Could the price drop between July and September 2011 have been caused by a bot?

Question

In July 2011, 1 BTC was trading at above $10 USD. By September, the price of 1 BTC had fallen over 50%, and at the time of writing (October 2011) 1 BTC is trading around $2.50 - $3.00 USD.

In a forum thread one of the pool operators for bitcoinpool claims this is due to some bot forcing the prices down:

Fairuser detected a buy/sell bot on the better portion of exchanges (currently, only Bitmarket (EUR) seems unaffected) that is consistently keeping the value of BTC low while it's generating tens of thousands of dollars worth of transactions across the exchanges at a profit of 2 - 40 cents per transaction. We're still unsure if it's intentionally dropping the price, or if it's just a side-effect of the way the bot is designed.

Either way, the bot is entirely responsible for the price drop from $10 USD to $5 USD.

Is there any evidence of such a phenomenon, and if so, what could be done to stop it?

Answer 1

Since the bot exists, and the people who wrote it presumably wish it to perform every transaction it performs, it reflects real supply and real demand. Why would you want to stop it? There is nothing inherently good about a high price.

Personally, I think the drop in value was due to the bursting of a speculative bubble. The price was previously kept high due to press attention that made people think Bitcoins might be a good investment. As soon as everyone who was going to be brought in by the hype was brought in, the demand started to drop. This caused a small price slide, which induced a lot of panic selling from people who thought the speculative rise would continue forever. Once the price starts dropping at the end of such a bubble, more and more people try to sell out to minimize their losses. Once everyone who expected a short-term profit sells out, the price stabilizes.

We're now back at that relatively stable floor, waiting for the next hype cycle to start another speculative bubble. Until Bitcoin's price is driven by its use as a real medium of exchange, this pattern is likely to repeat over and over.

Answer 2

I've heard this mentioned so many times by so many different people- but the only real cause is supply and demand. If a "bot", or "manipulator", or whoever you want to call it, was selling off so many coins that it has the effect of lowering the price... then there is not enough demand to satisfy the supply, and so the price drops.

Answer 3

A bot can hardly cause a noticable long-term price decrease. To do this, it would have to use an algorithm. The algorithm has to operate along the goal of the bot. Normally, the goal will be maximum profit. If the bot tries to bring the price down, it has to buy high and to sell low; this does cost money. Worse, if someone else suspects a but doing this, he could write a bot which buys low and sells high, making a lot of profit. The net effect would be that a hughe amount of money is transferred from the owner of the first bot to the owner of the second bot.

This isn't to say that prices cannot be influenced or even manipulated. But this has a lot to do with psychology, and apart from that this works only at specific times, bots are not good at this.

Answer 4

A bot has one advantage over humans: speed. Other than that, it is not that different from a human.

That said, it is not very relevant whether a bot or human sold coins at a low price. Someone accepts selling this low, thus the price is this low.

The decline of the price was a classic economic bubble. The process started in May at the latest, from there up until October the market was dominated by the dynamics of inexperienced masses speculating wildly. If you want to understand why things happened the way they did, read on economic bubbles.

Answer 5

If there is a bot running a lot of transactions on the system, one could find it out by analysing all the transactions and looking for some emerging patterns. This, however, is very difficult. One interesting example I can think of that is related to that is a TED talk about the stock exchange (I recommend seeing it).

A sure way to stop that would be to disable bot operations on the exchanges, but that might do more damage than the bot. Alternatively, one could make a second bot to counter the first one and hopefully bankrupt it, but that would also be bad. Probably the best thing one can do is not trade on websites that are botted and organically shift the business to exchanges that are not facilitating automatic transactions. But as that isn't too likely to happen, things will probably stay this way.

As it was mentioned in the other answer - having a bot on the exchange is not a bad thing in itself.

Answer 6

I think the single biggest event that triggered the downward spiral of the price was the theft of all coins from MyBitcoin.com. Whether it was "Hackers" that took the coins or the site operator himself is as yet unknown, but they were certainly stolen.

MyBitcoin attempted to solve the two main issues of Bitcoin in its current form:

1 - You need to be logged on to the computer containing your wallet if you want to spend your coins

2 - The time taken for a transaction to "confirm" is much too slow for most types of internet transaction.

MyBitcoin represented a real hope of solving both issues by offering users an online "E-Wallet", coins from which could be transferred instantly to other MyBitcoin users.

When the site was taken down it had just under 500'000 Bitcoins in its vaults, more than 5% of all the bitcoins in the world, which at the time was worth around $5m. The thieves got away with the single biggest online theft in history.

This had two effects:

1 - Many users lost all confidence in the Bitcoin project. If a site so big and seemingly officail as MyBitcoin could be taken down, what hope is there for anyone?

2 - The theives had to sell the coins they stole, selling quickly for well under market value and setting off a domino effect which led to a big a price drop.

Personally, I don't think Bitcoin will ever be worth more than $5 again, even $4 seems a bit too much to hope for. With many alternative cryptocoins available with better security, more features and stronger support from developers than Bitcoin, it seems like it has no real future.

Bitcoin will be remembered as the coin that started it all, but another coin will surely take its place soon.