This morning I received an important news alert – Walmart (WMT) was pairing up in a venture with Litecoin to allow WMT customers the option of paying for purchases in Litecoin. That would be very newsworthy indeed. If a huge brick and mortar retailer that is actively boosting its online presence was making a step into cryptocurrencies it would seem to validate notions about crypto’s viability. But the story was quickly quashed by WMT.  The logical assumption is that someone planted this story to give a lift to the price of Litecoin and other cryptocurrencies. If so, this story joins a long history of fake financial news that was designed to influence prices on behalf on nefarious traders.

Looking at the intraday chart of Litecoin below, it is clear that someone had the opportunity to profit handsomely from the fake story. We have included the price of bitcoin on the graph since it is a reasonable proxy for cryptocurrency sentiment as a whole.

Intraday Chart of Litecoin (white) and Bitcoin (blue), September 13, 2021

(Click on image to enlarge)

Source: Bloomberg

It is fairly easy to see from the graph exactly when the story broke and was subsequently squelched. Someone who played the ruse perfectly could have reaped a 30% round-trip profit in a matter of minutes. It would be ill-gotten gains, of course, but the incentive is obvious.

Those of us who have been involved in markets are no stranger to fake financial stories. There probably have been fake stories designed to influence prices for as long as people have gathered in a forum to trade goods.  This article details a case from the early 1800s.  One of the most notorious cases arose as the tech bubble was bursting. A fake profit warning from Emulex, a high-flyer at the time, sent shares plunging about 60%, only to have them rebound when the story was debunked. A short seller could have profited handsomely. The litany of fake financial news is so long that we can’t fully recap it here. The Securities and Exchange Commission (SEC) catches some of the wrongdoers, but many slip through the cracks. If a crime is lucrative enough, people will try to commit it, unfortunately.

As many of you know, I was an options market maker for many years, and we were acutely affected when stocks would have outsized moves – especially if there was some sort of illegal trading involved. I know first-hand how costly this can be, and spent a great deal of time helping exchanges’ regulatory divisions track down offenders. I only wish that we caught more and were fully reimbursed.

So now it is clear that cryptocurrency has joined the fray. It’s to be expected, I suppose, and certainly naïve if one thinks that there aren’t scads of self-interested folks on social media doing their best to pump and dump various cryptos. But the more interesting wrinkle is that a feature of the crypto space is that it exists in a sort of regulatory limbo. It is under-regulated compared to other financial assets because existing securities regulation doesn’t quite cover cryptos. At least not yet, if SEC Chair Gensler has his way. 

Many crypto investors and traders enjoy the paucity of regulation in their sphere of influence. If that’s the case, they’d better get used to ever more sophisticated schemes to separate them from their investments. It’s a feature, not a bug when regulation is lax.