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Bitcoin bot malfunctions at BTC-e, insanity ensues

A chart from BTC-e showing the volume spike on the BTC/USD trading implement on Aug. 31, 2014.
A chart from BTC-e showing the volume spike on the BTC/USD trading implement on Aug. 31, 2014.Own work

On Aug. 31 at around 2:00 a.m. EDT, the Bitcoin exchange rate began to drop. Shortly after this, at least one trading bot at BTC-e started behaving erratically, seemingly caught in a loop of buying and selling to itself or other trading bots. The details are not yet known, but the activity caused the exchange rate to drop from a local maximum of $500 down to $472 over the next 12 hours.

To illustrate the difference that the bot or bots have made, BitcoinWisdom shows that the 24-hour trade volume on the BTC/USD implement was 41,191 Bitcoins, while the total for the past week was 54,875 Bitcoins. The average for the other six days is therefore 2,281 Bitcoins, meaning that the bot activity spiked trading volume by 1,706 percent above its expected value. By comparison, the Sunday trading volume was 16,736 Bitcoins on Bitfinex and 12,245 Bitcoins on Bitstamp.

Bots have been blamed for price manipulations in the past, such as the peak exchange rate of over $1,200 per Bitcoin that occurred at the now-defunct Mt. Gox in December 2013 and the “flash crash” at BTC-e on Aug. 18. But as BTC-e gets its revenue by collecting commissions on trades (0.2 percent per trade on the BTC/USD implement), they have little incentive to solve any problem that leads to higher trading volume. This episode alone allowed the exchange owners to make a profit of about 78 Bitcoins (about $37,000 as of this writing).

As a result of the activity, the exchange rate at Bitstamp dropped from $504.49 to $473.33, the exchange rate at Bitfinex dropped from $520.27 to $471.65, and the exchange rate at Huobi dropped from the equivalent of $503.05 to the equivalent of $473.21.