Was the recent market spike a result of an exuberant market, or did it show the SEC how open to manipulation crypto markets can be?
- A fake news tweet from Cointelegraph sent markets soaring, temporarily.
- For many, the tweet showed how easily the Bitcoin market can be manipulated.
- Many in crypto believe it has scuppered the chances of a spot Bitcoin ETF approval.
Pity the fool that messes up on a slow news day, said someone, somewhere—probably. At least, that should be the epitaph for the October 16 debacle that had the crypto world transfixed for several hours.
It all began when Cointelegraph tweeted fake news about an SEC approval for a spot Bitcoin ETF. An announcement that, if true, would make it the first of its kind in the U.S.
Over the course of about an hour, the news suddenly disintegrated as BlackRock confirmed its application was still pending approval. But not before Bitcoin had surged 5% in mere minutes. Pity the fool, indeed.
Is the Crypto Market Ripe for Manipulation?
In the flurry of excitement, and subsequent wave of disappointment, industry watchers were anxious to know how this might affect the pending applications for spot Bitcoin ETFs.
Famously, Securities and Exchange Commission (SEC) chairman, Gary Gensler, takes a dim view of crypto. Well, at least now he does . The worry among many is that the recent episode will only confirm Gensler’s priors. Namely, that the cryptocurrency markets are “open to manipulation .” But is he wrong?
In order to consider this question, it’s important to lay out why cryptocurrency markets are different from other financial markets and how this increases the chances of manipulation.
Firstly, crypto markets tend to be much less liquid than major markets like the stock or forex markets — because there is less overall trading volume, large trades, or coordinated efforts can have an outsized impact on prices.
A whale making a large buy or sell order in the Bitcoin market is more likely to provoke a market movement. Something that is harder to achieve in highly liquid markets where large orders represent a smaller percentage of volume.
Second, cryptocurrency markets are more decentralized, with trading spread across many exchanges and platforms. This fragmentation can make prices more volatile and make coordinated manipulation easier than on centralized exchanges like NYSE and NASDAQ. Theoretically, this means traders can take advantage of price differences across platforms.
To compound things further, many market participants are small-time traders rather than institutional investors. These retail traders are usually much more susceptible to panic selling or reactive buying around price swings and rumors (see: October 16).
How Does This Affect Chances of SEC Approval?
Now, whether or not the above points constitute the ingredients for a market open to manipulation is another question. However, it’s unlikely that Gensler and the SEC think the market is irredeemably crooked. Otherwise, it wouldn’t have approved a Bitcoin futures ETF —distinct from the spot Bitcoin ETFs still awaiting approval.
It’s also unlikely that the SEC would about-turn on what looks like a promising pathway to approval for spot Bitcoin ETFs simply because of media misbehavior. After all, this isn’t the first time dodgy reporting has caused tremors in markets.
One precedent pointed out by Jeff Dorman, Chief Investment Officer at Arca, is illustrative. In April 2013, someone hacked the Associated Press’s Twitter account and posted a headline with the news that the White House had been attacked and President Obama injured.
The tweet caused markets to plunge, wiping out hundreds of billions of dollars in losses in equities and debt. The episode also took place the same month Bloomberg had added Twitter to its trading terminals, a fact that probably escalated the crisis. Crucially, after the episode, there was no meaningful response from the SEC.
Will Cointelegraph get a slap on the wrist or a strongly-worded letter? Potentially. But, to imagine the SEC scrapping over 10 spot Bitcoin ETF applications because of a tweet appears far-fetched—at least for now.
