have taken the stock market decades to generate the returns that virtual coins dished out in just one year.

Wait, bitcoin can go down in value?

However, 2018 has been a completely different story. Bitcoin, the largest cryptocurrency in the world by market cap, shed more than half of its value in just a one-month span toward the beginning of the year, and it's struggled to recover ever since.

A declining red line overlaid on a physical gold bitcoin, surrounded by binary code and circuitry.

Image source: Getty Images.

What's behind bitcoin's struggles, you ask? Part of the blame can be assigned to a step-up in regulation. Investors tend to appreciate the anonymity and unregulated nature of virtual currencies. However, in South Korea, a market that's critical to the success of bitcoin and digital currencies in general, new laws in place require banks to verify the identity of their members before linking their bank accounts to cryptocurrency exchanges. This newfound transparency likely goes a long way to validating bitcoin as an asset, but it's not been viewed as a positive by some within the crypto community. 

Bitcoin's woes may also be partially blamed on what I refer to as the proof-of-concept conundrum associated with blockchain technology. Blockchain -- the digital, distributed, and decentralized ledger that underlies most cryptocurrencies and is responsible for logging all data in a secure and unchanging manner -- has proven its worth in numerous small-scale projects, but has yet to catch on in the real world. Until businesses are willing to give this technology a shot, and blockchain can demonstrate its ability to scale, it'll remain constrained.

More recently, though, legal concerns have held back bitcoin.

Are traders manipulating the price of bitcoin?

Last week, the U.S. Department of Justice (DOJ) announced that it was opening up a criminal probe into whether cryptocurrency traders are manipulating the price of bitcoin and Ethereum for financial gain. The DOJ will be working side by side with the Commodity Future Trading Commission, which currently handles all derivatives trading tied to bitcoin.

The DOJ believes that bitcoin is susceptible to fraud for a number of reasons, as listed by Bloomberg. In particular, regulators question whether cryptocurrency exchanges have adequate measures in place to actively pursue those folks who attempt to cheat the system. They also point to the wild volatility in digital currencies as a lure for cheaters who are looking to manipulate the system. Lastly, the aforementioned lack of regulations could make it considerably easier for traders to move virtual coins like bitcoin.

A person using black gloves to type on black keyboard with a dark background.

Image source: Getty Images.

According to sources familiar with the matter, regulators are looking into two specific types of manipulation: spoofing and wash-sale trades. 

Spoofing involves a trader, or group of traders, placing an order that creates a new best bid or adds to the perceived liquidity of an asset. Shortly thereafter, the trader(s) will then cancel their initial bid (the spoof) and place a trade on the opposite side of the market. This is done so a trader can sell their stake in an asset, but at an improved sales price thanks to their spoofed bid, which may have offered the perception of downside liquidity and/or support and encouraged other traders to bid up the price of an asset.  The same can be done in reverse, with spoofed asks, ultimately allowing the trader(s) to net a more attractive purchase price on an asset.

On the other hand, a wash-sale would involve an individual, or group of traders, buying and selling an asset with themselves in the hope of pushing its price higher and giving off the perception of improved liquidity.

Given how little regulation surrounds most decentralized crypto exchanges, spoofing and wash-sale trades may very well both be occurring, but we won't have any confirmation on that until the DOJ's investigation wraps up, which could take some time.

Yet another reason to avoid bitcoin

It's become pretty evident as time has passed that bitcoin, while being an incredible creator of wealth over the past couple of years, is rife with risk. In addition to potentially being manipulated by cryptocurrency traders, bitcoin's network has slowed to a crawl, relative to its peers.

A man in a suit holding his hands up as if to say, no thanks.

Image source: Getty Images.

According to an analysis of transaction speed per second conducted by, bitcoin peaks at a meager seven transactions per second. By comparison, leading global payments processor Visa can handle up to 24,000 transactions per second using its existing infrastructure.

Bitcoin's block-processing time of approximately 10 minutes also tends to be substantially longer than its peers, resulting in an average validation and settlement time of 78 minutes. Sure, this is still quicker than sending funds across borders using traditional banking networks, but it's substantially slower than practically all of its peers. Though the Lightning Network is supposed to resolve bitcoin's scaling issues, the damage may already be done.

What damage you ask? We've witnessed a small handful of merchants moving away from bitcoin as a medium of exchange due to its slow network. Payment processor Stripe, which was the very first major company to accept bitcoin in 2014, dropped bitcoin as a payment method last month. 

And, just to round things out, there aren't any traditional fundamental metrics with which to value bitcoin. Unlike a stock, which has income statements, balance sheets, earnings reports, and management commentary that can be scoured, bitcoin offers nothing more than transaction speed and average daily transaction count, which tell us absolutely nothing about its long-term staying power.

As amazing as the gains have been, the writing appears to be on the wall to avoid bitcoin.

Sean Williams has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool owns shares of Visa, but has no position in any cryptocurrencies mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/13/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.