Robots are manipulating the bitcoin price in "Wild West of Crypto"

"When any location tolerates manipulative or abusive behavior, the integrity of the entire market is at risk," the report states, citing automated trading programs, or "bots," as a source of price manipulation. Exchange programs exist in other markets, such as stocks, and can be used for both legitimate and manipulative strategies. Cryptographic merchants can create bots themselves or buy them online.

In crypts, the fundamental difference is the lack of supervision. While established markets such as control of the New York Stock Exchange for illegal trade and punishment punish rule breakers, crypto exchanges vary widely in their surveillance efforts. Most cryptographic exchanges are adjusted slightly, if at all. The result is that cryptographic robots can be used to execute abusive strategies on an industrial scale.

"This type of business is rampant in the market right now," said Andy Bromberg, co-founder and president of CoinList, a startup platform for the issue of new digital tokens.

Abusive robots are a fact for Stefan Qin, managing partner of Virgil Capital, a $ 80 million hedge fund in digital currency that runs its robots on dozens of cryptographic exchanges around the world. He said he engages in a constant game of cat and mouse with enemy robots.

"We had to develop error handling functions to check for hostile and potentially illegal activities," said Qin. "Such is the wild West of the crypt."

At the beginning of this year, Virgil has lost money on some operations in ether after a "bothering bot" has targeted the fund, Qin said. The ether is the second largest cryptocurrency after bitcoin, measured on the basis of market value.

Here's what happened: Mr. Qin's fund specializes in finding arbitrage when a digital currency has a different price on different stock exchanges and buys quickly where it's cheap and where it sells where it's expensive. At that time, Virgil was checking for such discrepancies about once a minute.

Second before that periodic check, the hostile bot would have ordered to sell ether at a lower price than other sellers. This would cause Virgil to try to buy ether. But before he could do it, the bot would have canceled his sales orders. Virgil has finished with the publication of purchase orders that have not been executed, briefly increasing the price of the ether on some exchanges, said Qin.

The bot strategy was similar to "spoofing", a practice in which traders inserted false orders only to delete them. The tactic, intended to deceive other investors into buying or selling an asset by falsely reporting that there is more supply or demand, has been banned in the US stock and futures markets in 2010.

Virgil eventually changed his algorithms to stop playing.

Bitcoin was conceived in 2008 as an alternative to money supported by the government, and many of its first to adopt are libertarians who oppose the regulation of cryptocurrencies. For people in this field, manipulation is not necessarily wrong, and some openly promote it.

Kjetil Eilertsen, a Norwegian who started to trade bitcoins in 2011, created a program called Quatloo Trader which he advertised as "the best tool for market manipulation in the world of cryptography".

Mr. Eilertsen says it is useless to prohibit manipulation in digital currencies. A better approach, he said, is to level the playing field by giving sophisticated manipulation tools to small traders.

"If everyone can manipulate, nobody manipulates," he said in an interview. "You can not ban anything from people who are dedicated to doing something".

But many other encryption traders argue that abusive commercial practices slow down the adoption of cryptocurrencies. "It damages market reputation and harms individual investors," said Mr. Bromberg from CoinList.

Among the most notorious abuses are the pump-and-dump systems, in which operators collect the price of a cryptocurrency before downloading it for a profit, damaging investors who bought the price downward.

Similar schemes are prohibited in stocks. The Wall Street Journal reported in August that the cryptographic "pumping groups" had generated at least $ 825 million in commercial activities for a period of six months.

Robots make it easier to pump digital currencies. For example, Quatloo Trader has a special tab called "whale instruments", containing automated tools for the execution of various abusive strategies. The idea is to make market manipulation as easy as filling out a form and pressing a button.

One of these tools, called "ping-pong", allows users to make simultaneous purchases and orders to themselves, creating a mirage of intense activity in a particular cryptocurrency. The tactic is known as "wash trading" and is illegal in stocks and futures.

It is not clear that this wild West environment will last much longer. The US Department of Justice and the Commodities Futures Trading Commission are investigating the potential manipulation of cryptocurrencies, according to the Wall Street Journal in June. The Securities and Exchange Commission is combating the issuance of fraudulent tokens. The New York Attorney General's Office has not announced any subsequent action. Furthermore, an industry-led self-regulation effort was led by the founders of the Gemini, Cameron and Tyler Winklevoss exchange.

Among former users of Quatloo Trader is Ryan Wright, a US citizen who lives in Taiwan. He liked how the program allowed a person to perform operations on multiple accounts at the same time. "It seems like people are buying and selling, but in reality it's all one person," he said in an interview.

But Mr. Wright stopped managing Quatloo Trader last year, concerned about growing regulation control. "I'm not the market manipulator I once was," he said.

Write to Paul Vigna at [email protected] and Alexander Osipovich on [email protected]

Corrections and amplifications
Kjetil Eilertsen is the creator of Quatloo Trader. An earlier version of this article erroneously wrote his surname as Eilertson on the second reference. (October 2, 2018)