Crypto Market, The New Wild West
The crypto market is in a state of imperfect competition which is quite the opposite of a free market since just a few BTC whales have the power to alter the prices of all cryptocurrencies.
Bitcoin was never a free market considering trading as manipulation by whales and exchanges, goes far beyond just selling a large chunk of their BTC and rebuying at a lower price.
Derivatives exchanges are a common trading practice in crypto since about 2012 when Bitcoinica appeared offering positioning and leverage. A website that was accused of many discrepancies and eventually shut down after getting hacked three times.
2013-2014: Extreme Speculation, Manipulation, And Hacks
By 2013, Bitcoin was on a trajectory of enriching everyone involved in it, and it was already trending in Silicon Valley circles. While its fundamentals remained the same and no actual attempts to undermine the network were in place until late 2013 (with Adam Back's appearance on bitcointalk), the price of Bitcoin started rising exponentially, reaching $1200 at the peak of 2013, while having started at about $12, exactly one year ago.
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MtGox was the main Bitcoin exchange traders and investors were using until it collapsed in 2014, after being hacked multiple times since 2011. Until its collapse, MtGox was serving about 80% of Bitcoin trading worldwide.
MtGox lost about 800,000 BTC to hacks and internal mismanagement, although Karpeles (MtGox CEO) recovered 200,000 Bitcoins from a cold storage wallet.
The Willy Bot
What is noticeable about MtGox and not often mentioned, was the discovery of two trading bots (Willy bot & Markus bot) operated by MtGox (Karpeles) during the investigation that proceeded after the exchange collapsed.
These two automated traders were purchasing standard large amounts of Bitcoin, without any actual funds used.
Karpeles was magically printing dollars in his exchange and creating artificial demand for Bitcoin for years. Karpeles later claimed the bots were an "obligation exchange", a mechanism helping the exchange recover funds.
The collapse of MtGox created a two-year bear market for Bitcoin. Just these two bots printing money from thin air, explain the level of manipulation in this market. It also makes us suspect how much the prevailing forces in centralized entities surrounding the crypto space can proceed by selectively supporting certain cryptocurrencies while creating negative terms for others.
There is a threshold in manipulation techniques such as naked-shorting, though, and Bitcoin Cash broke it twice in 2021. One time when Musk simply acknowledged Bitcoin Cash, replying to a tweet by Kim Dotcom, and a second time when US retailer "Kroger" published fake news on its official website of accepting Bitcoin Cash.
Both times high demand took over and boosted the price of BCH significantly. The second one, while fake news, still challenged algorithmic trading, as trading bots observed just the charts.
Poker Black Friday in 2011
Michael Saylor wasn't a popular figure in the Bitcoin ecosystem until 2013. This Tweet wasn't noticed in 2013, and Saylor wasn't even posting any Tweets or acting related to Bitcoin in 2017.
Yet, Saylor made a good point there. Back in April 2011, the Black Friday struck the online gambling world, with poker room FTP seized by federal agents. Arrests were made, as Full Tilt Poker caused financial damage, was operating unlawfully and against its players, giving multiple advantages to affiliated poker pros.
FTP was accused of a Ponzi scheme, and players of this poker room lost access to their funds for years until a resolution was reached and Pokerstars covered for these losses.
It wasn't just Pokerstars and FTP, though, but dozens of online poker rooms had to shut down and seize operations as the US gambling law was enforced.
One of these poker rooms was Ultimate Bet. Together with Absolute Poker were involved in a cheating scandal, offering "god-mode" features to some accounts
Certain accounts were beating the odds at an unexpected rate, always making the right calls. These accounts cheated millions from online poker players having knowledge of the hole cards of their opponents.
A subsequent KGC investigation found that the cheating had been going on since 2004, and had cost players millions of dollars
The most infamous online cheat account was "Potripper", on Absolute poker. More accounts were used in both these two online poker rooms that seemed to be affiliated, sharing many similarities.
As Bennett Tomlin explains in his blog, there are relations between shady online poker rooms not functioning today and centralized entities within the crypto space.
Stuart Hoegner, the General Counsel for both Bitfinex and Tether, used to be Director of Compliance for Excapsa. (Archive) Excapsa was notorious for being the parent company of Ultimate Bet. Ultimate Bet allowed some of the poker players on their site access to a ‘God Mode’ that allowed them to see other players cards. (Archive) This does seem to have been occurring during Stu’s tenure.
