The tone of any financial market is determined by the so-called forces of supply and demand. There must be buyers and sellers. This dynamic, in a paper, can force prices up or cause an asset’s price to dump.
The beauty of the financial market is that prices can either move up or down. It would be a tad bit complicated if there was a third or a fourth dimension. And because of this binary nature of markets, emerging asset classes have not been spared the sword of market manipulators.
In fact, it is easy to spell out those two words, “market manipulation”. Most players, especially in the cryptocurrency market, know that the field is not level.
There are elements who want more for themselves and nothing but red profit and loss for others, especially retail traders. Thing is, market manipulation of any form is illegal—until it comes to the cryptocurrency market. Unlike traditional markets like S&P 500 or the DJ 30, there is insufficient regulation in the crypto scene.
This loophole allows them to deploy whatever tactic they may want knowing very well that they might not face the full force of the law. It is a stain that any emerging and developing asset class must contend with before steadying and strengthening their legs.
What is Cryptocurrency Market Manipulation?
So, getting right into the mix, what the heck is “market manipulation”? Investopedia defines it as “the act of artificially inflating or deflating the price of a security or otherwise influencing the behavior of the market for personal gain.” It couldn’t be far from the truth.
Market manipulation is being selfish, plain, and simple. The goal is to artificially inflate or dump the price of an asset, in this case, a cryptocurrency, for the sake of one’s gains.
However, sometimes, it should also be stated, the goal of a market manipulator is to influence the market behavior, not necessarily the price. This, therefore, means, for a market trader, the state of affairs isn’t as it seems. The market, to them, is an illusion.
Why Cryptocurrency Market Manipulation is Bad
Since crypto regulations are being developed, there might be avenues for nefarious agents to manipulate the market.
If the markets are meant to be efficient and there are players who want to change everything in their favor, could this portend trouble to every other shareholder? Absolutely. For example, in 2018, the U.S. Department of Justice (DoJ) carried out an investigation to determine whether Bitcoin prices were being manipulated.
The results were damning. Not only did they confirm that Bitcoin prices had fallen into the hands of manipulators but also that most exchanges were actively manipulating prices. With this data in their hands, it took another three years for a complex derivative product in an exchange-traded fund (ETF) to be approved. The U.S. eventually approved a Bitcoin Futures ETF. Note, this product tracks the value of a Bitcoin derivative, the Bitcoin Futures—which in turn aggregates its index from the spot rates of Bitcoin from leading, manipulation-free exchanges like Coinbase and others mostly within the U.S.
Top 5 Cryptocurrency Market Manipulation Tactics
The cryptocurrency market is not efficient and so are all other financial markets. If it was, there would be no opportunities to arbitrage and trade. However, crypto markets can be easily manipulated because they are relatively illiquid and policymakers are slow to catch up with the rapid pace of innovation. Therefore, to avoid being a sitting duck and duck all market manipulator’s tactics, take note of the following tactics:
Of all manipulation tactics, this is the most pervasive. However, let’s remind ourselves that not all assets can be easily pumped or dumped.
Artists behind pump and dump schemes choose their assets well. Qualifying cryptocurrencies are those outside the top 100 in the market cap leaderboard. These coins have support in various cryptocurrency exchanges and second, their liquidity is decent. As a result, through a coordinated effort via Telegram, Discord, Reddit, and other forums, they decide to either pump a coin before dumping it when they have accumulated a decent profit.
Those who coordinate might get out sooner when the asset’s liquidity is high and slippage low. However, this manipulation style does hurt people who are late to the pump or dump because they won’t easily liquidate the asset without having to worry about unrealistic slippages.
To catch a pump or dump scheme, a trader should often watch the volumes indicator. Typically, a coin will dump or pump based on underlying fundamental reasons. In a pump and dump scheme, however, prices exponentially rise or fall in a few exchanges without a concrete reason. To avoid being snared by this tactic, a trader should stay away from assets whose prices are tearing without solid fundamentals.
Whale Wall Spoofing
Walls are large block limit orders placed on an exchange with the intention of “spoofing” the market. The goal of the manipulator is to trick market participation that there is a big supply or demand at a given level.
The problem is, the whale trader intends not to execute the trade and pulls out the limit order. Meanwhile, gullible traders who had pointed out a block sell or buy order would sell or buy only for the price to explode the other way. Often, the idea of a whale buy wall is to shift the sentiment of traders that prices would rise.
Meanwhile, in the background, the tracer usually liquidates their assets at better prices before the trend moves in the opposite direction in a dump. The same can be seen in whale sell walls which spoof weak hands to liquidate, allowing whales to double down at better prices.
Traders should not fall for these tactics because whales often trade in Over-the-Counter (OTC) where swapping occurs at predetermined price levels. Block orders are extremely rare in centralized crypto exchanges. Therefore, when thousands or millions of coins appear to be sold or bought, traders should take precautions lest they be spoofed.
Wash trading is a manipulation tactic employed by shady exchanges. Their goal is to create an illusion of trading activity by repeatedly and concurrently buying and selling an asset.
Wash trading creates fake volumes and is illegal in regulated markets. Using fake volumes, shady exchanges can paint a picture of activity, hooking in new traders. At the same time, traders can fall for fake volumes when trading. Since volumes translate to liquidity, fake activity can be detrimental to their baseline.
To counter wash trading, a trader should first look to avoid shady, periphery cryptocurrency exchanges. Always register with established exchanges that are registered in the U.S., Europe, Japan, and other established economies.
Also, active traders should regularly scan their broker’s order book for symmetry of buy and sell order sizes and other key attributes.
Stop Loss Hunting
Sketchy cryptocurrency exchanges who practice wash trading also actively “hunt” for stop losses placed by retail traders. Often, given the human nature of cryptocurrency traders, they tend to lump stop or take profit levels at key technical levels, around psychological levels like $50k, $10, $100, $30, and so forth.
Manipulators will therefore activate bulk buy or sell orders to trigger stop losses before initiating long or short orders at favorable prices.
FOMO and FUD
Fear of Missing Out (FOMO) rides on trader greed while Fear, uncertainty, and Doubt (FUD) is a trader rushing for the exits in fear of being crashed. They are bullish and bearish sentiments, respectively, that can be used to manipulate asset prices or market behavior.
Thing is, there is a lot of garbage in crypto. These can be churned out by gutter crypto news outlets, influencers with a vested interest, and many other unverified sources which can move the market in either direction.
FOMO can be due to positive verified news mostly on the fundamental fronts. Things like exchange listing, high profile partnerships, the release of new products can pump a coin’s price.
Meanwhile, regulation fears like the recent blanket crypto mining ban in China can force a coin down. For altcoins, the best way to prevent being decimated is to do your own research, not just latching on a FOMO or FUD which might as well be pump and dump schemes.
The Crypto Future is Bright
Cryptocurrencies, like every other asset class, present all parties with opportunities. Still, applicable regulations are not mature enough considering how fragmented the space is.
There are strides being made. Before crypto becomes mainstream and strong laws are formulated, the space’s players are self-regulating to protect retail traders. This, and arming oneself with the above top 5 cryptocurrency market manipulation tactics, are tools to make cryptocurrency trading safe for all traders irrespective of experience.
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