First of all most Bitcoins are actually owned by a very small number of people. Bloomberg did an investigation in December that found that only 40% of all Bitcoins were owned by only 1,000 people, which it called “Bitcoin whales“:
Holders of large amounts of bitcoin are often known as whales. And they’re becoming a worry for investors. They can send prices plummeting by selling even a portion of their holdings. And those sales are more probable now that the cryptocurrency is up nearly twelvefold from the beginning of the year.
What’s more, the whales can coordinate their moves or preview them to a select few. Many of the large owners have known one another for years and stuck by bitcoin through the early days when it was derided, and they can potentially band together to tank or prop up the market.
It’s simple to think that a small group of people can manipulate a price and it does appear that there has been Bitcoin price manipulation in the past.
A group of researchers published an article in the Journal of Monetary Economics in which they concluded that one person likely drove the price of Bitcoin from $150 to $1,000 back in 2013.
“This paper identifies and analyzes the impact of suspicious trading activity on the Mt. Gox Bitcoin currency exchange, in which approximately 600,000 bitcoins (BTC) valued at $188 million were fraudulently acquired,” the researchers wrote. “During both periods, the USD-BTC exchange rate rose by an average of four percent on days when suspicious trades took place, compared to a slight decline on days without suspicious activity. Based on rigorous analysis with extensive robustness checks, the paper demonstrates that the suspicious trading activity likely caused the unprecedented spike in the USD-BTC exchange rate in late 2013, when the rate jumped from around $150 to more than $1,000 in two months.”
You can read their full paper by clicking here.
What few people understand about manipulation operations is that it is much easier to manipulate a price upwards and much more difficult to make it to go back up after it has fallen.
You’ll see why in a moment.
Now several things have happened in the past few months.
First of all Bitcoin started to trade as futures contracts on the CBOE and CME.
When they started to trade all the talk was that this was a sign of mainstream acceptance of crypto trading and could even lead to the creation of exchange traded funds.
But the SEC has pulled the filings of several funds down and one of the things they said is that they fear that there is manipulation in the crypto world. As Fortune reported crypto ETF’s are now off the table.
The second big thing that happened of course is that in November there was a total mania in people all over the world opening up crypto accounts and buying for the first time often with small amounts of money less than $100 and usually in the $20.00 – $40.00 range. In the week after Thanksgiving in the United States hundreds of thousands of new accounts were opened at Coinbase.com and by the end of that November there were more Coinbase accounts than stock trading accounts at Charles Schwab.
The people buying Bitcoin for the first time were doing it as if they were buying a lottery ticket and crypto leaders were actually promoting it as such saying things like put in $100 and make a million.
What has happened is that there was a huge spike in trading volume thanks to their buying surge that has now died down.
Take a look at this chart which shows the number of daily Bitcoin transactions and you’ll see what I mean.
There are now half the number of Bitcoin trades going off than there were in the first week of December when Bitcoin surged to $20,000.
What this tells me is that there were a lot of people who bought Bitcoin in December once and that was it.
They bought it one time and did not become Bitcoin traders in the sense of someone jumping in and out of it to make money or even to use it as a form of currency.
They just bought it as if it were a lottery ticket and now there are fewer trades going off in Bitcoin on any given day than there were before November.
One way you could look at that is to say that Bitcoin is returning to normal. The fast gains of November and December aren’t going to happen anytime soon again, because they were just an anomaly.
But that’s really not how markets tend to trade.
When you see a market go up like Bitcoin did with a surge of people jumping in at higher prices only to fall 50% you see a market that often simply slowly dies out.
That is what it looks like is now going to happen to Bitcoin or is already starting to happen.
As far as manipulation goes I do think that something akin to a Bitcoin cartel formed with the so called “whales.”
But I do not know how much they truly were working together.
The problem is they don’t need to be.
If the whales knew that the masses were coming in one day they could have just decided to sit there and let the masses bid Bitcoin up with the idea that they would start to sell one day at a high price.
For that scheme to work they would have to agree to act like a cartel and not sell.
And when the futures market came along it gave them a wonderful opportunity to simply short futures to hedge their Bitcoin prices and lock them in.
The problem with any cartel though is that it only works as long as all cartel members agree not to sell.
The moment one member suspects that another is selling he is apt to conclude that cartel control of price is going to end and start to sell himself.
So the whales themselves are now likely to act as selling pressure on Bitcoin going forward whether they want to or not.
If there was a cartel controlling Bitcoin prices it is likely no longer able to function as such manipulation works on the way up, but not the way down.
In fact at this point if a whale has hedged his Bitcoin position in the futures market if he sells his Bitcoin and makes Bitcoin prices drop he’ll actually make more gains on his short positions in the futures market!
The thing is few of those people that were buying Bitcoin in November know much about how financial markets work and themselves weren’t really true believers in the Bitcoin story. They were really buying it as if it were a lottery ticket as they didn’t buy anymore or start to use it like it as money, because the transaction volume they helped to create died out.
And that appears to be a sign to me that what is happening now is that Bitcoin is now slowly dying on the technical analyis charts.
Silver prices did that in 1980 when they went up nuts and then crashed 50%.
Silver prices then remained stagnate for over a decade.
The launch if Bitcoin futures trading did not lead to an ETF.
Instead it may have been a factor in the death of Bitcoin!
I know that when Bitcoin went up many Bitcoin promoters were claiming that it would one day replace the US or that it was an investment to buy as a “safe haven” in case the dollar fell or the stock market did.
In reality there has never been any correlation between the price of Bitcoin and the US dollar at all.
This year in fact the US dollar is down and so is Bitcoin!
And yesterday the DOW fell 300 points and so did Bitcoin.
Crypto currencies are instruments of speculation and nothing else.
And finally in order for crypto currencies to have another big boom will require more people opening trading accounts in order to buy.
Yesterday Facebook banned all crypto ads from their platform claiming that many of the ads were simply scamming people. I also have heard that Google did the same.
Yesterday as US markets approached their closing bell I talked with David Skarica about what he sees happening as the DOW dumped over 300 points.
To listen to that discussion click here.