Spoofy

Spoofy is a mysterious trader who's allegedly involved in manipulating cryptocurrency exchanges. Spoofy is named after spoofing, a strategy considered illegal in equity exchanges.

Buying and selling a cryptocurrency has some of the hallmarks of trading official currencies, such as the U.S. dollar, Japanese yen, and the euro. Trading platforms use a quotation and pricing structure in which the price of a cryptocurrency is listed as a comparison to another currency, such as the U.S. dollar. This is called a currency pair.

Platforms also show market capitalization, the day’s high and low price quotes, and the supply. Unlike trading a non-digital currency, however, the market for cryptocurrencies is not nearly as liquid, and trades may not be executed as quickly. This can create volatility, and can make the market for cryptocurrencies ripe for manipulation. (See also: Bot Activity Plays Major Role in Cryptocurrency Price Swings.)

Individuals who own a large number of bitcoin, ether, or other virtual currencies are referred to as “whales.” This is because they can have an outsized impact on how cryptocurrencies are priced. Whales may favor particular exchanges, often because they understand the underlying mechanics better than smaller investors, and are in a better position to exploit weaknesses in how orders are processed.

In 2017, a trader (or group of traders) was suspected of manipulating prices on the Bitfinex trading platform. The name “Spoofy” was assigned to this unknown trader based on one of his go-to strategies: spoofing. Spoofing is a form of market manipulation in which a trader places one or more highly-visible orders, but has no intention of keeping them (the orders are not considered bona fide). While the trader’s spoof order is still active (or soon after it is canceled), a second order is placed of the opposite type.

For example, an investor places a large buy order, only to cancel it and place a sell order. The buy order drives up the price of the cryptocurrency, while the sell order takes advantage of the higher price. The spoof buy order allowed the trader to execute the sell trade at a better price than if the spoof buy order had not been placed. For Spoofy, this strategy works because the trader can place large buy and sell orders – typically for bitcoins worth millions of dollars.

It has also been suggested that Spoofy has been involved with wash trading. This involves making offsetting trades, which gives other traders the impression that a market is worth getting into. Once traders are drawn into the market, Spoofy may then go back to spoof trading. (See also: What's the Difference Between Wash Trading and Insider Trading?)

Equity markets consider spoofing and wash trades to be illegal. Cryptocurrency trading, however, is not regulated by organizations such as the Securities and Exchange Commission (SEC), so it is more susceptible to this type of trading strategy, and provides fewer options for recourse.

Spoofy specifically focused on the Bitfinex platform because it was an exchange where he was able to place larger trades than any other investors. It was, in short, an exchange where Spoofy would be the largest whale. While other traders could try to counter Spoofy’s trades, this would require a large number of bitcoins. Depositing thousands of bitcoins in a single exchange is very risky, as the exchange could fail and leave the trader without access to a digital wallet.