what could be traced directly to the suspicious trades alone. “This suggests that the fraudulent trades may have sent a public signal to the broader community to pile in and buy more bitcoins, further accelerating the price rise,” Moore wrote in an e-mail exchange with Xconomy. The exchange rate plummeted after Mt. Gox imploded, and took years to recover.
Granted, those were early days when bitcoin traded at much lower volumes and at fewer exchanges, and therefore might have been more vulnerable to manipulation by a lone individual or small group of malefactors. But Moore says the market might have been just as easy to tinker with in the 12 months ending in May 2017, when the bitcoin exchange rate ballooned by an even greater percentage, from $1,500 to $19,000.
“While we do not know what has driven the recent spike in Bitcoin’s value, we cannot rule out fraud,” wrote Moore, a professor at the University of Tulsa. His co-authors on the research paper were JT Hamrick, his colleague at the Tandy School of Computer Science at the University of Tulsa; and Neil Gandala and Tali Obermana of the Berglas School of Economics, Tel Aviv University.
Aside from bitcoin, Moore says the values of emerging cryptocurrencies could be as vulnerable to market manipulation as bitcoin was about four years ago, when the fraudulent Mt. Gox trades he and his colleagues studied represented a significant percentage of all trades in bitcoin.
A rare trove of leaked trading data
The team of researchers was able to root out suspicious trading activity on Mt. Gox because they could mine the leaked data on 18 million transactions that included the user ID numbers behind the buyers and sellers—part of the trading details that currency exchanges in digital coins don’t routinely reveal. The researchers analyzed the dates and times of trades, the price being paid for bitcoin, the way sellers on the exchange were credited for dollars paid by the buyer, and overall trading patterns.
The researchers found that a collection of 50 trading accounts were probably run by a single individual who, they maintain, drove bitcoin values up with a combination of illicit tactics, including fake, one-sided trades and bitcoin purchases from real sellers who were never paid. The trickster was allegedly credited with acquiring 600,000 bitcoins, then valued at $188 million.
The motive for all this hocus-pocus may have been simple profit, the researchers say. Outsiders may have taken advantage of a security weakness at Mt. Gox to drive up the perceived bitcoin exchange rate. As a result, people who had bought bitcoin at low prices could then take big gains by selling them, Moore and his co-authors speculate.
But other theories would implicate the operators of Mt. Gox themselves. At the time, some observers suspected that the questionable trades may have been an attempt to cover up a major bitcoin heist from Mt. Gox in 2011. The false trades might have been intended to inflate trading volume to simulate investor confidence, and prevent the exchange from imploding, the researchers theorize.
According to the academic study, the list of irregularities that somehow escaped the notice of Mt. Gox operators included:
—Unpaid transaction fees they themselves should have received from the suspicious traders
—Duplicate trading records that were later doctored to change the price paid for bitcoin
—One-sided transaction records
—Periods when Mt. Gox trading was offline, but the suspicious trading continued
One trading account, dubbed Markus for want of a real-world identity, was credited with acquiring a total of 335,898 bitcoin, then valued at $76 million, although no real Mt. Gox customer ever received dollars or other government-backed currency in payment.
Another set of 49 counts, attributed to an entity called Willy, who traded with legitimate Mt. Gox customers, acquired $112 million worth of bitcoin, but also never paid for it. The sellers’ accounts were “nominally” credited with the payments in conventional currency on the Mt. Gox books, but as it turns out, that didn’t mean they would later be able to withdraw it.
The legitimate customers might have had no immediate suspicion that anything was wrong, the researchers say. Customers often left their balances in bitcoin and dollars with Mt. Gox, because such exchanges operated something like a bank. However, as Mt. Gox tumbled toward insolvency, it allegedly stalled off customers who wanted to withdraw their dollars, according to the academic study. The net effect of Willy’s trades may have been to convert Mt. Gox’s losses in the bitcoin theft to a loss of dollars or other government-backed currency, thus depleting the reserves it needed for customer withdrawals, Moore and his co-authors say.
That theory foreshadows the current fears about the Bitfinex exchange—that digital coin purchases can become one-way transactions. Buyers’ gains on paper may never be redeemed in dollars.
The aftermath of Mt. Gox
Users of the Mt. Gox exchange were among the first to discover how difficult it might be to recover their losses from a failed cryptocurrency exchange.
The fate of the Mt. Gox creditors is still being disputed in a bankruptcy court in Japan, where the laws may have the ironic consequence of allowing Mt. Gox alone to profit from the upsurge in bitcoin value since 2014, Fortune reported in December.
Mt. Gox has apparently
