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Bitcoin’s Slick Willy: Insider Bots Behind the Bitcoin Bubble

by Nickolas Argyris @ 2014-05-27 07:23 AM
Was Bitcoin’s spectacular surge in November 2013 the result of fraudulent market manipulation by a bot that serious traders are calling “Willy”?

After Bitcoin’s price on Mt. Gox rose from US$200 in early November to $1,236 record high on December 4, 2013, early adopters and analysts alike were at loggerheads over the underlying cause. Some suggested the Chinese, with their fee-less exchanges, were buying like mad. Others argued that Bitcoin’s resilience to the US government’s first Silk Road seizure was turning investors on to the value of a digital currency.

An anonymous trader has thrown their theory into the ring with the publishing of the ‘Willy Report’, whose analysis is based on trading logs that were leaked on March 9, 2014, and included details of all trades on Mt. Gox between April 2011 and November 2013.

The Willy Report details suspicious bots buying up approximately 570,000 bitcoins from September through November 2013. While there are no logs thereafter, other serious traders have observed similar behavior through the end of January 2014, albeit at a “slower, more consistent pace (around 2000 BTC per day).” Including the bitcoins purchased by these bots in December and January, the total comes eerily close to the 650,000 Mark Karpeles claims to have lost.

Suspicious Automated Trading

The Willy Report’s analysis concludes that automated bots operating under constantly changing user IDS were buying a between 10 and 20 bitcoins “every 5-10 minutes, non-stop, for at least a month on end until the end of January." Willy bought a grand total of 270,000 bitcoins, usually in $2,500,000 allotments, mostly in November, at a staggering price of $112 million.

The other bot, dubbed “Markus”, is even more anomalous. It appears to have bought approximately 300,000 bitcoins at completely random prices, with some trades totaling US$15.13 regardless of the number of bitcoins bought, and paid zero trading fees.

Unlike Willy, Marcus also sold bitcoins, but these trades were priced correctly. Willy and Markus were most active just prior to bitcoin’s sudden rise to the moon, before and during November 2013.

Both bots were among the 500 highest-volume users on Mt. Gox, whose activities are graphed here. Willy and Markus represent the two most anomalous trading charts, #281 ‘Greater Fools’ and #15 ‘Glitch in the System’ respectively.

 This begs the question: Who controlled these bots and does their activity lend credence to crypto-currency skeptics who assert that Bitcoin Bubble is the 21st century version of the 17th century Tulip Mania.

Who Is Behind the Bots?

The author offers two competing hypotheses: either the activity was the result of outside hackers gaming the system for profit (as Mt. Gox CEO Mark Karpeles suggests) or it was a con by the insiders, representing the interests of very powerful people with a direct link to the exchange’s API.

The author discounts the external hacker theory for a number of reasons. They note convincingly that Willy’s 10-20 BTC buying sprees were unaffected by Mt. Gox’s downtimes, when the exchange was inaccessible to regular users. The author states:

”This makes it likely the bot was being run from a local Mt. Gox server. It is not impossible that a hacker was able to install some kind of rootkit on Mt. Gox’s servers and ran the bot from there, but that seems extremely unlikely.”

A third theory has emerged from traders on the Bitcoin Market subreddit that chastises the hoop-la surrounding the Willy Report. These traders argue that Willy and Marcus are the product of an insider deal between Mt. Gox and multi-million dollar investors, commonly refereed to as ‘whales’, whereby these investors were able to enter the market and purchase up to 7% of Mt. Gox’s volume using software that linked diretly to the exchange’s API.

As this theory goes, the whales had to resort this method to accumulate such a large position without immediately rocketing the price. They could not simply deposit hundreds of millions of dollars into a Mt. Gox account and buy like the exchange’s other users were.

The privileged nature of these transactions would explain the lack of fees assessed on the trades, as they would have been part of a separate fee arrangement negotiated with Mt. Gox.

However, proponents of this "Whale Willy" theory have split into factions with one side arguing that the these bots single-handedly incited the November 2013 bubble, resulting in a Ponzi scheme that collapsed when the bots were ultimately switched off. 

Other analysts suggest that this 7% figure was not a but-for cause of the surge in price because (1) it is likely that the two or three other similarly-sized exchanges had their own versions of "Willy" which have not been discovered; and (2) the price is still well over the $200 mark that coincides with the beginning of the bot activity.  This viewpoint concedes that Willy may have been a motivating factor, buoying the price by purchasing coins from any weak hands, but outright reject the idea that Bitcoin is simply a Ponzi scheme. 

Anomalous Records

The mystery surrounding the trading bots market behavior is compounded by the suspicious details in their user registration data. First, both had ID numbers unusually high compared to other users. Next, Willy was the only entity with a ‘??’ listed for a country code when all other accounts were identifiable (Markus’ location was listed in Japan). Lastly, details of Markus’ activity is curiously corrected in a separate, anonymized version of Mt. Gox’s trade data from April 2013 that matched the leaked version in every other way. In that version, Marcus’ ID number appears as ’634′ – the ID connected to Mark Karpeles.

The Problem With Bitcoin

The Willy Report highlights, once again, the concern Bitcoin enthusiasts, governments, and crypto-currency skeptics alike share. That even if the Bitcoin protocol is as good as it gets, it is a victim of the unregulated exchanges that connect Bitcoin to the legacy financial system.

These exchanges, located off the block chain, require Bitcoin holders to trust them while their bitcoins are deposited in the exchanges’ uninsured coffers. So while Bitcoin is not susceptible to fraud, malice, and incompetence, its pillars are.

Thus, even those who abhor the thought of ever-increasing Bitcoin regulation, which could stifle Bitcoin’s innovative capacity and put it back in the hands of those it was meant to escape, are wary of keeping their coins anywhere but cold wallets. The problem here is that Bitcoin will never go mainstream if people cannot access their money on-the-fly as simply as paying by credit card.