Shady Market Makers Caught Wash-Trading a Token Created by the Feds

The streak of established crypto companies turning frauds continues with Gotbit’s recent lawsuit for alleged market manipulation and wash trading.

The company, holding over $1.5 billion assets under management right before the start of the prosecution, faces a fine of up to $5 million or twice the gross gain or loss from the offence and forfeiture. The CEO, who was also charged, faces a sentence of up to 20 years in prison.

In this article, we’ll give you all the information that we know as of October 10, as well as some thoughts on what will happen with the crypto market after the conviction. Enjoy!

Market Manipulation Masked as Market Making

US federal prosecutors charged four market-making firms - Gotbit, CLS Global, MyTrade, and ZM Quant - along with several crypto projects and individuals. They are accused of wash-trading cryptocurrencies and artificially inflating their prices.

Wash trading involves creating false activity in a token by repeatedly buying and selling it to inflate its value. This makes the token appear more legitimate and active than it is.

These manipulated tokens were then sold at artificially inflated prices to unsuspecting buyers. The firms also marketed the tokens and convinced exchanges to lower fees for them, further boosting their profits.

Gotbit is the biggest company on this list. The market maker worked with established brands like Bonk, Hamster Kombat and Robo Inu. At its peak, the company reached $1.5 billion in assets under management and almost $200 million in investments made through Gotbit Ventures.

In 2019, the twenty-year-old CEO of Gotbit, Alexey Andryunin, spoke to CoinDesk about his practices. He then said that Gotbit was not registered in any jurisdiction because it was “not entirely ethical.” Separate criminal charges have been filed against Andryunin.

In 2023, ZachXTB cracked Andryunin’s operation with the help of some leaked documents and a pitch deck that stated: “During the first minutes in the price discovery stage, we are going to push the price up to 10x to create FOMO and accumulate as much buying power as we can to reach extreme Xs and sell maximum tokens on the subsequent spike”

At the time, according to DoJ’s accusations, Gotbit and the other three firms generated quadrillions of transactions and billions of dollars of fake trades for various projects.

How Did the Feds Crack This Operation?

The DOJ’s investigation started over two years ago. After gathering enough evidence about the companies, the FBI launched an Ethereum-based cryptocurrency called NextFundAI, in collaboration with cooperating witnesses.

This fake token was designed to lure the market manipulators into illegal trading activities. ZM Quant, CLS Global, and MyTrade, three of the companies under investigation, agreed to manipulate the price and trading activity of the token.

What Projects Are Tied to Gotbit?

Now, let’s see what companies used Gotbit’s “market-making” services and got caught by the DoJ.

Saitama

Saitama was a cryptocurrency company founded in Massachusetts in August 2021.

The company reached a peak market value of $7.5 billion, claiming to offer various products tied to its token. However, Saitama’s leadership allegedly engaged in market manipulation, secretly selling tokens for tens of millions in profits while making false public statements.

Saitama's leadership manipulated the market by coordinating small token purchases across multiple wallets, creating the illusion of increasing demand.

They allegedly paid market makers, including ZM Quant and Gotbit, to wash trade Saitama tokens on exchanges like BitMart, LBank, and XT.com. The leadership’s actions were discussed in private Telegram messages, aiming to deceive investors into buying more tokens.

Robo Inu

Robo Inu was a cryptocurrency company and token created by Vy Pham after she left Saitama in 2021. Pham promoted Robo Inu from the U.S. and has since been charged, agreeing to plead guilty to conspiracy to commit market manipulation, wire fraud, and operating an unlicensed money-transmitting business.

Like Saitama, Robo Inu claimed to develop products tied to its cryptocurrency. However, starting in 2022, Robo Inu allegedly engaged in market manipulation by paying Gotbit to artificially inflate its token's trading volume. These wash trades were executed on exchanges like BitMart, misleading investors about the token’s popularity and activity.

Lillian Finance

Lillian Finance was a cryptocurrency company and token founded by Bradley Beatty, 48, from Florida. Beatty has been charged with wire fraud in connection with the company. Lillian Finance claimed to use blockchain technology for healthcare solutions and promised to donate a portion of its token sale proceeds to charity.

However, Beatty allegedly made false statements to attract investors, including claims that he was a defence contractor and had addressed Congress on cryptocurrency matters.

It is further alleged that Beatty misappropriated a portion of the company's profits, which were supposed to go toward charitable causes, for personal gain.

What Will Happen Next?

If Gotbit and the rest of the market manipulators are found guilty, the market will get hurt in the short run. The volumes on CEXs will fall, especially for memecoins listed on tier 2 and tier 3 CEXs, leading to big differences in prices.

As Gotbit specialises in memecoins, we shouldn’t wait for another $1 billion market cap meme coin anytime soon. There won’t be a memecoin season either, the volumes will drop and the retail will understand what’s what.

The prosecutors and the mainstream media will, once again, paint cryptocurrency as the Wild West and the most evil thing there can be. Wait for articles on CNBC and Wall Street Journal saying that cryptocurrency is overrated and the market caps, as well as the trading volumes, are inflated by entities like Gotbit.

What about the prices and the narratives?Following the exposure of market manipulation, there is likely to be an initial reaction of FUD in the crypto market. Retail traders, driven by panic, may sell off their assets, causing a temporary price dip. However, markets often react differently than expected when fear dominates the headlines.

Historically, moments of extreme FUD can signal market bottoms. As retail traders sell, more experienced investors may step in to buy at lower prices, potentially igniting a short-term rally. Despite the initial panic, the crypto market has shown resilience to negative news in the past.

The exposure of fraudulent activities, like Gotbit's manipulation, may eventually lead to a healthier, more transparent trading environment. This way, the FBI made some space for the legit companies that are building something, not sucking the liquidity out of the market and spending it on yachts.

Conclusion

In conclusion, while exposure to market manipulation may initially trigger panic and selling, the crypto market has shown resilience to this type of event in the past. Retail traders may react emotionally, but experienced investors often use these dips as buying opportunities.