From the beginning, it was a mystery. In 2008, someone using the alias Satoshi Nakamoto published a paper to a cryptography mailing list. It was called Bitcoin: A Peer-to-Peer Electronic Cash System.
Little did anyone know that, at its height, it would establish an entire market (the crypto market) valued at $800B. That’s more money than Coca Cola, McDonald’s, Ford, Caterpillar, Nike, Nintendo, and Goldman Sachs combined. And now, with that large fortune behind it, some think this single PDF has the potential to upend the entire global banking industry.
On one side of this battle is a group of unknown cyrptographers vying to bring down the status quo. On the other side is the United States government, the European Union, JPMorgan Chase, and Deutsche Bank.
Currency-creating governments across the globe, if seriously challenged, will stop at nothing to keep control of their monetary systems. They’ll likely find a well-financed ally in the 50-trillion-dollar banking industry. The War on Money might be the most critical war of the modern era because the victor will decide the fate of developing economies, taxation, inflation, terrorism, and — quite possibly — democracy itself.
You’d think with that much at stake, the author of this notorious paper would step into the spotlight. During Bitcoin’s meteoric rise, as the creator’s personal wealth surpassed one billion dollars, you’d imagine somebody would uncover him. And when his wealth reached an estimated $19.4B, you’d assume the IRS would come knocking.
But nobody has even been able to track down the mysterious Nakamoto. And that’s part Bitcoin’s appeal. For those who don’t know, Bitcoin is like a digital dollar. In 2009, it was worth less than one-tenth of one cent, and in 2017, it was worth $20,000. Within a few days, it can be worth half or twice as much. Its value fluctuates rapidly. That’s one of its problems. But the best part about Bitcoin is the one thing that doesn’t change. If you know what you’re doing, it’s hard to track down. It’s mostly anonymous.
It’s the anonymous bit that’s attracted the interest of everybody from money launderers to drug traffickers to fraudsters. By its very nature, Bitcoin is hard to regulate. And something that’s hard to regulate makes it easy to cheat a lot of laws to make a ton of money.
If you would’ve bought $10 worth of Bitcoin in 2009, you’d be sitting on a cool $200M right now. That’s the type of news headline the average person pays attention to. So news networks started reporting it. Your friends started buying it. And it seemed like anybody who put a few bucks into Bitcoin was cashing out with buckets of gold. So the madness began, in 2017, when Bitcoin went from a play-toy of technologists and an enabler of organized crime to a common investment held by just about everyone’s grandma.
I’m not here to tell you that Bitcoin is a bubble, because I am nowhere near qualified to prove that. Experts are still debating if Bitcoin is a commodity, a security, a store of value, a currency, or some altogether new asset class entirely. Because of this I won’t even begin to estimate the true value of Bitcoin. I’m not even sure it makes sense to. And besides, if I somehow could, if I had some secret, clairvoyant power to know where the price of Bitcoin was headed, I’d be investing, not writing this article.
What I am here to do is: tell you about the cheaters. Because they’re everywhere. It’s blatantly obvious. And if you’ve got some Bitcoin, or you’re thinking about buying some (or any other Cryptocurrency), you better know just how bad the cheaters are. Because when you’re the least informed person on the exchange, you get taken to the bank.
How deep does the Rabbit-Hole Gox?
On January 3, 2009, Satoshi Nakamoto established the Genesis block. That’s a fancy way of saying he “mined” the first Bitcoin.
He didn’t go out to some cave in Madagascar with a pickax and come back with a shiny, precious metal. He ran a hashing algorithm on his computer for a while and stored the results in a ledger. We call that ledger the “blockchain”. It’s public information. The reason it’s public is so that it’s distributed. The reason it’s distributed is because, unlike with US Dollars, if you get on some government official’s bad-side, there’s virtually no risk of your assets being frozen (or stolen).
The blockchain is a pretty revolutionary technology. And after the mysterious Nakamoto releases the Genesis block to the public, crypto enthusiasts take notice. Some of them start “mining” Bitcoin. Some of them do it out of the goodness of their hearts. But a lot of them are probably driven by the reward that gives “mining” its name. When you run this hashing algorithm on blocks of transactions and store the results to the public ledger, you’re rewarded with Bitcoin. At its peak, this reward could amount to more than 250,000 US Dollars.
When the first miners took notice, Bitcoin didn’t have any value. But the miners hoped that, in the future, it would. Within 10 months, they were proven right. In October of 2009, New Liberty Standard set the exchange rate for Bitcoin. These were the early non-shady days of Cryptocurrency. The value was set at the humble price of 1,309.03 BTC to one US Dollar, or about $0.0007. This was not a get-rich-quick scam. New Liberty Standard derived the price from the cost of electricity used by a computer to generate, or “mine”, the currency.
Fast forward another 10 months, and the first Bitcoin sale occurs. Previously dozens of users had bought Bitcoin from one another, but on May 22, 2010, a BitcoinTalk user by the name of Laszlo purchases something with Bitcoin. Specifically, Laszlo busy a pizza off another user for 10,000 BTC (~$200M at Bitcoin’s peak).
A couple of months later, in July, Slashdot picked up the story. The value of Bitcoin rose from $0.008 to $0.08 in 5 days. That’s a 10x increase! That’s the type of growth that gets attention.
And with attention comes scandal. Exactly one week later is when things start to get shady. Mt. Gox, a Tokyo-based company that traded Magic the Gathering playing cards, starts operating a Bitcoin exchange. Demand goes through the roof, and on March 6, 2011, Jed McCaleb sells mtgox.com to Mark Karpeles.
