Independent researchers have found that the initial price spike that took Bitcoin from $150 to $1,000 in 2013 was not caused by legitimate trades, but by bots.
In a research paper entitled “Price Manipulation in the Bitcoin Ecosystem” compiled by Jt Hamrick, Tali Oberman, Tyler Moore and Neil Gandal, it was revealed that Bitcoin’s beginnings were primarily influenced by illegitimate trades caused by bots.
As published in the Journal of Monetary Economics, the four co-authors discussed their findings which explicitly found that one entity was responsible for a series of substantial transactions consisting of a total purchase of 600,000 Bitcoins from the now-bankrupt cryptocurrency exchange, Mt. Gox.
Due to average trading volumes being relatively low, the large transaction significantly skewed averages, leading to an appearance of sharply-increased trading levels. As such, the market responded in kind, driving the price further up as a Bitcoin purchasing frenzy was sparked.
“This paper identifies and analyzes the impact of suspicious trading activity on the Mt. Gox Bitcoin currency exchange, in which approximately 600,000 Bitcoins (BTC) valued at $188 million were fraudulently acquired,” began the report.
“During both periods, the USD-BTC exchange rate rose by an average of four percent on days when suspicious trades took place, compared to a slight decline on days without suspicious activity. Based on rigorous analysis with extensive robustness checks, the paper demonstrates that the suspicious trading activity likely caused the unprecedented spike in the USD-BTC exchange rate in late 2013, when the rate jumped from around $150 to more than $1,000 in two months.”
The Fall of Mt. Gox
Before Mt. Gox was forced to close its doors in 2014, the Tokyo-based cryptocurrency exchange was the largest in the world. At the time, almost 70 percent of all Bitcoin transactions went through it, until hackers made off with 850,000 Bitcoins in 2014. It was later discovered that contributing factors to the attack were neglect and a lack of adequate management from the inexperienced directors.
More importantly, the CEO of Mt. Gox, Mark Karpeles, failed to reimburse those affected by the attack and remains a wanted fugitive in France.
The bots in question are named Markus and Willy, which performed seemingly legitimate trades with Bitcoin that were not owned by them. Not only did the fake transactions drive up the price of the digital currency, but the bots gained millions of dollars from the operations.
It is not until recently that these facts were uncovered and the truth behind the sudden craze in 2013 was made clear. Interestingly, there is also a rumor that states Mt. Gox also had 650,000 Bitcoin hacked from the company in 2011, and to preserve its reputation, the exchange took drastic measures to keep this from being discovered.
The $600,000 bot transaction alone has been singlehandedly connected to the almost sevenfold increase in the value of the cryptocurrency at the time. Had it not been for the bots creating a Bitcoin-purchase catalyst, it is difficult to say where we would be today.