In your example there is a huge player who has a buy limit order below $5 and a sell limit order above $5. In this example the investor would lose money in an effort to dampen volatility. An imbalance between the number of selling orders and buy order executions would result in losses. Running an imbalance over time almost a given. To prevent this from ruining his ability to make a profit he needs to be able to see beyond the order book. He needs inside information.
Nonesense, all he needs is enough funds to be able to buy out the entire market, which would be exceedingly easy to do for any billionare willing to do it. If the bot is set up to buy (with resources at least as large as the whole market, which is effectively limitless for this tiny market) at $4.90 with a delay of several hours, he can accumulate bitcoins for $4.90 or sometimes less without dramaticly affecting the volume adjusted price. By selling at $5.10 (again, with a delay) he sells them at $5.10 or more. The delay exists to 1) let smaller players soak up the price movements in order to stretch out his funds and 2) to obscure the presence of a "wall". The only way for said player to lose money in the near term is if 1) everything goes sour in a hurry and he ends up buying all the bitcoins in existance at that price level (as in a major security hole is found in the protocol that cant be fixed, unlikley at this point) so that volume goes to zero because he already has them all and there are no buyers or 2) the price movement that wants to trend lower overwhelms his funds. If the top end of the bot is ever overwhelmed then the investor
still makes money in the process of defending the top end of his target trading range. Not as much as he could have if he let the top end seek it's market price, granted, but he can't lose money by buying at $4.90 and selling at $5.10 even if he doesn't have the resources to defend the peg. Perhaps the top and bottom aren't rigid price points, but percentages. There are major market makers in the commodities markets that do things on the stock market this way to prevent (or profit from) 'buy the rumor, sell the news' type panic movements. The goal of such a bot isn't primarily to profit from price movements, although it generally does except in extreme conditions. It's primary goal is to suppress voltility
for a time to permit the market to mature as well as develop a 'safe' reputation; and the profit taking occurs in the long run. It's speculation taken to a long view.
If a big player wants enter this market a better strategy is simply accumulating bitcoins with small buys over time. Market trading is too thin to do otherwise. Moving the market that much would be risky.
That is functionally what the bot does. Perhaps the bot is set up to set aside 5% of the coins it buys on dips, so tht if the high end of the bot is ever overwhelmed (selling 95% of all teh coins it's accumulted) then the bot owner still has the las 5% to take full profits from once the market price has found it's new home. Set the bot up again with a new trading range, rinse repeat. Again, the only way the investor stands to lose under this scenario is after the
whole bitcoin market grows bigger than he is. Any investor knows how big he wants to be, few are going to get caught off guard in this sense.
Better than accumulation on exchange whose purpose is price discovery would be over the counter buying at wholesale prices. There's a substantial over the counter market. Even if he got a large amount of bitcoins selling at 5x would be difficult due to fact that the market depth is so thin. He wouldn't have to sell much before exhausting demand, dropping price, and reducing the value of his remaining holdings. He would want to wait until the size of the market had increased to the point that unloading would not cause a big splash.
This is true, and exactly what I said the long term goal would have to be. Did you bother to read it?
Hidden orders wouldn't help much. They are not that well hidden. Traders can test the waters with market order. They'll notice if an order fills at a price that isn't listed.
Bitcoin is risky regardless of trading strategy. For a big player it comes down to a buy and hold proposition, a highly risky one.
So?
Big players know market manipulation when they see it. They are not going to get in this market while schemes are in place. That may be accounting for the weak volume on Mt. Gox. Big players know trading on this exchange is worse than trading on the stock market of a third world country. The lack of credibility is very damaging and is retarding growth.
It only takes one big market maker to do the job. If others come along later a see that some bigwig has already set up his system, maybe they do look for another market, but so what? Again, this is a long view speculation, the speculation being that the bigwig is
betting on the long term success of bitcoin. Isn't that what we all are doing? The suppression of voltility imply mimics a larger & mroe mature currency market, which is what small businesses want to see before diving in. By encouraging these small businesses to dive in, the invetor
wills his prediction to become reality as the market really does mature under his watch and voltility really does stableize just as the bigwig is ready to withdraw his deliberate support and start to take his profits. Notice it's not in his best interest to take
all his prifits in any particular time frame.
One thing that we know from is history is that every market that has been created has had to deal with manipulation and insider trading. Somebody is always going to find a way to rig the market somehow. But then at some point they get busted and then we figure out how to prevent people from doing that again. It would be nice if we could catch these people and expose them now so we could move ahead.
We actually don't want that.