Why bitcoin bulls are running for cover

Bitcoin is languishing at $7,500 as the anticipated post New York Blockchain Week surge failed to wing. The next support levels could be at around $6,600 marked by the low in early April, as bulls run for cover.

It would appear a number of factors may have conspired to trigger renewed selling, dating back to the problems at the South Korean exchanges Bithumb and UpBit that surfaced following a raid by the authorities on the latter two weeks ago.

That rekindled fears about a regulatory clampdown, and that train of thought has been strengthened by the news the US Justice Department has opened a criminal investigation into price manipulation in the crypto markets.

US and UK regulators go hunting for price manipulators and ICO fraudsters

Practices outlawed in mainstream equity markets are allegedly widespread in bitcoin and other crypto markets, but crypto exchange surveillance systems are unlikely to be strong enough to identify problems let alone rectify them.

Bloomberg reports that the Justice Department and the Commodity Futures Trading Commission are working together on the investigation, which apparently is targeting activities such as spoofing, where traders make orders they have no intention of following through on in order to create a false impression of buying and selling activity, and thereby effecting price manipulation.

Not mentioned in the Bloomberg report is what is thought to be one of the most rampant forms of manipulation – the “pump and dump”.

Pump and dump schemes involve traders acting “in consort” to encourage others to buy a coin, often by buying low themselves, then spreading rumours about some imminent positive news flow.

As the price starts to rise the conspiring traders dump their coins forcing the price into a decline in which the unsuspecting lose money.

With such immature markets where liquidity can be thin, especially among the smaller coins, manipulation may be fairly easy to accomplish.

Also, there is a thin line between the fact that some coins, including bitcoin, are comparatively tightly held, which means that the perfectly legitimate actions of relatively few sellers and buyers can have an outsized impact on the market price and outright dishonest manipulation.

John McAfee, the tech entrepreneur and fan of crypto, was accused at the end of last year of orchestrating pump and dump schemes with his “Coin of the Day” tweets, which led to spikes in the prices of the coins he named.

Many ‘pump and dump’ and other forms of price manipulation schemes are organised through messaging apps such as Telegram.

Many of the groups are legitimate, but it is difficult to sift the good from the bad. Wash trading, where investors “buy” shares they already own to give a false impression of trading activity in a coin, is also thought to be prevalent in the industry. Greater oversight from regulators is, to say the least, overdue.

Earlier in the week, the Wall Street Journal revealed that US and Canadian regulators are working together to close fraudulent initial coin offerings (ICOs). The plan, called Operation Cryptosweep, has 70 open operations and another 35 pending.

Joseph Borg, president of the North American Securities Administration Association said in comments highlighting the extent of the investigations, that “the action announced today is just the tip of the iceberg”.

The first results of that clampdown are seen in moves by state securities regulators in California and Alabama, with cease-and-desist orders issued a couple of days ago to ShipChain, a logistics blockchain project in California, and Extrabit, LEV and Platinum projects in Alabama.

All of those ICOs mentioned have been accused of selling unregistered securities.

Billions of dollars have been raised in token crowd sales, and it is probably the most popular and successful use of blockchain technology to date, and threatens to transform how tech start-ups raise seed and venture capital funds.

On 17 May, the Wall Street Journal published an investigation it has conducted into 1,450 ICOs, and found that 271 raised red flags, estimating investor loses at $273 million, although the WSJ did not provide the names of the suspect projects.

Among the most common red flags were fake executive teams, plagiarised whitepapers and promises of guarantee returns to investors.

Other factors hurting market sentiment include fears about the so called Mt.Gox whale – the bankruptcy trustee of the now defunct Mt.Gox exchange appointed by the Japanese court to look after funds once held by the exchange  – dumping coins on the market.

Other poorly received news saw the Bitfinex exchange forced to hand over client details to the tax authorities in the US, although that in itself would not be a cause of selling as such actions would potentially create taxable events for US crypto taxpayers.

The UK’s Financial Conduct Authority is currently investigating 24 crypto-related businesses, according to a report in the Financial Times today.

Coinbase and Circle moves

Coinbase, likely to be an exchange that would benefit from tighter regulation given its deeper pockets than most and better surveillance mechanisms, has acquired the decentralized crypto exchange Paradex.

As part of that move it is rebranding its GDAX crypto exchange Coinbase Pro, as it seeks to cater for all areas of the trading market.

GDAX, unlike its parent, does not take fiat deposits but Coinbase Pro, which is now live, does. Both GDAX and Coinbase Pro have markets in Bitcoin, Bitcoin Cash, Ether and Litecoin.

GDAX and Coinbase Pro, in addition to allowing trading of crypto against other crypto, provide customers with access to the private keys of their coins, while the more consumer-friendly Coinbase does not.

You can also make limit orders on GDAX and Coinbase Pro, but only market orders on Coinbase, where fees are also much higher.

Circle, the payments startup backed by Goldman Sachs, has introduced a “Buy the Market” feature in which clients can buy an index comprised of a basket of coins.

The Circle Invest app, launched in November last year, will allow investors to buy seven coins in one go, with each coin weighted according to its market capitalisation. The coins are bitcoin, Bitcoin Cash, Litecoin, Ethereum, Ethereum Classic, Zcash and Monero.

The app is only available in the US, but the company has plans to expand into Europe, although no timetable has been released. The company will make money from the index trades through a 1% spread on the buying and selling price.

Staying with the new breed of trading apps, European mobile financial app Revolut, that has been making waves recently with a younger crowd, has added Ripple’s XRP token and Bitcoin Cash to its crypto line-up, in addition to Bitcoin, Litecoin and Eth that are already available.

As with Circle Invest, it charges no commission on trades but has a spread of 1.5% between the buy and sell prices.

However, unlike Circle, clients are not directly purchasing crypto but instead gain exposure to the price movements of the underlying assets via contracts for differences (CFDs).

A Series C founding round in April raised a whopping $250 million, which values the company at $1.7 billion, propelling it into the ranks of the few European-based tech “unicorns” valued at more than $1 billion.

The latest funding round was led DST Global, the venture arm of Russian billionaire Yuri Milner, with Index Ventures and Balderton Capital also taking part.

Revolut growth, UK crypto task force meets, EOS to go live

Vlad Yatsenko, co-founder and chief technical officer of Revolut, said: “We’ve been asking the Revolut community which Cryptocurrencies they would like to see next, and the demand for both XRP and Bitcoin Cash has been absolutely overwhelming.

“After months of negotiations and development work, we’re incredibly excited to offer exposure to these two digital currencies to the UK market.”

Revolut has 1.7 million customers across Europe and is successfully using its crypto markets to make its offering more attractive to younger people.

When crypto trading was first introduced on the app last year, users had to pay a £15 charge to trade crypto only to see the company provide it free of charge to all customers at a later date, attracting complaints and demands for reimbursement from early adopters.

The UK government’s Cryptoassets Task Force met this week and representatives from HM Treasury, the Bank of England and Financial Conduct Authority were in attendance.

The objectives of the group were set out at the meeting and include exploring the impact of crypto, understanding its benefits and challenges and “assessing what. If any, regulation is required in response”.

Andrew Baily, the chief executive of the FCA, commented:

“Cryptoassets have been an area of increasing interest for markets and regulators globally including the FCA. We look forward to working with our counterparts at the Bank of England and the Treasury as part of the taskforce to develop thinking and policy on cryptoassets.”

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation, and is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company’s or index name highlighted in the article.