What Is Cryptocurrency Spoofing?

 One of the hallmarks of most digital currencies is extreme volatility. Frequent and significant price fluctuations were a concern particularly in the earliest days of some of the major cryptocurrencies, but the phenomenon continues up to this day. One need look no further than the largest digital currency in the world, bitcoin (BTC),  to see evidence that this is the case; in late 2017, BTC rose to a  record high of almost $20,000 per coin. By just a few weeks later, it  had plummeted to roughly a third of that value. Price fluctuations don't just occur on a larger time scale such as  this one, stretching out over weeks and months. In fact, they also take  place from second to second as well. It is this fact that has allowed  some criminal operations to benefit from flash crashes of popular digital currencies, buying up the hottest tokens at low prices and then selling them once the prices are corrected. Now, a new trend has caused the cryptocurrency community concern as well. Called "spoofing," it is the process by which criminals attempt to artificially influence the price of a digital currency by creating fake orders. 

A Spoofing Primer

As with all tradable securities, the price of a digital token depends  on many factors, among them the overall sense of optimism or pessimism  pervading the broader market and individual investors. While this sense  of the momentum  and potential of a cryptocurrency can be difficult to quantify, it is  nonetheless something that savvy investors are highly attuned to.  Because of the impact that a feeling of optimism or of pessimism can  have on a group of investors' tendency to buy or sell that digital  currency, these concepts are critical to the price of that token, even  if they remain somewhat elusive. It is the fact that these sentiments are elusive that allows spoofing  to be possible and effective. Traders wishing to manipulate the market  for a given cryptocurrency can create the illusion of optimism or  pessimism by initiating fraudulent buy or sell orders. When traders  generate these orders without the intention of filling them, they trick  other investors into either buying or selling, and the price of the  cryptocurrency stands the possibility of being adjusted accordingly. The  trader cancels the orders once the price of the cryptocurrency moves in  the direction he or she desires. 

Spoofing in Practice

Bloomberg reported on an  investigation by the U.S. Department of Justice (DOJ) launched to  determine whether cryptocurrency price manipulation had taken place in  the bitcoin network as a result of spoofing. According to the  report, authorities at the DOJ are concerned that exchanges around the  world have taken an active approach to pursuing traders engaging in  spoofing. It may be that the investigation is focused on bitcoin not  only because it remains the largest digital currency by market cap,  but also because its massive price increases late last year drove  hordes of new amateur investors into the space. These investors, keen to  make what they see to be easy money off of a digital currency that  seems destined for stratospheric heights, may be the most susceptible to  spoofing. When spoofing does take place, it often is accompanied by wash trading.  Wash trading is similar to spoofing in that it aims to manipulate the  price of a digital currency by artificial means, although the means of  implementation are different. In wash trading, a cheater trades with him  or herself in order to create the illusion of market demand, thereby  luring unsuspecting investors into entering trades as well. University of Texas finance professor John Griffin believes that the cryptocurrency space is particularly susceptible to spoofing.  He explains that "there's very little monitoring of manipulative  trading, spoofing and wash trading" in the cryptocurrency world, adding  that spoofing the market and illegally manipulating prices "would be  easy." 

Guarding Against Spoofing

How is an investor best able to protect herself from investing in a  digital currency while spoofing is taking place? Overall, caution is the  central approach for many investors. It's best to beware of  opportunities that seem too good to be true, and it's also worthwhile to  ensure that any exchanges you trade on are vigilant to the possibility  of fraud of all types, including spoofing and wash trading. At the same  time, some  exchanges are looking to ramp up their security and monitoring systems  in an effort to guard against spoofing and protect customers. The Gemini exchange, created by Cameron and Tyler Winklevoss, for instance, has recently announced a partnership with Nasdaq to conduct surveillance of digital token trading. Ultimately, even the most vigilant investors can still be susceptible  to price manipulation in the digital currency world. For that reason,  it's crucial to keep in mind that this space remains a highly