Mark Karpeles is the kind of guy that makes the Wolf of Wall Street seem like a saint. A month before he takes over Mt. Gox, the price of Bitcoin reaches $1. That’s a 125x increase from the price 7 months back, the day of the Slashdot story. It’s a 1,309.03x increase from the original value. You’re not finding that kind of return on Wall Street. You’re also not finding these type of wolves…
When sane people see a rise in price like that, they start to wonder if maybe the asset is inflated. Mark Karpeles doesn’t think that. He bets everything, literally, that the price climb will continue. This might sound pretty risky to you. But with an exchange at his hands, Mark Karpeles can guarantee a price increase. And since a guarantee isn’t really a risk, it’s no surprise Mark Karpeles takes it.
Within a few weeks, he finds himself with some competition. Three other Bitcoin exchanges open, allowing Bitcoin to be purchased for Fiat money. Britcoin trades BTC to GBP, Bitcoin Brazil trades BTC for USD and BRL, and lastly, BitMarket.eu opens Bitcoin up to the Euro.
With Bitcoin now easily convertible to and from almost every major currency, it only takes another two months, until June 1st for the price to increase 10x again. On the same day, Gawker publishes an article about the Silk Road, a website that allowed you to purchase anything from heroin to a hit on your husband. Users could purchase these things in Bitcoin and only in Bitcoin. And the purchases were anonymous.
Predictably, when the public finds out about how easy all of this is, demand for Bitcoin skyrockets. It’s no longer a play-toy for technologists. It has real, tangible value in facilitating narcotics transfer. Everybody who’s anybody wants an easy way to buy recreational, quality drugs through mail order delivery. So the price of Bitcoin climbs to $31 within a week of the publication.
Murders purchased aside, all is not rosy in Bitcoin-land for long. On June 19, 2011, Mt. Gox is hacked. An attacker gains access to the database. Armed with all the usernames and passwords, the attacker sells Bitcoin from random accounts until the price of Bitcoin plummets to $0.01.
This attacker isn’t the sharpest tool in the shed, though. Mt. Gox easily fixes this. The exchange shuts down, reverses the trades, and all is well, at least on Mt. Gox. The price of Bitcoin re-stabilizes. But the attacker uses those same usernames and passwords to hack the wallets of 600-some users. In total, he makes off with about $50k.
As far as financial crimes go, this one is pretty insignificant. The average banker on Wall Street steals more money than this while he’s taking a shit on his lunch break. But it’s a precedent. It shows that a distributed ledger isn’t all pros. It has its cons. And the cons start seeming like they aren’t worth the trade-offs as this sort of activity becomes more and more common, and the values would keep increasing until January 26, 2018 — when $530M was stolen in a single hack.
A few weeks after the first hack, Coinbase / GDAX opens for operations in the US. Bitstamp opens in Luxombourgh not much later. And on October 7, 2011, the world’s second Cryptocurrency is released: Litecoin.
In the following year, Linode will be hacked, resulting in the theft of $150k+ worth of Bitcoin. The Bitcoin codebase is forked for the first time, and investors worry which version of Bitcoin (if any) the miners will run. Lastly, Bitcoin undergoes its first “halving day” — where the reward for mining a block is cut in half. With the reward dropping, investors fear miners will quit, and some entity will become a “51% miner”.
For reference, a 51% miner can control the history of Bitcoin. That means, the miner can say whoever it wants owns however much Bitcoin it wants. So if you own $1M in Bitcoin, the miner can say you don’t — if it wants to. It can say it owns all the Bitcoin in the world if it wants to. You don’t really get a say.
Organizations start attempting to pull this off. After all, Bitcoin is worth about $82M at this point. If that’s not a good incentive, I don’t know what is.
But on March 25, 2013, a critical win happens for Bitcoin that assuages those fears and starts first Bitcoin Bubble. The European Central Bank and the International Monetary Fund bailout Cyprus to the tune of €10B. Among the conditions of the bailout is a hefty levy collected from bank accounts in Cyprus with holdings over the €100K cutoff.
Since Cyprus was — at the time — a popular global tax safe haven, particularly for Russians, panic ensues to get money out of the country in a hurry. As the story goes, some of the billions of Euros held in Cyprus are laundered out by purchasing Bitcoin in Cyprus and selling it to an account in a different country. As far as money laundering goes, this is revolutionary. Since Bitcoin is a new technology, and because of its cyrptographic nature, laundering money has never been so easy and yet so tricky to track down. In ten days time, the value of Bitcoin doubles. In 20, it nearly triples, and the increased trading volume breaks Mt. Gox — the most popular exchange at the time.
And this is where the real mystery of Bitcoin begins.
Is the price of Bitcoin set by its utility to launder money? Or is it almost entirely a fraud? I used to believe that capital flight in China and money laundering (mostly to avoid international sanctions on Russia) was causing most of the price increase in Bitcoin. But the evidence is conclusive that the price rise in 2013 is almost entirely the result of fraud in Mt. Gox.
The capital flight out of Cyprus was just a convenient narrative to get people to fall for the price increases. The real story, as it is often in financial bubbles, is fraud.
How to Make $650M Out of Thin Air
If the New York Stock Exchange wasn’t heavily regulated, you’d be pretty crazy putting your money in the stock market. There’s dozens of tricks traders on Wall Street could pull to steal your hard earned money. Thankfully, as these tricks are uncovered, most of them are made illegal. This makes it relatively safe for common people like you and me to participate in the market.
Mt. Gox is not a stock exchange, though, so it isn’t regulated. So when the value of all Bitcoin crosses $250M, it doesn’t take long for the banned tricks on Wall Street to make their way to Mt. Gox.
