Data Mining Suggests Mt. Gox Was Used in Price Manipulation Tactics

The team, led by Weili Chen, has been working on finding suspicious activity. This has been done by analyzing individual transactions during the run-up to the 2014 collapse. As the team began to check these data points, some disturbing patterns have appeared.

The Rise and Fall

Mt. Gox was the largest cryptocurrency exchange in the world in 2013, processing more than 70 percent of all transactions. The company was on the road to being the dominant player in the space until February of 2014 when more than 850,000 bitcoins went missing—now worth over $3 billion. The loss was staggering. The entire cryptocurrency market went into a prolonged slump that only ended with the uptick at the end of 2015 and moving into 2016. As the market struggled to cope with the failure of its largest exchange, lawsuits began to fly.

Working the Extremes

As experts have begun to analyze the data, the picture has become bleaker. Chen and his team have discovered that there were substantial efforts at price manipulation and market fixing using a variety of methods. For example, bitcoins were often sold at massively inflated or reduced prices. On any given day, coins could sell as high as $45,000 and as low as $0.90—without the market actually changing that much. A simple analysis reveals that such trades would swing the market wildly, allowing profiteers to take advantage. Remarkably, nearly 3 percent of all transactions on Mt. Gox were manipulative in this way. Chen explained that the transactions can be linked with specific market shifts.

“Price manipulation is also a likely purpose. We find that the abnormal transactions are greatly correlated with the Bitcoin exchange price.”

Self-Fulfilling Prophecy

Another example involves suspicious accounts and self-trading. Some accounts on the exchange would frequently conduct hundreds of trades with themselves. By washing the market in this way, the account could move the market in discreet ways. Profiting from such movements would be simple. Others made massive numbers of trades with other single accounts. Chen and his team suggest that these trades were for market manipulation also. He explained that these types of trading patterns are likely nefarious,

“These findings convinced us that there are many market manipulation behaviors in the exchange.”

These are just a few samples of the data that is being revealed. Rather than just a victim of theft, the exchange was being used to drive prices, and make huge profits.

The Future in Numbers

The argument that traders will need a regulatory change in order to trust the market is nonsensical. The explosive price and transaction growth from 2016 to 2018 indicates that investors were more than willing to enter the market. Nevertheless, something must be done to protect against such abuses in the future. However, Satoshi would argue that proliferation and adoption are actually the answer. As more exchanges and users enter the market, the ability for a single massive exchange to conduct these types of manipulations drops proportionally. In fact, as the market has become increasingly main-stream, stability has increased. It may be that the potential for a Mt. Gox situation has completely been erased. As the market continues to grow, such tactics will become obsolete. This is not to say that attacks and manipulations won’t occur. However, attackers will need to be more creative than in the early days of Bitcoin. Do you think Mt. Gox-style attacks are a thing of the past or will market manipulations like this continue to occur? Let us know your thoughts in the comments below!