Understanding crypto and its role in finance.
What is cryptocurrency?
Recently, it has been hard to circumvent the hype of cryptocurrency; digital currencies are becoming more popular as we move on into the future of the digital age. Most cryptocurrencies are essentially peer-to-peer electronic cash systems that use blockchain technology to record the transactions that flow through the networks.
In this article, we investigate cryptocurrency price manipulation, specifically the most prevalent digital currencies and some altcoins that have recently been publicised by numerous celebrities, which fundamentally impacted the market prices for the better. We will also discuss blockchain decentralisation, and how these cryptocurrencies differ from fiat currencies.
Price manipulation
Before discussing price manipulation in the world of cryptocurrency, a brief understanding of the event that shaped it is needed. Named the “GameStop short squeeze”, in January 2021, a group of Redditors shorted the GameStop Corp stock and other securities leading to mass inflation of the stocks [1], it led to a lot of controversy in the stock market with investigations and lawsuits being launched [2].
The event gained a lot of publicity, leading to it trending across most media outlets. Investors from cryptocurrency communities on Reddit had similar ideas, with the main target being Dogecoin, an asset that was created in December 2013 by two individual engineers as a joke and gained little traction for years after its initial launch [3]. Moving forward into late January 2021, subreddits built around cryptocurrency known as “r/CryptoCurrency” and “r/SatoshiStreetBets” used dogecoin as the “Crypto version” of the stock market event. Robert Hart’s article on Forbes stated “At the time of writing, Dogecoin is up 56% over the last 24 hours and experienced a 1,421% increase in trading volume according to crypto data firm CoinMarketCap.” [4]. It is clear the price was dramatically inflated, Figure 1 [5] gives a visual representation of the Dogecoin market price from 2020 to 2021 and you can see the dramatic spike from this event.
Figure 1 - Dogecoin price chart 26/02/2020-26/02/2021 [5].
The Redditors managed to increase the asset’s price by over 800% [5] in 24 hours with partial encouragement from Elon Musk and the GameStop short squeeze. Comparable to the previous stock market event, the rise led to commotion across social media. February followed up with a flurry of tweets from Elon Musk, Snoop Dogg, and Gene Simmons, which led to Dogecoin hitting its all-time high price of £0.06 [5]. From these events, it is evident that celebrities and online communities with large followings can manipulate market prices with great success when executed correctly.
Cryptocurrency Decentralisation
With cryptocurrency becoming more prominent in modern society, conventional financial institutions are facing a new form of competition, one that is not controlled by an individual entity [6]. That competition is cryptocurrencies, most of them run on blockchain technology, which does not require administrative control like the systems that conventional banks use. This means that everyone who owns a wallet has their transactions saved in their own distributed ledger [7], so all transactions are logged and can be accessed by anyone, decentralising the transaction. Due to the decentralisation, it means that tracing the origin of a blockchain transaction is extremely difficult, therefore, it attracts cybercriminals and is commonplace for illegal activities such as money laundering.
On the other hand, financial institutions like banks monitor transactions using their own centralised system, so they manage all customer transactions. This has been the most popular system for years; it allows for all transactions that run through it to have a distinguishable log. There has been a lot of controversy around the world regarding the legitimacy of cryptocurrency because, as previously mentioned, it is common territory for criminals, which has led to regulation of the currencies in some countries. This is displayed in Figure 2 [8].
Figure 2 - Regulation of cryptocurrency around the world [8].
So blockchain is great for the average consumer as it allows them to have the ability of full control of their money but is only seen as a negative by some governmental bodies due to the criminal side.
Conclusion
Society has formed a lot of different perspectives on cryptocurrency. Some look at it as the future, but many still look at it as a scam based on misinformation. The market price of the digital currencies can be manipulated similarly to how the stock market can [5], so the stability is not comparable to conventional banking. We can also conclude that because most cryptocurrencies use blockchain technology, the transactions are decentralised, which allows users to manage their own money without administration from financial institutions. This could become a main benefit to consumers due to the preference of being in control of your assets, so the decentralisation could essentially fuel the future of digital currencies.
References
[1] J. Cramer, "The GameStop Short Squeeze Explained: 10 Questions and Answers," The Best Interest, 31 January 2021. [Online]. Available: https://bestinterest.blog/gamestop-short-squeeze. [Accessed 11 March 2021].
[2] M. Leonhardt, "Robinhood now faces roughly 90 lawsuits after GameStop trading halt—here’s how customers might actually get their day in court," CNBC, 17 February 2021. [Online]. Available: https://www.cnbc.com/2021/02/17/robinhood-faces-lawsuits-after-gamestop-trading-halt.html. [Accessed 11 March 2021].
[3] "Dogecoin," coindesk, 11 March 2021. [Online]. Available: https://www.coindesk.com/crypto/dogecoin. [Accessed 11 March 2021].
[4] R. Hart, "‘It’s Doge Time’: Dogecoin Surges As Reddit Traders Push To Make It The Crypto GameStop," Forbes, 1 February 2021. [Online]. Available: https://www.forbes.com/sites/roberthart/2021/01/28/its-doge-time-dogecoin-surges-as-reddit-traders-push-to-make-it-the-crypto-gamestop/?sh=252f2cf3217e. [Accessed 7 March 2021].
[5] "Dogecoin," coindesk, 11 March 2021. [Online]. Available: https://www.coindesk.com/price/dogecoin. [Accessed 11 March 2021].
[6] R. Kher, S. Terjesen and C. Liu, "Blockchain, Bitcoin, and ICOs: a review and research agenda," Small Business Economics, vol. 54, no. 1, p. 1, 2020.
[7] M. Iansiti and K. R. Lakhani, "The Truth About Blockchain," Harvard Business Review, vol. 2017, no. January-Febuary, pp. 118-127, 2017.
[8] Library of Congress, "Regulation of Cryptocurrency," Library of Congress, Washington, 2018.
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