One of these tricks is called “Painting the Tape”. It’s super easy to understand.
In a primitive market like Bitcoin on a primitive exchange like Mt. Gox, the value of ALL Bitcoin is determined by the last trade of Bitcoin.
It doesn’t matter if the total value of Bitcoin is $250M, and you’re only buying $5 worth. If a Bitcoin was worth $4.95 prior to your purchase, the very act of you making a purchase of one Bitcoin for 5 cents over asking affects the value of the other 15M+ coins. That means, by adding a very small amount of money to bitcoin ($5), you can increase the entire “market cap” by $750K.
Why would you do this? Well, if you own 100K Bitcoin, by buying one Bitcoin for a little more than the asking price, you make $5000. I don’t know about you, but if I could spend $5 a day and make $5000, I’d do it. People started doing it on Mt. Gox.
By September 27, 2013, there’s almost indisputable evidence that Mark Karpeles — or someone inside Mt. Gox — was Painting the Tape. If some common investor were doing this, it might only have been frowned upon. The real story here is that because Mt. Gox was doing it, and because they owned the exchange, they were able to buy $5 of Bitcoin without adding $5 into the system.
Every 5–10 minutes for the next five months, one account from a group of accounts, would buy between 10–20 Bitcoin on Mt. Gox. In two months’ time, by November 29, 2013, the price of Bitcoin would increase from $128 to a peak of $1132.
Armed with the capital flight narrative — that rich people are buying Bitcoin in droves to launder money — most people assume demand is legitimate, even as the market cap of Bitcoin soars into the billions. But a huge problem comes along. The narrative starts to slip away.
2013 was the year of Taper Tantrum. The Bond Market is enormous. It makes the stock market look a market for poor people and fools. So when the price of bonds started rising as people began to fear the Chinese government was walking down a path eerily similar to Japan in early 90s, wealthy Chinese citizens started getting their money out of China. At the peak, they were getting out one trillion dollars a year.
One trillion dollars is a fuck-ton of money. But the Chinese have got it. Like the top 1% in the United States, the top 1% in China is doing quite dandy. But China’s population is so enormous, the top 1% is a staggering 14 million people. A lot of them are millionaires. Virtually all of them wanted their money elsewhere. Most of them started buying real estate all over the world. The price of houses in Canada and Australia reached insanity. I mean, there are only 7 million single-family detached houses in all of Canada. What happens when 14 million Chinese want to buy a house there? The price goes through the roof.
So some of the Chinese took notice of what the Russians did in Cyprus. They started buying Bitcoin instead of houses. A few Chinese exchanges opened to facilitate this. But on December 5, 2013, the Chinese government banned financial institutions from using Bitcoin.
The price plummets more than 40%, even with the insiders at Mt. Gox trying to paint that bubble to the sky. With the narrative gone, everybody was selling. Basically the only people left buying Bitcoin was that suspicious group of accounts in Mt. Gox.
What was so suspicious about these accounts, you ask? A few things. According to public logs released by Mt. Gox themselves, all of these accounts had IDs that were too high to exist for a regular user. See, the way a database works is, when a new entry is added, it gets an ID. The IDs are sequential, so the first user would get an ID of 1, and the second, 2, and so on. The highest ID for a regular user was in the 10-thousands. All of these tape painting accounts had IDs in the 600+ thousands. Additionally, all regular user accounts had an entry for “User_Country” and “User_State” . But these high ID accounts didn’t. They all had values of “!!”. This means they were most likely added by someone manually — most likely someone inside Mt. Gox.
Secondly, these accounts were able to make trades during the many times that Mt. Gox shutdown for “maintenance”. These “maintenance” periods were often unannounced, and often coincided with a sharp decline in the price of Bitcoin. A funny thing about the demand problems, only once did it cause an outage when the price was going up. Almost every time the price went down, though, there was a demand problem.
But lastly, and most suspiciously, even though these accounts bought Bitcoin constantly from regular users — they only ever sold to other accounts with suspicious IDs. And the really strange thing about these sales is, they weren’t sales at all, because they sold them for nothing. In essence, these trades were gifts.
So where was Mt. Gox getting the money to buy Bitcoin constantly and then give it away for nothing? Well on February 7, 2014, the house of cards started to fall apart. A DDoS attack hit all the major exchanges. The other exchanges reopened promptly, but Mt. Gox halted withdrawals. They kept withdrawals halted until February 24. Without Mt. Gox Painting the Tape, in just 17 days, the price of Bitcoin would plummet almost 25%.
Way back in May of the previous year, Wells Fargo had caught on to something funky at Mt. Gox. Mark Karpeles had answered “no” to the questions, “Do you deal in or exchange currency for your customers?” and “Does your business accept funds from customers and send the funds based on customers’ instructions (Money Transfer)”? Wells Fargo thought otherwise and tipped off Homeland Security, which went on to seize almost $3M from Mt. Gox.
From the time of the seizure, it takes Mt. Gox about 3 months to start Painting the Tape. It’s not clear how much of the money seized by Homeland Security was Mt. Gox’s vs their customers. Maybe Mt. Gox manipulated the market out of necessity to win back some of the lost money for their customers. But one thing is clear, they didn’t have that $3M to buy 10–20 Bitcoin every 5–10 minutes for 5 months.
By making the purchases anyway, Mt. Gox was effectively counterfeiting money. Counterfeiting US Dollars is a bigger crime to the US government than raping a baby. It doesn’t take it lightly.
