Writing on Medium this Tuesday, the Co-Founder of Zurcoin, Daniel Mark Harrison, claimed that most cryptocurrency exchanges are manipulating the price of cryptocurrencies.
In his post, Harrison said that a distinction needs to be made between cryptocurrencies, which are decentralized and whose supply cannot be tampered with, and virtual currencies, which are centralized and whose supply can be manipulated. The supply point is significant because a currencies value is in large part dependent on its supply.
Exchanges, the Zurcoin Co-Founder says, are taking deposits in cryptocurrencies and giving out virtual currencies. Essentially, an exchange user may look at their account and see that they have BTC 1, but it is just a number on a screen as opposed to being a ‘real’ bitcoin.
If this sounds familiar, that’s because it resembles, almost exactly, a fractional reserve banking system. Knowing that all of their customers are not going to be withdrawing their cash at once, banks only hold a fraction of their deposits in actual cash, loaning out the rest in order to make money.
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Zurcoin Co-Founder: Volumes Should not go up as prices go down
Though he does not put it in those precise terms, Harrison claims that cryptocurrency exchanges are doing the same thing. The difference is that exchanges, unlike banks, are not loaning out their cryptocurrency holdings.
Instead, it seems that their owners may simply be taking deposits, converting them into fiat currency and withdrawing the cash to their own bank accounts.
In order to ensure that their customers can withdraw their holdings, Harrison claims, exchanges have to engage in a form of market manipulation, with trading volumes increasing as the price of cryptocurrencies declines.
According to Harrison, it can only be the result of price manipulation that this scenario, of increasing volumes and decreasing prices can occur. Exchanges, he says, are driving prices down in order to remove the incentive for customers to withdraw their funds.
Whether or not the Zurcoin Co-Founder is correct remains to be seen but, as there is little to no regulation governing them, it is unlikely exchanges are going to be revealing their exact business models any time soon.