Bitfinex – Insider Trading Allegations - Essay Example

Bitfinex Denies Insider Trading Allegations

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Phil Potter, the CSO at Bitfinex, came under a lot of pressure last Thursday, after he seemed to admit in an interview that an insider trading is going on at Bitfinex.

The interview was recorded in a podcast and later posted on online voice recording service Vocaroo.

Insider trading is the buying or selling of a security by someone who has access to material, nonpublic information about the security.

Insider trading is legal only once the material information has been made public, at which time the insider has no direct advantage over other investors. The SEC requires all insiders to report all their transactions.

Mr. Potter clarified in the interview that he was a bitcoin investor. He added that he was not involved in any trading on the Bitfinex trading platform and stated that it would be highly inappropriate.

Bitfinex defended for Mr. Potter. The firm’s VP for Business Development, Josh Rossi, and defended Potter’s trading on a Reddit post.

He explained that before Potter joined Bitfinex, he was in charge of managing a fund which dealt in crypto currencies but he stopped trading after he started work at Bitfinex.

He also stressed that the management team regularly monitored all the of company officials’ accounts. This was an action designed to create checks and balances on the members.

Josh Rossi added in the statement that all orders by Mr. Potter were limit orders. This kind of order is designed to reduce losses if the asset experiences a bear run.

As expected many comments were posted against the statement, implying that the community was not convinced.

The conflict of interest regarding Bitfinex is expected to arise, especially because of margin calls. Mr. Potter has access to all information on the Bitfinex clients as he is a senior company official.

This means he has the competitive advantage over all the other traders. Conflict of interest could also arise from stop-loss orders. These orders used by traders to protect against loss.

A manipulative trader can use insider information and distort the bitcoin price.

He could start to issue margin calls and stop-loss orders, which will allow him to gather huge quantity of coins and build a long position.

Usually, the intention of such traders is to purchase as many bitcoins as possible in minimum price. This ultimately turns him into a bitcoin whale.

Because bitcoin’s capitalization is low now, the effect of a bitcoin whale on its price can be significant. The whale tries to keep the price low at first, as it allows him to buy more coins at low cost.

This process becomes very easy with insider trading. This is because a whale’s main task is to trigger maximum stop-loss orders and entice others investors to dump their own bitcoins.

After more coins are available on the market at a lower price, the whale injects capital and increase the price.

The aim behind this pumping is to inflate the price of bitcoins to a very high amount before allowing the market to correct itself by bringing the value of bitcoins back to where it should be.

Even though Bitfinex has made it cleared that Mr. Potter is not an inside trader, there is a need to ensure transparency in crypto currency trading.

Mark P. Wetjen, a Commodity Futures Trading Commission (CFTC) commissioner informed at a New York seminar in november, that the agency was authorized to intervene against price manipulation in bitcoin markets.