When there is an opportunity for criminals to potentially manipulate something for their own benefit, it’s bound to take place.
After years of being in the know about this budding ecosystem, I’ve come to realize that blockchain systems do have a large sense of security. For examples sake, let’s pretend you are sending any amount of bitcoin to another wallet. Even though the transaction is recorded in the blockchain ledger, it’s irreversible – there is no scenario where the transaction can be edited.
However, this can only hold true if the said transaction takes place within the system. There are ways that fraud can happen, and today I’ll dive into just how that happens.
Bitcoin Can Be Traded Like Equities
Investigations are being sought due to the number of transactions that are being treated like speculative investments such as equities. Orders are being made to buy bitcoin, but then the actual cash exchange is happening later to complete the deal. Investigations are happening because of a trend called “Spoofing.” This is when orders are made by then canceled prior to a deal being finalized, thus avoiding a service fee. This creates an artificial demand which will drive up the price of bitcoin.
This practice can happen with about any type of asset, however it’s quite easy with bitcoin in comparison to stocks or bonds. The main reason is that a very small amount of people are holding the vast majority of bitcoin. It’s a fact that the largest 1,000 bitcoin accounts hold 40 percent of all coins that exist. To go even further, 20 percent of the bitcoin is held in only 100 of these accounts, meaning a very small amount of people have major clout and influence on the price of bitcoin.
Related – Bitcoin price index.
Most of these people holding these accounts have held this digital currency for a very long time. In fact, many of them are friendly with one another. Without any regulation in the cryptocurrency markets, they can easily collude to increase or decrease the price of bitcoin.
When any sort of major fluctuations happen in the U.S. stock market, triggers alert governing bodies and trading can be halted. This does NOT happen in the cryptocurrency space.
Another fraud that is happening is called “wash trading.” This is when one person creates a purchase and sale deal, but doesn’t involve anyone in the sale. In reality, they are exchanging the bitcoin to themselves! This can create an illusion of more activity taking place, which will increase the value in addition to demand.
The reality is that any one person can create as many accounts to trade cryptocurrency as they wish. The blockchain-based system in place always keeps the identity of people anonymous. While transactions are logged and the activity is there, the accounts only show bitcoin addresses along with elongated alphanumeric codes.
This makes it extremely difficult to prove that any wash trading is occurring.
Regulation Coming Soon?
There are countries attempting to regulate the markets. A federal investigation in 2015 found that Ripple Labs had not properly followed anti money laundering laws.
Just last month, there were as many as 70 investigations that opened up in the USA and Canada that looked into fraudulent cyrptocurrency trading. 35 companies were issued warnings.
However, there is a lot of activity happening throughout the world where there is little to no enforcement taking place. Many trades happen through Chinese exchanges, and some of these exchanges have inflated trading volumes. Many YouTube channels covered this very rabidly.
Over time, regulation will have to take place, or this trading scene will be the wild, wild west.