Bitcoin’s $150 to $1,000 price rise was likely caused by one person
Researchers found that bitcoin's first big price spike could have been the work of just one person.
A new paper by researchers Neil Gandal, JT Hamrick, Tyler Moore, and Tali Oberman taking a look at bitcoin price manipulation has been released in the Journal of Monetary Economics this week.
As a whole, the paper found that bitcoin, particularly in its infancy was able to be manipulated with just a handful of players.
During the prominence of Mt Gox, before hackers ran away with US$188 million worth of bitcoin, the paper found that suspicious activity seemed to directly link to price increase for bitcoin. The researchers found that on days in which suspicious activity was detected, the USD-BTC price rose by an average of 4%, while on days where there was no suspicious activity the price of bitcoin took a slight decline.
The paper found that due to the market volume being particularly low at that time, it was relatively easy for the market to be manipulated. With the initial price spike, the work of just one person manipulating the market.
This manipulation happened through two bots, known as Markus and Willy. These bots appeared to be performing valid trades, but were hacking the market, inflating the price with an increased trade volume and steal millions of BTC. The trade volume between the bots was much higher than non-bot trading, however it brought in real traders who were buying and selling based on prices that were manipulated through these bots.
As a result, over a period in late 2013, bitcoin's price spiked massively from US$150 to US$1,000 before Mt Gox's collapse.
It would be much harder, if not impossible, for bots to do this with bitcoin today, due to the genuine volume that is going through the market.
However, in the altcoin market, new coins can be victim to such plays. There have been no examples yet of bots creating such a market manipulation with altcoins, but groups performing classic pump and dumps are performing essentially the same thing. They find low volume coins, use the group to buy them cheaply, driving up demand and price, and then sell them at a peak to buyers who see the price go up fast hoping to be able to cash in. Once the pumping is over, those coins are now worth what they were before with the same demand.