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I have heard many claims that transaction volumes can be "faked" for cryptocurrencies, but I am skeptical about how this is possible. I want someone to walk me through the math describing what you need to believe in order to make money by boosting transaction volumes.

1) First, assume a constant velocity of money but a positive transaction cost t. Suppose t is relatively high. Is it possible to make money as a market manipulator? What would these profits be? Is there a point where t prevents you from making money as a manipulator?

2) Second, assume it is possible that coin velocity declines because momentum-driven speculators enter on news that prices rose due to "fake" transaction volumes from the market manipulator. What is the required velocity change as a function of the transaction cost t?

I am not sure whether I understand the math here, but I suspect that coin manipulation is possible. However, there is a point where t exceeds the possible change in coin velocity, which creates a limit to market manipulation.

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For exchanges with no fees, users colluding can sell each other coin backwards and forwards all day to manipulate prices at no cost to themselves. Or you could do it with one user but two accounts. If you are buying and selling at the same time, at the same price, the price doesn't matter.

  • Thanks, but even for exchanges with no fees if the coin in question has a high "coin market capitalization" then if your trades are a meaningful portion of the overall transaction volume (e.g., 20%+) then will they still be free? This seems difficult for an exchange to afford (I was under the impression they can make these trades free because they route transactions effectively through the blockchain to avoid excessive fees but I could be wrong). An example would be Ethereum or Bitcoin where it is difficult to imagine that trading 20%+ of exchange volume per day could still be free. – griggah Jan 25 '18 at 13:17
  • Most exchanges do not trade on chain. On chain transaction only occurs when depositing/withdrawing funds. You don't need 20% of volume to influence price. All you need to do is make people believe the price is going to keep rising/falling and others will join in. Obviously when volume is low, it is cheaper to manipulate price. I don't think there are any limits on most no fee exchanges. What you don't know of course, is if while you are trying to push price up, someone else is trying to push it down :). – bitdreemz Jan 27 '18 at 6:06
  • I'm skeptical this is true, bitdreemz. Suppose you have an island economy with 10 residents. And a GDP of 100 with 10 units of currency that are all exchanged once per year. Each unit of currency must be worth 10 to facilitate exchange given that level of GDP. Now suppose 1 resident is "evil" and does circular transactions with his wife that is effectively worth 100 GDP. Does the currency become worth more money now to the other islanders? I am hesitant to think that this is true. – griggah Feb 18 '18 at 19:48
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    If I sold you a brand new lambo for 1BTC, will that make all Lambo's worth 1BTC ? The value of all money is based on collective belief, nothing more. We like to believe our beliefs are based on facts, like "market capitalisation" and "GDP".....two of the most deceitful terms used in finance. – bitdreemz Feb 19 '18 at 22:28

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