Spoofing is the act of placing an order on a market or exchange which you don’t plan to actually execute. This is done to move the wheels of the market, to influence peer traders. A large bid will tell bots and people it might be time to close short positions, or the inverse. If you have coins for sale, you can manipulate the market into buying them from you at your preferred rate through spoofing, if done correctly. Spoofing is a high frequency trading tactic and in the regular stock market it is wholly illegal under the Dodd-Frank Act.
A block of traders powered by a trading bot, or a single entity, or the exchange itself, must have a massive pile of cash in order to properly spoof.
According to author “Bitcrypto’d,” there is a high likelihood that Bitfinex itself is spoofing the entire market place. Phil Potters, CSO of Bitfinex, responded to the article in audio in the following clip:
Potters says that anti-spoofing measures are “philosophically off-base anyway.” Since Bitfinex is mostly unregulated, and since this is why they have trouble integrating with traditional banks, Potters and his team are the final authority.
Meanwhile, the bitcoin market capitalization as a whole inches toward 100 billion on its own, and Bitfinex wields a mighty position of power and influence over the convertible value of bitcoins. Bitfinex continually has trouble maintaining bank accounts and this could lead to serious problems in the future if a “bank run” on it were to ensue in which people wanted to cash out their dollars and euros instead of bitcoins. Bitcrypto’d writes:
Since March 2017, I’ve been warning people about the issues regarding Bitfinex and their disconnection from the traditional banking system. […] The issue regarding Bitfinex’s banking woes is essentially on the backburner as prices have gone up significantly since then, but in my opinion, this is a very big driver of why the price of Bitcoin is exceedingly easy to manipulate. […] You can’t send US dollars to the exchange without going through an unknown third party, anyone who legitimately wants to invest in Bitcoin, would never do this.
He goes on to note that most bitcoin traders are not going to have enough in a hot wallet account on a remote exchange to actually combat spoofing measures with alternate spoofs that actually make the spoofer pay the piper.
This is, of course, the best and longest lasting method of forcing the market back to legitimacy, because the spoofer, were it not likely Bitfinex itself, would run out of money fairly quickly if they had to eat their spoofs often enough.
The incentive also isn’t there: combating spoofing while the price is on an incline could lead to massive unintentional losses. Everyone’s guilty, in this respect, of looking the other way. In the words of Rusty Russell, "Tribalism causes unpleasant facts to be treated as an attack. But if nobody tells the truth, you can’t blame anyone for being confused."
Bitfinex has experienced serious problems in the past. Almost 120,000 bitcoins were stolen, for instance. The incident caused Bitfinex to go to its users for equity, and by this time last year they completed repayments on the IOUs.
With a market of this size, it would be good if more realistic price mechanisms would emerge than "what they’re doing at market X." For this author, the rates at Bitfinex and elsewhere are far less important than the rates at LocalBitcoins.com, because the rates at LocalBitcoins.com are the rates that everyday people are actually willing to pay and accept, on a global scale.
We encourage all our readers to maintain control of bitcoin private keys as much as humanly possible. The higher the value of bitcoin, the more at risk your bitcoins are.
Featured image from Shutterstock.