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It's very possible, even likely, that Bitcoin price rigging has played a major role in dragging down the price of the cryptocurrency some 70% over the past six months.
Related: Why Billionaire Frank Giustra Loves This $1 Bitcoin Stock
Fortunately, you don't have to be a victim to market manipulation...
What started last year as allegations on Twitter and Reddit have this year become academic papers by respected scholars and criminal investigations by the U.S. Department of Justice (DoJ).
Frankly, it's ugly.
In a research note earlier this month, Wall Street analyst Tom Lee, head of research at Fundstrat Global Advisors, suggested Bitcoin futures traders have at least partly caused this year's steep decline in crypto prices.
He cited "significant volatility" in the days surrounding the expiration dates of Bitcoin futures contracts on both the Chicago Mercantile Exchange (CME) and Chicago Board Options Exchange (CBOE). Both launched Bitcoin futures trading in December, just as the Bitcoin price was climbing to its all-time high.
Lee's analysis showed an 18% decline in the Bitcoin price in the 10 days leading up to an expiration date and recoveries by the sixth day following that date.
Lee outlined a scenario in which a futures trader long Bitcoin and short the futures would sell actual Bitcoin holdings just before the expiration date. The drop in the Bitcoin price would ensure "a handsome profit" on the short position.
But Lee isn't the only market observer that suspects monkey business in the Bitcoin markets...
The CFTC Smells Bitcoin Price Rigging and Isn't Happy About It
The Commodity Futures Trading Commission, the regulatory body that oversees futures trading in U.S.-based markets, was worried from the outset that Bitcoin futures trading posed higher-than-normal risks.
On Dec. 1, just a week before CBOE started Bitcoin futures trading (CME followed a week later), the CFTC made its expectations clear.
See Why Bitcoin Is Far from Dead: Cryptocurrency legend Michael Robinson just revealed why Bitcoin could be poised for a record-breaking rebound. Before the mainstream public gets any wiser, you need to see this now.
"We expect that the futures exchanges, through information sharing agreements, will be monitoring the trading activity on the relevant cash platforms for potential impacts on the futures contracts' price discovery process," CFTC Chair J. Christopher Giancarlo said in an official statement. "This includes potential market manipulation and market dislocations due to flash rallies and crashes and trading outages."
Both futures exchanges rely on Bitcoin exchanges - the "cash platforms" the CFTC referenced -- to help set futures contract prices. That's why the CFTC wants them to monitor the activity on the exchanges they use.
CBOE uses the Winklevoss twins' Gemini exchange, which has gone to great lengths to comply with all regulatory requirements.
But CME uses data from four exchanges - Bitstamp, Coinbase's GDAX, itBit, and Kraken. But starting after the first contracts settled in January, several of CME's partners resisted providing the data needed to ensure proper oversight.
By May, mounting concerns over suspected manipulation and a lack of market transparency prompted the DoJ, in cooperation with the CFTC, to launch a criminal investigation.
The focus of the probe is on tactics known as "spoofing" and "wash trading."
Spoofing is when a trader sends a large number of buy or sell orders to move the price in the intended direction but cancels before the orders execute. Wash trades involve a trader buying and selling to themselves to create an illusion of market demand with the goal of luring in other traders.
And the mechanism behind at least some of the manipulation could be a cryptocurrency called Tether...
The Tether Controversy May Be Part of the Rigging Puzzle
This month a professor at the University of Texas, John Griffin, published a 66-page paper linking the trading of the cryptocurrency Tether on the Bitfinex exchange with major increases in the price of Bitcoin.
Griffin has a decade-long history of ferreting out financial fraud. He's published papers on fraud by credit agencies, mortgage fraud by banks, and, last year, on manipulation of the CBOE Volatility Index.
Bitfinex also happens to issue Tether, a "stablecoin" intended to maintain a value of $1. Bitfinex claims to hold U.S. dollars to back up all $2.7 billion worth of the cryptocurrency. But last year questions were raised over whether Bitfinex has sufficient U.S. dollars on hand. The company has never definitively answered those questions.
But the Tether/Bitfinex suspicions are just one possible avenue for the Department of Justice probe. It's likely investigators will be looking into activities at multiple exchanges.
Regardless of what happens with the investigation, crypto investors need to be prepared for the possibility that bad actors have been manipulating Bitcoin prices.
Here's all you need to do...
How to Deal with Bitcoin Price Manipulation
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The unfortunate fact is that many, if not most, investments today suffer from some sort of manipulation.
Commodities in particular are prone to price manipulation. And Bitcoin, according to the CFTC, is indeed a commodity.
We see evidence of price manipulation in the markets all the time - from oil to stocks to gold.
And it's nothing new.
A successful attempt to corner the onion market in the 1950s resulted in Congress banning the trading of onion futures.
But investors continue to put their money into the markets because, despite the manipulation, it's still possible to profit. You just need to stay focused on buying quality and stay away from trading on emotion.
Bitcoin is no different. Price manipulation, if it is happening, doesn't change the strategy for investing in cryptocurrencies.
Seek out the cryptocurrencies with the best long-term prospects. Don't get caught up in the emotion of big price swings by buying when prices are soaring and selling when they're falling.
Remember that cryptocurrencies are a revolutionary financial development. Prices of the best cryptocurrencies will not only rebound but go much higher than the all-time highs we saw in December.
Plenty of experts see much higher prices ahead.
Fundstrat's Lee - who uncovered the manipulation in Bitcoin futures - has remained bullish despite the cryptocurrency's recent slide. He has maintained a price target of $25,000 by the end of this year and has added a target of $36,000 for the end of 2019.
Saxo Bank global macro strategist Kay Van-Petersen thinks Bitcoin could hit $100,000 within the next year thanks to an expected inflow of institutional money.
And Tim Draper, founder of the VC firm Draper Fisher Jurvetson, predicted in April that Bitcoin would reach $250,000 by 2022.
They're optimistic because they understand Bitcoin's potential. They believe catalysts like the influx of institutional money and growing adoption rates will push prices exponentially higher.
But I haven't even mentioned the biggest catalyst yet...
Most People Don't Know This About Bitcoin
Money Morning Defense and Tech Specialist Michael A. Robinson believes one catalyst alone can push the price of Bitcoin to $100,000.
"There is something big coming that only the geeks right now know about," Robinson said. "But when it rolls out in the very near future, and when everyone hears about it, it's expected to reignite everything."
Robinson has put together a special report on a unique strategy that could help you pocket one windfall after another not just on Bitcoin, but on all the cryptos he's following now. To learn how to get step-by-step instructions on how you could become the next crypto millionaire, click here now...
Follow me on Twitter @DavidGZeiler and Money Morning on Twitter @moneymorning, Facebook, or LinkedIn.
About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.