On February 24, 2014, Mt. Gox couldn’t keep the scheme afloat any longer. It shut down for good. The people who still had Bitcoins inside the exchange lost everything — 744,000-ish Bitcoins to be semi-exact. You know what’s strange about that number. The group of accounts with suspicious IDs that was essentially buying Bitcoin for nothing to drive up the price 10x — you know how many Bitcoins it bought in 5 months? Roughly 720,000. Pretty close to the amount that was lost…
If you had to venture a guess what happened to Mark Karpeles, you’d probably assume he ended up in jail. You’d be wrong. Mt. Gox’s bankruptcy proceedings repaid the customers in Japenese Yen to the tune of $400 per Bitcoin. That’s pretty shitty for them since most of those coins were purchased at the inflated price of around $1200. Mark Karpeles got to keep whatever was left, which now amounts to about two billion dollars. He did get “arrested”, but not so much as a slap on the wrist happened to him.
If you think other people didn’t take notice, you’re crazy. The bros at BitFinex looked up to Mark Karpeles like an idol. But what they’re doing now makes Mark Karpeles look like Robin Hood.
The Bitfinex and Winklevoss Bros
For the next two years, Bitcoin is shrouded in scandal. Without large organized rings of accounts to Paint the Tape, Bitcoin’s volume dries up. Prices fluctuate mildly, mostly falling within in a range of about $600 to a low of $245 on October 18, 2015. But then from this date on, the price of Bitcoin just went up and up, never dipping below that. In fact, the price would never go down substantially again without immediately (and mysteriously) going back up the next day.
On October 18, 2015, the Winklevoss brothers open up the Gemini exchange. This exchange only ever handles about 1–2% of all cryptocurrency volume. It’s revolutionary in some ways, but it’s also pretty insignificant. Is it really the driving force behind $700B of wealth creation? I doubt it. But is it a coincidence the price of Bitcoin bottoms out on the day this exchange opens and only goes up from here on? I also doubt it.
You’ve probably heard of the Winklevoss brothers before. They supposedly invented Facebook and sued Mark Zuckerberg for a few hundred million. They function as the evil villain brothers in Aaron Sorkin’s telling of the Social Network. They might be doing the same thing in Bitcoin.
Like in any good mystery, they seem innocent and pristine from the start. Gemini is unique among exchanges in that it’s licensed to operate in 26 US states. The exchange is fully compliant with US law. Further, Gemini is FDIC insured on customer deposits thanks to a New York bank. Honestly, it’s the most reputable exchange at the time (and probably still to this day).
But one doesn’t need to explore the Blockchain for more than a few minutes to dig up some dirt on the Winklevoss Brothers. They initially purchase about 40,954 BTC the day Coinbase begins trading. This appears to be a horrible investment, as the value of their coins loses 85% of their value in a few months, or more than $550K. But the Winklevoss Brothers remain confident as the price falls, and during that time they purchase another 70,160 BTC for an estimated $368K. Of course this turns out to be an excellent decision. Later that year, as Mt. Gox is inflating the price of Bitcoin, their coins reach a value of $126M. And on March 9, 2014, exactly 13 days after Mt. Gox collapses, the Winklevoss Brothers attempt to cover their trail by “mixing” their coins. Then, they double down on their investment — literally — by pouring $1.5M into Charlie Shrem’s BitInstant in May of 2013. BitInstant, would go on to be convicted of Money Laundering, and Charlie Shrem would go to jail for his association with The Silk Road, but that’s two years down the road. Best not skip ahead…
A few days before Mt. Gox closes, a separate exchange, BitFinex, begins trading. BitFinex is the polar opposite of Gemini. Where Gemini seems reputable, BitFinex is almost blatantly shady. So what do these two exchanges have in common?
Well, about six months before the Winklevoss brothers open the Gemini exchange, BitFinex introduces a new type of cryptocurrency called Tether. Tether is an interesting cryptocurrency in that it’s supposed to be backed by a US Dollar. If you look at the historical data for the price history of Tether, on any exchange, it always says the price is $1.
If you don’t know, the US Dollar used to be backed by gold. You could take the US Dollar to the government, and they’d take it off your hands and give you some gold — if you wanted. The US government doesn’t do that anymore. It doesn’t need to. But that’s sort of the idea behind Tether. BitFinex claimed it was backed by US Dollars. But nobody has ever yet converted a Tether back to a US Dollar.
For a few months after it is introduced, Tether remains pretty insignificant, like a snake in waiting. But around the time the Winklevoss Brothers open the Gemini exchange, Tether shows its ugly face.
Until this time, only a couple hundred dollars of Tether are exchanged per day. These might represent legitimate usages of Tether. But then something strange happens. Suddenly with the wake of the Gemini exchange, a lot more Tether starts being traded. Within months, by February 03, 2016, $100,000+ Tether is traded, and never again does that value drop below $10,000.
Where did all these Tethers suddenly come from? Is BitFinex, like Mt. Gox, buying Bitcoin with nothing? In this case — at the very least — BitFinex is buying them with something: Tethers, to be specific. But are these Tethers backed by real US dollars? Shortly after the Gemini exchange opens, BitFinex changes the terms of service for Tether to specifically state that it is NOT backed by US Dollars. And under no circumstance is the Tether corporation obligated to redeem one Tether for one USD.
Days later, on December 1, 2015, Tether “grants” $500K in tokens. Suddenly, $100k+ Bitcoin is traded per day with Tether, which at this point is essentially monopoly money. If Tether was functioning the same way as the accounts at Mt. Gox Painting the Tape, if it was buying between 10–20 Bitcoin every 5–10 minutes, it’d buy about ~2160 Bitcoins per day. That’s about $900,000 worth of Bitcoin.