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Bitfinex and Tether are both raising many questions.
Bitfinex announced in 2016 it was hacked for 120,000BTC, worth $72 million at the time ($4.5 billion today).
As with most crypto exchange hacks, there was a lot of speculation and suspicions, however, it seems that the US authorities solved this puzzle by arresting some individuals that are supposed to be the Bitfinex hackers and proceeded with "seizing" 90,000 BTC.
USDT has reached a size of 70 Billion tokens, and while each USDT was supposed to be backed with by 1 USD, this changed along the way.
The MtGox Collapse Was An Opportunity For Other Exchanges
Bitfinex (founded in 2012) gained an advantage after the collapse of MtGox, and Bitmex derivatives exchange was created the same year (2014).
BTC-e was a notorious exchange, one that perhaps had a significant role in the laundering of the stolen MtGox Bitcoins, with one of its founders (Alexander Vinnik) arrested in Greece in 2017, and extradited to France in 2018, to be trialed, while also waiting for the second extradition to the US.
Kraken and Coinbase also gained from MtGox's collapse and grew into two of the top cryptocurrency exchanges in the USA. Concerning transparency, these exchanges (together with Bitstamp in the EU) helped the cryptocurrency industry avoid the shady past and reach mainstream adoption in terms of investing.
The Rise of Crypto Trading After The 2011 Black Friday
There are some factors to include in the rise of crypto trading in the early days.
Until 2011 the online poker phenomenon was massive. Volumes and userbase of the top poker rooms were reaching millions, while billions of USD were flowing into this "industry".
WSOP, the poker veterans, and the countless poker pros appearing out of nowhere and documenting on camera how they made millions from online poker was attractive, especially to younger ages.
A similar approach in crypto is the display of newfound wealth by multiple influencers on social media and YouTube.
Online poker, though, was not a place to make money. It was enriching just a few at the top while the overwhelming majority of poker players was losing money.
We can compare poker with day-trading in this aspect. In day-trading just a few manage to profit in the long run, while about 90% lose money.
The online poker algorithms, besides being all centralized and rigged, they favored a selection of individuals after careful consideration on the appeal they would have to the public.
Right after the Poker Black Friday of 2011, the internet seemed it suddenly turned empty for poker players around the world. It wasn't just the fact that the vast majority of poker players were from the US. Poker rooms turned into more shady businesses, bots were vastly increased, suspicions of cheating multiplied.
It wasn't just the hundreds of thousands of Americans that stopped online poker, but most decided to quit as the games became unbeatable, and often players were against 24/7 active bots. It wasn't looking real at all, anymore.
The profit margin declined even more as more countries introduced taxation on earnings, making online poker unprofitable.
By 2012, everyone knew online poker was not going to be profitable, but probably not enjoyable or recreational either.
Some online poker players switched to live poker in casinos, while others sought new opportunities online. All these poker players enjoyed the thrill of the game whether profitable or not.
Bitcoin was attractive, but at the first glance to a poker player, it certainly looked like a massive pump and dump was taking place.
Thus, it was the less honest individuals that first made the move from online poker to cryptocurrencies.
Trading Bitcoin offered an alternative to the ban of online poker. Saylor wasn't wrong there.
Not A Free Market, Yet
Tether has an interesting case as a threat to BTC.
USDT is centralized, Tether will seize funds and make them untransferable if ordered to do so by a government. Perhaps this is the reason Tether still has some leverage left as the US authorities probably sense there is room for cooperation.
Tether is mostly used by exchanges to support BTC.
The reality for many other cryptocurrencies, is at times when demand for crypto is low, and influx of new money is not enough for miners to pay their bills, Tether will sustain only BTC, at the expense of other cryptocurrencies.
From Bitcoinica to the Willy Bot, from the Bitfinex hack to South Korean exchange hacks of 2017 and 2018, to Bitgrail and Quadriga, scams, shady and malicious practices are common.
The price of assets in conditions of a "Wild West" is not indicative of a free market that decides without multiple restrictive factors taking effect. It is a heavily manipulated market, and it is not state regulations that will create better terms, but better procedures and organizing of the various communities.
Whales have manipulated price of BTC and other crypto assets all this time. As dominance of BTC declines, the effect of such manipulation will be less and eventually completely eliminated.
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Now,I can see how the crypto currency market is being run. your article give much guide about crypto God bless u friend