Researchers from Cornell Tech and several other universities recently published a paper looking at how many major cryptocurrency exchanges operate – and what they discovered is nothing short of chilling.
As it turns out, manipulation is rampant across many crypto exchanges – and it's typically the little guys that are bearing the brunt of the resultant losses.
Special arbitrage bots, the paper reveals, are programmed to reap all of the "profits" from ordinary users that deposit their cash into mostly decentralized crypto exchanges. This allows the big players to basically steal all of this money after they manipulate crypto prices in tandem.
"We have no idea what the extent of the malfeasance is on centralized exchanges," stated Ari Juels, a professor at Cornell Tech, during a presentation he made at a blockchain conference at his school's New York City Campus.
"If we extrapolate from what we've seen on DEXes, it could well be on the order of billions of dollars."
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As much as 90 percent of crypto exchange volume is being manipulated
The term DEXes, in case you're unaware, is shorthand for decentralized crypto exchanges. And while DEXes still account for a mere fraction of overall crypto trading volume, they're continually growing, reports indicate.
With as much as 90 percent of exchange volume already suspected of manipulation, the growth of DEXes means that this percentage will likely peak even higher.
"We explain that DEX design flaws threaten underlying blockchain security," Juels and the seven other authors who published the paper together revealed.
"These bots exhibit many similar market-exploiting behaviors – front running, aggressive latency optimization, etc. – common on Wall Street, as revealed in the popular Michael Lewis expose 'Flash Boys,'" they added.
High-frequency trading firms control the crypto markets, experts warn
"Flash Boys," in case you're unfamiliar with this as well, tells the story of how the equity market is supposedly rigged in favor of high-frequency trading firms that, according to Olga Kharif and Vildana Hajric from Bloomberg, "profit from high-speed data links with stock exchanges."
It would appear as though a similar cabal of high-frequency trading firms is actively manipulating and controlling crypto markets as well, of course in their own favor and at the expense of everyday traders.
"This should incentivize the community to consider new exchange designs," Juels concludes about the situation, suggesting major changes to the system moving forward.
DOJ currently investigating alleged crypto crimes to try to identify sources of manipulation
If there's any takeaway from this for you as the reader, it's that you really can't bank on Bitcoin or any other crypto behaving in a logical or predictable way. And that's because the crypto markets are stacked against you, based on who really runs them.
This would explain why the Department of Justice (DOJ) announced last year around this time that it would be conducting a criminal probe into crypto manipulation crimes that are basically making the rich richer, and the poor poorer.
One such tactic is known as "spoofing," and it involves high-frequency traders putting in fake buy and sell orders in order to steer the price of cryptos up or down for the purpose of generating rapid and ill-gotten profits.
"The market got cornered [back in 2017], and now it's just pump and dump, like printing money," explains one Zero Hedge commenter who's been tracking the progression of Bitcoin specifically.
"JP Morgan executed the same play here in the U.S. (that) Rothschild did in the U.K.. It's an old move and I'm in shock that ... people don't see it," this same commenter adds further.
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