By February 03, 2016, Tether is well short of $900k volume. But also, the rise in price is far behind the days of Mt. Gox. It only took Mt. Gox two months to inflate the price of Bitcoin 10x. In the two months of Tether trading after Gemini opens, the price of Bitcoin rises, but it doesn’t even double. So 1/9th the volume of imaginary money being pumped into Bitcoin obviously has a lesser effect.
Perhaps BitFinex is just testing the waters at this point. Perhaps they’re waiting for the right opportunity to unleash Tether in full force on the market. Perhaps they’re in cahoots with the Winklevoss. Perhaps anything. The one thing that’s missing from the previous price explosion is a narrative.
But the narrative starts to take shape RIGHT after the Winklevoss brothers open Gemini. Only 14 days later, for seemingly no reason, the EU declares no VAT on Bitcoin trades. Then someone smart with a lot of money starts a publicity campaign for Bitcoin.
Nine days after the EU decision, Bitcoin makes its debut on the front page of The Economist. You know those days when you’re on Time.com, and you see a headline about how someone saw Jesus in a grilled cheese sandwich? Four days later, it was Bitcoin’s turn to be that article. Bitcoin made headlines again for its symbol being accepted into Unicode. Shortly after, major publications like WIRED and Gwern publish front-page articles about the identity of Satoshi Nakamoto. In April, OpenBazaar, a decentralized marketplace to sell goods in Bitcoin, receives $1M in funding. 23 days later, Steam starts accepting Bitcoin as payment. Two weeks later, Craig Wright makes headlines all over the world claiming to be the mysterious Nakamoto. Then the Winklevoss Brothers do an “Ask Me Anything” on Reddit, where they talk about how they invested big in Bitcoin and expect it to reach a $400B “market cap” (spoiler: it almost does).
Their thread reaches the front page. Their predictions ignite hysteria. And the public is now talking about Bitcoin on a regular basis. The foundation is set for a dramatic price increase. What the public isn’t focused on, is the steady rise in volume of Tether, which is no longer backed by a USD.
By May 10, 2016, Tether has granted $1.5M in tokens and its volume reaches $6M+. It will only ever fall below $100k on two other occasions. On June 1, 2016, Tether will grant $1M tokens (supposedly backed by dollars) in a single day. 13 days later, it will grant $1M again. It only takes another 19 SECONDS, for Tether to print another $2M. Within six months, by December 30, 2016, Tether will have granted a total of $9.5M tokens, and its volume will only ever drop below $1M on 3 trading days.
Remember, $1M can buy scarily close to the amount of coins Mt. Gox needed to increase the value of Bitcoin 10x. From the time Gemini opens to December 22, 2016, the price of Bitcoin has risen steadily, but it’s only tripled.
The following year, is when Tether starts pumping into the market like monopoly money in $100M daily intervals, and the wall street tricks come back with rampant price spoofing and wash trading, which drive the price of Bitcoin up 20x.
Along Came Spoofy
Until April of 2017, Bitcoin hovered around $1000 per coin without much volatility. Then along came Spoofy, a bot that started spoofing prices on BitFinex daily to successfully manipulate the price of Bitcoin through the roof.
Spoofy gets its name from a type of market manipulation called “Spoofing”. Spoofing is pretty easy to understand, like Painting the Tape. Here’s how it works:
Let’s say Spoofy has 10,000 Bitcoins that the market values at $1000 each. Spoofy wants to sell his Bitcoins, but he wonders if maybe he can make them worth more money. It’s pretty easy to do this in unregulated markets. What Spoofy does is: he puts in an order to buy 1,000,000 Bitcoin for $1100 on BitFinex. Simultaneously, he puts in an order to sell his 10,000 Bitcoins for $1050 on Gemini or Coinbase (or any reputable exchange). Some trader will see Spoofy’s order on BitFinex, notice a chance for arbitrage — to buy his real shares for $1050 on Gemini and to sell them on BitFinex for $1100. This trader will buy the shares at a higher price, but as soon as the trader does that, Spoofy will cancel his order on BitFinex. The arbitrager is fucked. He thought he had an opportunity to make $500k. Really, Spoofy is the one that made $500k, by overcharging the arbitrager with his spoofed order on BitFinex.
The way the Bitcoin exchanges work is a fraudsters wet dream. See, in the stock market, all exchanges MUST be fully compliant. They’re all on the same playing field. They also all deal in Fiat money, that’s issued by mostly reputable entities like the US and Chinese governments and the European Central Bank.
But with cryptocurrencies, only a select few of the exchanges are compliant. This creates an important advantage: the illusion of security for an uninformed trader. You might think that because Gemini is fully compliant, you’re somehow immune to things like Spoofing. You’re not. Gemini can’t control what happens inside BitFinex.
To my knowledge, Gemini is still the only exchange resembling anything like a fully-compliant, fully-regulated stock exchange. On a good day, it accounts for 6% of BTC volume. That’s like 2% of all crypto volume. Even adding in Coinbase, Kraken, and BitStamp — at best 30% of the crypto market is compliant in some way.
Spoofy saw this opportunity and went wild. From April to mid-august when Spoofy is outed by @Bitfinexed, the price of Bitcoin goes from $1080 to $4376. During that price increase, Spoofy is caught spoofing the market daily.
But then something happens, after the article is published, the spoofing stops. With no blatant market manipulation, Bitcoin hovers at $4300 for two months leading up to October 5. And then a newer, more aggressive, much better version of Spoofy comes to life: Picasso.
Tethers All the Way Down
Picasso is a smooth criminal.
It’s almost as if this bot read Michael Lewis’s Flash Boys and created the ideal market for itself to manipulate.
