The investigation comes on the heels of complaints by crypto critics that crypto markets are being scammed by savvy traders who know how to "spoof" the trading platforms and flood them with fake buy and sell orders. Such crimes can drive the price of a crypto way up, or cause it to plunge way down, apart from natural market forces.
It isn't exactly a good thing for the reputation of cryptocurrency in general, which requires honesty, transparency, and accountability if people are going to trust using it. That the crypto world is essentially rife with misconduct at this current juncture is precisely why the DoJ is now getting involved, along with the help of the Commodity Futures Trading Commission (CFTC), which oversees derivatives specifically tied to Bitcoin.
While crypto exchanges are expected to go after these bad players themselves, this obviously doesn't always happen – hence the DoJ involvement. And with all of the crazy price swings with Bitcoin over the past year, many say there isn't a better time than now for regulators to start cracking down and cleaning up the crypto world.
What the DoJ is specifically focused on are spoofing and wash trading, two forms of cheating that regulators have been working for years to eradicate from both the futures and equities markets. Spoofers essentially submit a spate of orders that they then cancel after prices have moved in the desired direction. Wash traders basically trade with themselves, which creates an illusion of artificial market demand, again in order to manipulate prices.
These criminal elements within the crypto trading world likely explain why Bitcoin rose from around $1,000 in early 2017 to almost $20,000 by the year's end. As of this writing, the price of Bitcoin is hovering right around $7,500.
It's the mom and pop investors who are being hit the hardest by these scams, as many of them assume the crypto markets are regulated in a similar manner to traditional money markets. Natural supply and demand, in other words, isn't necessarily at work when it comes to crypto trading, and it's the price manipulators who are largely to blame, critics say.
The U.S. Securities and Exchange Commission (SEC) is also cracking down on crypto crimes, with its own investigation into rampant fraud with initial coin offerings, or ICOs, which are basically digital tokens that some up-and-coming companies offer to investors in exchange for their investments.
Because the concept of cryptos is still so new, regulators haven't yet figured out how to properly keep tabs on which ones are real and which ones are fake. This is especially problematic with fly-by-night ICOs, many of which have defrauded investors of tens of millions of dollars.
Another problem is that many crypto trading platforms still aren't registered with either the CFTC or the SEC, which means they could disappear in an instant, along with the money of everyone who used them to make an investment.
"There's very little monitoring of manipulative trading, spoofing, and wash trading," says John Griffin, a University of Texas finance professor who studies manipulation, including that of digital coin markets. "It would be easy to spoof this market."
One of the most well-known examples of this is a trader, or group of traders, widely known as "Spoofy" that allegedly placed orders as high as $1 million, only to not execute them, thus driving the price of crypto toward Spoofy's desired target.
Read Bitraped.com for more coverage of the coming Bitcoin collapse.
Sources for this article include: