Bitfinex and Tether Limited have been sued for allegedly printing billions of dollars of unbacked Tether (USDT), and using this Tether (USDT) to artificially pump the price of Bitcoin (BTC) to its all-time high of $20,000 in late 2017.
If these allegations are true, then the situation is analogous to the Mt. Gox Willy Bot, which apparently caused the bubble of late 2013 when Bitcoin (BTC) exceeded $1,000 for the first time. Indeed, the Plaintiffs in the Bitfinex/Tether Limited lawsuit reference the Mt. Gox Willy Bot as a precedent for how a major crypto exchange can fraudulently manipulate the entire market.
Here, we do a deep dive into the Mt. Gox Willy Bot. First and foremost, the CEO of the now-defunct Mt. Gox, Mark Karpeles, fully admits to operating the Willy Bot, so what follows in this article is approximately what happened. It’s a wild story.
In June 2011 Mt. Gox was hacked and the hackers drove the price of Bitcoin (BTC) down to nearly $0 with fake trades. Hundreds of thousands of Bitcoins (BTC) were stolen. Although it was publicly announced that a hack had occurred, and the fake trades were rewound, Karpeles did not inform the public that Bitcoin (BTC) had been stolen since he apparently feared for his life.
Karpeles’ plan was to earn the stolen Bitcoin (BTC) back from Mt. Gox’s profits. The hackers actually crashed the price of Bitcoin (BTC) down to $2 in November 2011 as they sold large chunks of the stolen Bitcoin (BTC), and Mt. Gox purchased the Bitcoin (BTC) at these low rates.
As long as withdrawals did not exceed deposits, Mt. Gox would have a chance at surviving without the truth of the hack being revealed. However, by 2012 new crypto exchanges were opening across the world, taking away Mt. Gox’s monopoly and eating away at Mt. Gox’s Bitcoin (BTC) reserves.
The situation neared a breaking point in May 2013 when the Department of Homeland Security seized millions of dollars from Mt. Gox’s Dwolla account, forcing Karpeles to slow USD withdrawals to a trickle. This caused customers to get worried, which resulted in a rising Bitcoin (BTC) price because the only good way to get money out of Mt. Gox was via Bitcoin (BTC) withdrawals.
One thing that became clear, though, was that a higher price differential between Mt. Gox and Bitstamp caused the outflow of Bitcoins (BTC) from Mt. Gox to slow since customers would choose to wait for a very slow USD withdrawal instead of losing a bunch of money buying Bitcoin (BTC) and withdrawing it.
Karpeles decided to purchase large amounts of Bitcoin (BTC) with customer’s funds and possibly with no funds at all, decreasing the amount of Bitcoin (BTC) that was missing and increasing the price differential between Mt. Gox and Bitstamp, slowing outflows from Mt. Gox.
This scheme was posthumously named the Markus Bot, and it was easily identifiable since the Markus Bot paid zero trading fees and purchased large amounts of Bitcoin (BTC) at any given price.
The Markus Bot trading activity, courtesy of http://bitcoin.stamen.com/#15
Ultimately, the Markus Bot purchased about 300,000 Bitcoins (BTC). After 8 months of activity, the Markus Bot became inactive seven hours before the first Willy Bot account began operating.
Unlike the Markus Bot, the Willy Bot purchased smaller amounts of Bitcoin (BTC) but at a constant pace and appeared to be paying trading fees. Each Willy Bot account would spend $2 million or $2.5 million via purchases of 10-20 Bitcoins (BTC) every 5-10 minutes, and when the funds in the account were spent, a new account would be created shortly afterward.
Some clear evidence for the Willy Bot’s existence is that on Jan. 7, 2014, when Mt. Gox was down for trading, the Willy Bot kept on making purchases.
Ultimately, the Willy Bot purchased around 270,000 Bitcoins (BTC), drastically reducing the amount of Bitcoin (BTC) held by clients, which was in-fact non-existent Bitcoin (BTC) due to the hack years earlier.
The Markus and Willy Bot collectively purchased 570,000 Bitcoin (BTC), absorbing a significant amount of the Bitcoin (BTC) stolen in the hack. However, Mt. Gox ran out of Bitcoin (BTC) in February 2014, causing Bitcoin (BTC) withdrawals to be disabled and forcing the endgame of Mt. Gox.
The problem at this point, aside from no Bitcoin (BTC) withdrawals being honored, was that customers collectively had $150 million of fiat funds in their accounts, while Mt. Gox only had $38 million of available funds.
The Willy Bot was thrown into reverse and dumped tons of Bitcoin (BTC) in an attempt to raise the fiat needed to keep withdrawals running. However, the price of Bitcoin (BTC) quickly crashed to below $100, especially since Bitcoin (BTC) on Mt. Gox was worth nothing because withdrawals were disabled. Mt. Gox was then forced to declare bankruptcy in February 2014.
The Markus Bot and Willy Bot were created by Karpeles in an attempt to keep Mt. Gox solvent via manipulating the global Bitcoin (BTC) market, and ultimately, these bots were a primary factor in Bitcoin’s (BTC) late 2013 rally to over $1,000 and also a primary factor at the beginning of a bear market that lasted several years.
It is mind-blowing that the first great Bitcoin (BTC) rally and crash were primarily caused by market manipulating bots operated on behalf of the biggest crypto exchange at the time and that this was all done in an attempt to cover up fraudulent activity.
It is even more mind-blowing that a similar scheme may have been a primary factor in the late 2017 rally to $20,000. Just like Mt. Gox, Bitfinex was the largest USD to Bitcoin (BTC) exchange in the world during the late 2017 rally.
It remains to be proven that Bitfinex and Tether Limited actually caused the late 2017 Bitcoin (BTC) bubble and the subsequent bear market, but the Markus and Willy Bots from Mt. Gox are evidence that it is in the realm of possibility.
It is clear that the cryptocurrency community and regulators need to develop techniques to identify and expose fraudulent market manipulation in its early stages rather than identifying such schemes after the damage has already been done. The Bitcoin (BTC) bubbles of late 2013 and late 2017 caused tremendous damage to the crypto space, by scaring away investors and users, destroying businesses, and bringing about harsher regulations.
This problem needs to be stopped at its source, which is apparently major cryptocurrency exchanges like Mt. Gox and possibly Bitfinex that lack transparency and have too much power over the market.