Back in the days of Flash Boys, the high frequency traders were adding exchanges to the market themselves. Daily, new types of orders were being added that were so complicated, nobody could possibly make sense of it all.
Queue the Bitcoin exchanges. When Picasso enters the scene, already dozens of cryptocurrency exchanges exist. These exchanges have longer trading hours than regular stock exchanges. Only one of them — Gemini — is fully regulated, which is a HUGE win. And most importantly, the underlying assets being used to make these purchases (altcoins) are so complicated with values so far divorced from reality, nobody can possibly understand the whole picture.
See, all stock exchanges deal with Fiat money. We use Fiat money to buy things, so intrinsically we understand it. It’s issued by reputable entities like federal governments. But most of the crypto exchanges don’t deal with Fiat money at all. They trade, exclusively, cryptocurrencies — which are backed by nothing, and almost never used to make purchases. Valuing them is done completely by the market. And absent even basic regulations, the market is easier to manipulate than a well-tempered puppy.
But all of these issues pale in comparison to Tether. Tether is a self-identified “crypto token”. It is treated by exchanges as if it is backed by a US Dollar. That means, like the US Government used to give you gold for a dollar, the Tether corporation is supposed to give you one US Dollar for one Tether. But there’s some problems with that. The Tether corporation lacks basic things, like an address and a phone number. But okay, fine. The critical problem is that the Tether corporation is printing millions of Tether per day. 32 addresses hold 82% of all Tethers. And according to the company’s own legal page, Tether is not backed by anything:
Tethers are not money and are not monetary instruments. There is no contractual right or other right or legal claim against us to redeem or exchange your tethers for money. We do not guarantee any right of redemption or exchange of tethers by us for money.
In some extreme cases, like during the Bitcrash of January 16, 2018, Tether printed $300M of its tokens in 36 hours. And even with $300M of funny money, it wasn’t enough to stop Bitcoin from falling 32% in a single day.
Again, like with Mt. Gox in 2013, Tether is able to receive large sums of USD without any traditional US banking. On January 23, 2018, after the counterfeiting is exposed, Tether stops printing USDT. But as Bitcoin’s price plummets 70%, falling below $6k, Tether starts printing EURT, or Tethers supposedly backed by Euros. On February 6, Tether prints $80M Euro. The price was $5951, and like clockwork — within 24 hours the price would rise 27% to $8212. Magically, Bitcoin stops free falling. As it turns out, the constant price recoveries aren’t so mysterious after all. The famous Twitter hashtag #BTFD “buy the fucking dip”, should really be: “Buy the fucking grant.” Every time there’s a Tether grant, the crypto market goes up.
But — somehow — there is something even scarier than the Tether corporation’s money printing habit. Not only was Tether incorporated in the Paradise Papers. It’s linked to BitFinex, a freaking exchange! So again, like with Mt. Gox in 2013, we have a corporation counterfeiting — this time one-billion+ dollars — to Paint the Tape.
From October 5 to December 17, armed with the monopoly money that is Tether, Picasso Paints the Tape like a mother-fucking master. In a mere 73 days, Picasso paints the price of Bitcoin from $4229 all the way to $20,089.
Not coincidentally, during this same period, the volume of Tether per day surges from $119M to $2.25B. On October 5, 2017, Tether’s volume as a percentage of Bitcoin’s volume is 10%. But by January 19, 2018, it reaches a staggering 26.7%. What’s the effect of that? 48.8% of all Bitcoin’s price increases can be linked to within 2 hours of 91 Tether grants by BitFinex.
When Mt. Gox was buying ~2160 Bitcoins per day with counterfeit money, that was bad. Tether is purchasing cryptocurrency worth ~508,076 Bitcoins a day. That’s ~26.7% of Bitcoin’s volume. Mt. Gox was purchasing a mere ~2.3%.
Given that all this is illegal, you’d think the person running the Picasso Bot would try to keep it a secret, right? I mean, especially if that person was also running the largest Bitcoin exchange… But on June 22, 2014, Giancarlo Devasini — the founder of BitFinex — admits to working on an improved version of the Mt. Gox bot.
A BitcoinTalk user asks Giancarlo, “Can you get a willy bot like Karpeles already and take us to 10,000?”
Giancarlo responds: “Currently working on it.”
And is it really surprising? Giancarlo Devasini was arrested for selling pirated copies of Microsoft Windows in 1996. In 2012, he posted at length, how easy it is to manipulate an illiquid market like Bitcoin. This is just after asking users to join a literal Bitcoin Ponzi scheme which he has since tried to delete. What could go wrong with someone like him running a financial exchange?
And the worst part of it is: Picasso shows not only a connection to BitFinex and Tether — but also to Coinbase. Picasso’s biggest and worst price gauge occurs on Coinbase the day Bitcoin Cash is introduced. In literally minutes, Picasso drove the price of Bitcoin Cash 200%+ higher than the rest of the market (thousands of dollars per coin). This shows, at the very least, Picasso has inside connections at Coinbase. In the worst, it shows that Coinbase is colluding with BitFinex to manipulate prices higher.
ICOs and Fake News
Like Spoofy, after Picasso is outed in late December, he seems to disappear. And after he disappears, with no one to egregiously manipulate the market, so too do the price increases.
But the crypto cowboys still see a last shot opportunity to make a killing: the altcoin market. With Futures trading opening up on CBOE and CME, the Bitcoin market was getting bigger and smarter and harder to fool. The altcoin markets, though, started to resemble the easy pickings of the early Bitcoin market.
