Single Trader with Enormous Bankroll is Manipulating Bitcoin Price, But to What End?
Single trader on Bitfinex engaging in illegal activity to manipulate the price of Bitcoin to suit his own ends
Rumors are swirling about a trader with nearly unlimited funds who is manipulating the Bitcoin markets. This trader, nicknamed "Spoofy," received his nom de guerre because of his efforts to “spoof” the market, primarily on Bitfinex.
What is spoofing?
According to the Dodd-Frank act, spoofing is the practice of:
"Bidding or offering with the intent to cancel the bid or offer before execution"
In other words, spoofers place a large buy order just below other buy orders, or a large sell order just above other sell orders. The idea is to make traders think that somebody with deep pockets is getting ready to buy or sell, in hopes of moving the market. If traders see a sell order of 2000 Bitcoin, for instance, they may rush to panic sell before the whale crashes the price.
The catch is this: If the price approaches the spoofer’s order, he immediately cancels it. Spoofing is actually illegal, but as Bitcoin markets are largely unregulated, it’s quite common. What is unusual in this case is the enormous bankroll that Spoofy has at his disposal. He regularly places orders approaching $60 mln.
Even more unusual is that most of Spoofy’s activity occurs on a single exchange: Bitfinex. This exchange came under fire earlier this spring when Wells Fargo cut off their banking ties. As a result, it’s virtually impossible to deposit fiat on Bitfinex without going through intermediaries. Spoofy has massive sums of both fiat and Bitcoin on that exchange, and is likely one of the only traders who does.
Spoofy has a number of weapons in his arsenal, including spoofing and wash trading. As BitCrypto’ed points out in a recent blog post:
“Spoofy makes the price go up when he wants it to go up, and Spoofy makes the price go down when he wants it to go down, and he’s got the coin… both USD, and Bitcoin, of course, to pull it off, and with impunity on Bitfinex.”
The BitCrypto’ed blog also describes Spoofy’s wash trades, when he trades with himself by either selling into his own buy orders or vice versa. Wash trading at high volumes can induce a frenzy of buying or selling, as other traders respond to the high trading volume. Spoofy can execute wash trades at very low cost, about $1,000 per million dollars of volume.
When Bitfinex announced its plan to distribute Bitcoin Cash, it initially planned to distribute Bitcoin Cash to holders of short positions. Immediately following that announcement, a single trader short sold tens of thousands of Bitcoin all at once. It’s likely this trader was Spoofy himself, planning on acquiring as much Bitcoin Cash as possible.
The large number of shorts on Bitfinex also led many to believe that an epic short squeeze was coming, and many Bitcoin traders purchase coins in expectation of this. Suddenly, he “claimed” all of his own shorts, closing them using his own Bitcoin. The number of shorts dropped drastically without affecting the price at all.
Who is he?
The identity of Spoofy remains a mystery. He may be a single trader, a group of colluding traders or even the Bitfinex management themselves. He sometimes seeks to drop Bitcoin price, and sometimes acts to increase it.
Not just Bitfinex
Spoofy’s activity also drives the price on other exchanges, as arbitrage takes place. Because BItcoin is so thinly traded, a single large “whale” can potentially move the entire market. While Spoofy is certainly exercising outsized control over the Bitcoin price, it is uncertain how much of an affect this is having on the markets. The price is currently rising, having finally surmounted the $3,000 barrier. The only problem? Nobody knows how much of this increase is organic and sustainable, and how much is due to the market manipulation of Spoofy and others.