Understanding Market Manipulation In Cryptocurrency Part-1
What is Market Manipulation?
It is a way to influence a crypto asset’s performance/ price behavior in a market. In most cases, it involves an individual or a group aiming to build a false illusion in the market, in exchange for profits. A perfect example would be the pump and dump scheme, wherein a person/group pumps a crypto asset by backing it up with fake news and PR, which takes the coin to the peak, resulting in profits. Unfortunately, the crypto market is still in the nascent stage and growing, which means foul players are still finding ways to exploit the lack of proper laws and regulations. It’s not easy to spot a manipulation because it’s hard to determine whether the news surrounding that particular coin is legitimate or not.
The Five Most Common Market Manipulation Strategies
- Pump and Dump
This method tops the list when it comes to manipulating the market. It typically involves a group of people joining hands to artificially increase a coin’s value. This technique is ideal for coins with a low-market cap that is available on limited exchanges. One of the group members will purchase a coin during its infancy and sell it off once there is enough traction from other traders and investors. Social media platforms like Reddit, Telegram, Discord, and Twitter have made pumps and dumps become more accessible in recent years. In most pump and dump situations, the perpetrators profit while the majority of the participants lose their money.
- Whale Wall Spoofing
This technique was often seen in earlier Bitcoin cycles, which means it has become less prevalent than before but can still be seen on some low-quality exchanges. It is a tactic in which the scammer will place a huge set of orders with zero intention of ever having them executed. Hence the name ‘spoofing. The logic behind this is to create the illusion of massive demand or supply in the crypto market. For instance, if they want to establish a bearish environment and plummet a coin’s value, the whale will set large sell orders to create an environment of panic and mayhem, which eventually results in influencing the traders to sell off their assets. Once traders sell off their assets, the perpetrator removes their sell orders and proceeds to buy more of the same asset at a much cheaper price.
- Wash Trading
This tactic is a close variant of the whale wall technique and is used to establish an illusion of an active market for a specific asset. It involves buying and selling the same asset at the same time by an individual or a group, projecting a false volume. The asset’s increased activity garners attention from traders, which leads to more dynamicity in price. The majority of the traders take into account the volume and liquidity of an asset before diving into it and sooner or later they discover false alarms related to liquidity when wash trading takes place.
- Stop Hunting
This is one of the most nefarious tactics deployed by the whales. With stop hunting, whales inflate a crypto coin’s value to a point where traders/investors have set stop-loss orders. The motivation for whales is to pick up the asset at a lower price once multiple participants’ hand is forced out. The majority of the traders place their stops at around the same key technical levels. Given the fact that crypto markets operate 24x7, the less aware traders discover their stops were hit and the value is back up to where they last saw it but they lost their positions.
Fear, Uncertainty, and Doubt, also known as FUD, is one of the most effective sleazy techniques to move crypto coin prices without even purchasing or selling a coin. New traders or investors become anxious when negative news hits the market surrounding a particular asset, which tricks them into running for exit doors quickly. Crypto traders avoid taking even minuscule losses and if half-truths and fake narratives are created around a specific project or asset then it can considerably impact the price of that asset.
In our next article, we’ll cover how market manipulation affects the market and how to equip yourself with the most essential strategies to tackle it.