These guys notice that, with even smaller amounts of Tether, they can inflate the price of something like Ripple by 17.7x in 26 days. To put that into perspective, it was not a small sum of money. It was just shy of 120 billion US Dollars — which is quite possibly enough money to buy all of fucking Cyprus. It was so insane that at the peak, Chris Larson — a guy you’ve never heard of and probably shouldn’t ever — was making one-billion+ dollars per hour, or enough to buy a goddamn Disney World. Briefly, he was the 8th richest man in the world, ahead of guys like Sergey Brin, who invented Google...
But the crypto cowboys aren’t satisfied with a measly $4B profit per day on a single altcoin. In 2017 alone, 235+ Initial Coin Offers (ICO) occur. An ICO is like an Initial Public Offering (IPO) for a company like Facebook. An IPO is the public’s first chance to buy stock in a company, so an ICO is the first chance to buy a coin. There’s an important distinction, though, between a company like Facebook and an altcoin: Facebook makes billions of dollars a year. Altcoins — usually — make nothing. A lot of times they lack basic things like an identifiable founder or even an address or a phone number. Startlingly, a HackerNews user reported that hardly any of the altcoins even work. He found that only Bitcoin (and its derivatives), Ethereum, Monero, and ARK, technically function as a cryptocoin. He found that even coins like Ripple, with “market caps” over $100B, don’t even pass the most basic tests of a working cryptocoin.
If you thought The Wolf of Wall Street was ripping people off with Penny Stocks, this is next level. The crypto cowboys start unleashing fake news onto the unsuspecting public in droves.
Less than a month later, rumors circulate that TRON is being used as payment by “The Chinese Netflix”. The price of TRON doubles in minutes. Before the rumor is debunked, the price inflates over 100x in a few days. And this isn’t exactly petty cash. The total value of TRON prior to the rumors was $140M. But that would explode to $14.75B before anyone realized there isn’t even a “Chinese Netflix” in the first place.
To mark the new year, rumors would circulate on January 1, 2018, that Dadi.cloud would be built on RaiBlocks. RaiBlock’s market cap would triple in 3 days, before Dadi announced it will run on Ethereum.
Similarly, rumors would circulate that Stellar is partnering with Visa. Its market cap would nearly double in value during a single trading day — not once, but twice, on January 3rd and 4th. Literally consecutive days! And with the same rumor! Fun fact about Stellar — remember that guy that who wasn’t qualified to be operating a financial exchange with the code that was used to trade Magic the Gathering Cards — the guy who founded Mt. Gox? His name was Jed McCaleb. Guess what else he founded? Stellar. And Ripple! As they say, fool me once, shame on you — but fool me thrice and shame on all of humanity…
It might sound like anyone falling for this is a complete idiot. But all of these rumors are well orchestrated. They start with several postings online that imply a partnership with some company is in works. The rumors intensify over the coming days as lots of fake accounts join in. For weeks this goes on, until finally it culminates with a post confirming the rumor. Given how easy it is to buy upvotes on important news sites, it’s no surprise that these rumors are able to circulate quickly.
Further, the outlandish returns caused by them creates a craze. In late December, as Bitcoin is hitting $20k, and as several altcoins are jumping 10–100x in days, the unsuspecting public starts investing in cryptocurrency index funds, even if they’re homegrown, and they’re just buying whatever altcoins a Google search turns up on whatever shady exchange they can buy them.
With all the interest in crypto, the narrative returns. It creates the perfect opportunity for the market manipulators to offload their low-value CryptoKitties onto the unsuspecting public for a huge profit. Just when the public goes crazy and starts buying every Bitcoin they could get their hands on, the manipulators cash out.
The Bitcrash of January 16, 2018, erases $250B in a single day. Within a week, the number reaches almost $360B. Even with Tether pumping $300M of monopoly money into the market in 36 hours, it can’t stop Bitcoin from plummeting 40%.
A Brief(er) History of Financial Bubbles
You know where Painting the Tape gets its name? Back in the days of ticker tape parades, the idea was that this particular type of trade allowed Wall Streeters to take whatever legitimate value the ticker spit out and paint whatever number they wanted over it. This type of trade was invented in the 1920s. It caused a bubble you might’ve heard of called The Great Depression.
After the bubble collapsed, when regular people were starving to death in the streets and the market languished for decades, there weren’t too many ticker tape parades. That’s the reason Painting the Tape is illegal today.
What’s crazy is, in 1929, the stock market didn’t even double. In 2017, Bitcoin rose 20x. The only bubble ever like it is Tulip Mania. At the peak of Tulip Mania, in February 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsworker. As we all know, Tulip bulbs aren’t selling for $500k a pop these days. They’re selling for about $0.25.
Bitcoin might have only reached about 1/2 a skilled craftsworker’s annual wages. But Bitcoin is literally not even tangible.
If you think Bitcoin is the future of currency, you might want to think again.
A Shortlist of Bitcoin’s Short Comings
Bitcoin isn’t really the money laundering dream it’s made to seem.
Graphs can show you that, as soon as China cracked down on Bitcoin on January 23, 2017, the Yuan went form accounting for 93% of sales to almost 0. They can also show you that the total volume didn’t really change. Nor did the distribution. The Japanese Yen still accounted for roughly 3x the volume of the USD.
One would imagine, if 93% of the market disappeared, the volume might drop a smidgen. But the volume holds steady for months, until the percentage of Bitcoin bought in Tether takes off in mid-march.
And just as the Chinese are not to blame, neither are the Russians. It’s unlikely the price rise is due to evil money laundering in Siberia. During the Russian sanctions imposed in 2015 and 2016, volume and prices remain flat. This is during Bitcoin’s deadzone when the price hovers around $300 for years. If the Russians are laundering money, they had a really slow start.
