Research workers at Sun Yat-Sen University in China led by Weili Chen appear to have cracked the reason for the world’s pioneering cryptoexchange, Mt.Gox to collapse in 2014 – Market Manipulation.
The exchange had until 2013 handled nearly 70% of the crypto transactions in the world. Overnight in February 2014 it filed for bankruptcy, suspended trading and reported ‘disappearance’ of over 850,000 bitcoins. Users and creditors claimed it was a foul play and have ever since been in a legal tussle to extract their funds from the exchange.
“Serious market manipulation”
Chen and his team have discovered evidence of serious market manipulation by studying network transactions between April 2011 and November 2013. Dramatically in 2014 data related to the period was released anonymously. In fact, the research team found this data to be “in more detail” than the blockchain record itself. Chen’s team was one of the first to study this data block to identify the network properties.
Analysis of Leaked Data on the Network
One of the first findings by the research group says Chen was “Price manipulation is also a likely purpose. We find that abnormal transactions are greatly correlated with the Bitcoin exchange price.”
The indicators were evident that the network included some abnormal accounts that were grouped tightly compared to standard accounts on the network. Chen explains that “one possible reason is that these accounts are controlled by one organization.” Price of bitcoin was found to be highly influenced by these accounts and their transaction. Such accounts were also responsible for ‘suspicious’ trade patterns.
First Chen’s team was able to catch such spurious transactions when they found in their analysis that on Feb 7, 2013, one of the accounts (called 231) made over 749 transactions with itself. Chen explains that “the self-loop pattern is that the account may belong to the exchange and may be used to increase daily transaction volume or price manipulation,”
High-volume Trading in clusters
The second pattern identified was that several numbers of trades used one account to trade with another or two other accounts only, like Account#231 trading 150 times with another single account.
Chen and his team say “These findings convinced us that there were many types of market manipulation behaviors in the exchange.”
The biggest impact of these findings in today’s markets is that retail and professional investors are in doubt if such manipulations continue to happen even under their noses across the industry.