While Bitcoin is likely facilitating vast sums of money laundering, neither the Russian Sanctions nor Capital Flight from China seemed to affect volume or price.
Cryptocurrencies are a novelty. You’re investing in Pokemon cards, Beanie Babies, Tulip Bulbs — what have you. Hopefully, it’s not your entire fortune. If you bought near the peak, and you’re still holding out to get rich quick from this point, sell your imagination, not your Bitcoin. For the crypto market to go up even another 10x, it’d be roughly the size of the Japanese economy. If you think nations are going to sit by, and watch the value of their fiats be erased by something as easy to stamp out as Bitcoin, you’re clueless. The fact that they’ve idly sat by for this long is, frankly, astounding. And even if they do, Bitcoin mining already consumes more electricity than entire nations, like Denmark. 10x that would be almost as much as the US and China combined.
All that electricity and even at its theoretical maximum, Bitcoin can only process 7 transactions per second. Visa, alone, can process 24,000 transactions per second. That’s a pretty big difference. And Visa could process more if it had to. Most importantly, Visa can process these transactions near instantaneously. Bitcoin can only process them in blocks, once every ten minutes.
If you had to wait ten minutes at the store every time you bought something, you probably wouldn’t go to the store very often. I mean, when’s the last time you saw an inconvenience store?
But anyway, Bitcoin isn’t a bad Visa. It’s a bad USD. See, the USD has two things going for it. One, you know when you go to Kroger, everyday, you can trade one US Dollar for one Honey Crisp Apple. With Bitcoin, some days you could buy the entire produce section, and the next day, you might not be able to buy a single napkin.
The other thing the US Dollar has going for it is that the US government demands you pay it taxes in US Dollars. If you don’t, you’ll be living on the street. The US government could care less about any other currency. So its 300 million citizens better damn well care about the US Dollar. That’s why it doesn’t need to convert US Dollars into gold anymore. Since no group of people need to have Bitcoin, it only has value because a lot of people think it does. Thoughts change, though, but — as they say — two things in life are certain: death and taxes.
It just so happens that Cryptocurrency is the get-rich-quick flavour of the month. So a lot of people do care about it right now.
But Bitcoin is not going up 100x in value from here. When people start to see that, it’s a lot more likely to be the next get-poor-quick scheme everybody wished they avoided. And this is because the one thing Bitcoin has going for it — the anonymous bit — turns out to be quite the fraud itself.
A VERY Brief History of Fraud
In a primitive market, there isn’t such a thing as fraud. It’s just theft. Fraud loves complexity.
Money by itself is too simple for fraud. Money existed for thousands of years before any fraudulent activities. But when insurance is introduced about 3000 years ago, humans quickly figure out there’s an opportunity to cheat the system.
Greece was a real pioneer in the insurance world. The inhabitants of Rhodes created the “general average”, which allowed a group of merchants to insure their goods being shipped. The collected premiums were used to reimburse any merchant whose goods were jettisoned during transport, whether to storm or sinkage.
Shortly after the “general average” is introduced, the first case of fraud occurs. A Greek merchant named Hegestratos takes out a large insurance policy known as bottomry. Basically, he borrows money and agrees to pay it back with interest when his shipment of corn is delivered.
But Hegestratos spots a hole to exploit. He thinks to himself, I can have my corn and eat it too! All he has to do is sink his empty boat. Then, he can keep the loan AND sell the corn.
But the plan didn’t work. As they say, the captain goes down with his ship, and Hegestratos was no exception. He accidentally drowned himself while sinking his empty ship. Fraudsters sometimes make a lot of money, but in the end, things rarely work out for them.
Which leads me back to the Winklevoss Brothers. By “mixing” their coins in an attempt to cover their tracks, they exposed their wallet. By exposing their wallet, they highlighted the suspicious timing of their moves. And by doing that, they showed the one thing Bitcoin has going for it — the anonymous bit — isn’t all it’s cracked up to be. Because the Blockchain is distributed, it’s public, and because it’s public, committing fraud and laundering money isn’t so easy after all.
Did the astronomic price increase of bitcoin begin the same day the Winklevoss Brothers open the Gemini exchange out of pure coincidence? Maybe.
But here’s the alternative:
They’re two smart, well-capitalized business-bros from Stanford who understand the importance of marketing and sales and strategy. They know that good tech by itself will do nothing. They’re connected to Silicon Valley via their Facebook holdings. And once they step into the game, suddenly Steam and other tech companies start accepting Bitcoin (for extremely little revenue). Suddenly there’s talk of Bitcoin futures trading and index funds, both of which materialize. Suddenly news publications all over the world are talking about Bitcoin on the front page. Suddenly governments start passing extremely pro-Bitcoin laws like the EU ruling (for no reason) that Bitcoin sales will not be taxed. If this isn’t the mark of lobbyism, I don’t know what is.
People like the Winklevoss Brothers end up guilty so often there’s a phrase for it. It’s so old, the phrase is Latin. It’s Cui Bono. It literally means: “For whose benefit?” But it’s used to say: whosoever has the most to gain is likely guilty. The Winklevoss Brothers certainly had a lot to gain, being the single largest holders of Bitcoin. At the peak, they held an amount estimated to have been as large as $3.2B. They had a lot to gain, $3B in one year, specifically.
Are they guilty? Probably not. Is BitFinex? Probably. But with $800B on the line, someone needs to be investigating this more thoroughly to figure it all out. Because one thing is for sure: someone is definitely cheating, and the public is starting to get fucked.
2016: “What is Bitcoin?”
2017: “What is Ethereum?”
2018: “What is a wash trade?”
2019: “Can I eat squirrel?”