Cryptocurrency Market Manipulation: What You Need to Know

Cryptocurrency Market Manipulation: What You Need to Know

Market manipulation is not unique to the cryptocurrency market, but it receives special attention because of its relative “newness” in finance and how it is regulated differently across the world.

Learning about this topic can help investors and traders to recognize the risks involved and manage them more effectively.

What is Market Manipulation?

What is Market Manipulation

Market manipulation in cryptocurrencies is much like manipulating any asset in any market.

It can be defined as an intentional action that artificially affects the price of an asset for personal gain.

Manipulation can cause the price of a cryptocurrency to go up or down depending on the manipulator's goals.

If the handler intends to buy more, it will aim to create a price drop. If they are already holding a large amount of the asset, they will aim to create a price increase.

Exchanges may also participate in market manipulation, including false orders or deleting orders.

Types of Market Manipulation

There are many types of manipulation, many of which are illegal. Here are some of the most common ones:

Pump & Dump

Pump & Dump is when a broker who already has a position in a cryptocurrency tries to raise the price in order to sell his position.

One way to do this is to buy a large amount of the available cryptoactive, which can create false demand and entice other investors to buy.

Another method is when an influential person or group transmits false information to convince investors that a cryptocurrency is more valuable than it actually is to inflate the price.

In either scenario, once the price goes up, the manipulator can sell his position for the higher price.

This is the form of manipulation of the cryptocurrency market by which most individuals were prosecuted.

Wash Trading

Wash Trading refers to making a large number of buy and sell orders for a specific cryptocurrency to create the illusion of a more active market.

This can attract new traders to the market for a specific cryptocurrency that would otherwise not receive much attention.

This form of market manipulation is usually reserved for cryptocurrencies or exchanges with less trading activity, as it would be difficult with an already active market.

Cross Trading

Cross trading occurs when a trade takes place but is not launched on the market, preventing the trade value from affecting the cryptocurrency's selling price.

In cryptocurrency, this can only happen if the exchange itself allows cross-trading or if it is colluding to manipulate the market.

Layering & Spoofing

Layering & Spoofing is when a trader places false buy or sell orders that he does not want to close.

This form of market manipulation creates an illusion of supply and demand for the cryptocurrency involved.

The purpose of the manipulator is to influence other investors to act on this false data and buy or sell the target asset.

Once the price moves towards the handler's desired price, they cancel their fake orders.

Whale movements

Moviventos whale (“whale”) is considered a form of market manipulation in cryptocurrencies.

A crypto whale (whale) is an individual that has such a large amount of a particular currency, that when they trade, they independently cause large changes in the market.

However, “whale” movements are considered market manipulation only if the whale makes a trade for the purpose of changing the price for its own benefit.

When did the Cryptocurrency Market Manipulation Happen?

When the Cryptocurrency Market Manipulation Happened

Market manipulation is difficult to detect and prove. Even when it is obviously happening, authorities cannot always identify who is responsible.

That said, the US Securities and Exchange Commission (SEC) has indeed accused individuals of manipulating the cryptocurrency market many times.

For example, on June 11, 2021, an individual behind the now-defunct Apis Tokens was charged with fraud.

The individual fraudulently claimed that the company supporting the project was preparing to buy an artificial intelligence company.

This increased the value of the project, which allowed the individual to sell their position for more than its real value—a classic Pump & Dump scheme.

Although Pump & Dump is generally attributed to influential people, it can also happen when groups of regular traders band together to influence the market.

Some of these groups, like the one in the image below, are made specifically to manipulate the market.

Pump & Dump

Communications from a Pump & Dump group and subsequent market activity (Source: Springer)

Communications from a Pump & Dump group and subsequent market activity (Source: Springer)

This Rocket pump Telegram group communicated and warned its members in advance that they were preparing for a Pump & Dump.

The group's administrators decided to target YOYOW (YOYO) currencies, but waited until the last minute to release this information.

This is to provide some exclusivity so that only group members can react quickly enough to the schema.

Any investor outside the group who can receive second-hand information would have less time to acquire the currency before the dump takes place.

The chart above right shows how quickly the Pump & Dump happened, with the price rising and falling between 17pm and 18pm.

This allowed traders participating in the scheme to dump their positions at the highest possible price before the currency corrected to its true market value.

Another alleged case of market manipulation took place on May 17, 2019, for Bitcoin (BTC).

A trader placed a large sell order in the order book at about 6% below the market price.

As other trades had limit buy orders at lower prices, these orders started to be filled, which lowered the selling price on the exchange.

As the sell price fell, it started triggering other Limit Orders that were set to sell a position if a price was reached.

This caused a chain reaction as Limit Orders and active trades drove the price down well below the price of the trade that triggered the sell.

The trader who made this first trade would be able to buy back what he sold at a price less than or equal to the original sale and then sell at a profit once the market corrected.

How to Prevent the Manipulation of Cryptocurrencies in the Market?

How to Prevent the Manipulation of Cryptocurrencies in the Market

As cryptocurrency moves towards widespread adoption, many institutional actors are bringing more legitimacy to the market by developing related technologies.

For example, Nasdaq has introduced three solutions that can be used to deal with market manipulation in cryptocurrencies:

  • Nasdaq Market Surveillance (SMARTS) is designed to detect and analyze any market abuse and view trading activity for review. Its main purpose is to consolidate the data into a simple snapshot that helps investigators identify potential abuses.

 

  • Nasdaq Marketplace Services Platform  provides a cloud-based service that allows exchanges to operate in the cloud. Built using Nasdaq's proprietary financial structure, the platform is designed to streamline operations and consolidate exchanges under a single, reliable source.

 

  • Digital Assets Suite is a specific encryption solution aimed at digital assets. It is built using an enterprise blockchain platform that facilitates the entire lifecycle of any digital asset.

This solution can also be integrated with the Nasdaq SMARTS solution to provide surveillance.

These are just a few of the many solutions being introduced by financial institutions, and many more are under development as the adoption of cryptocurrencies increases.

What Can Traders Do To Avoid Market Manipulation?

Holders – Hodl Your Crypt

There are always risks involved in trading any asset and in any market. The best thing to do is always understand your investments and use strategies to reduce your risks.

Market manipulation mainly concerns short-term traders. If you plan HODL, then market manipulations have less power to affect your position as their effects happen quickly before the market corrects itself.

Short Term Traders Can Monitor The Relationship Between Long/Short Positions

This does not mean that short-term traders cannot protect their positions.

By learning to recognize common types of market manipulation, you can minimize its effects on your investments.

One way to identify potential manipulation is by monitoring the relationship between long and short positions in the market.

When the ratio of long positions to short positions is greater than usual, a dump may be about to happen.

When the opposite is true, a pump could be happening. You should watch different time periods to see if there are sudden changes in any direction.

Cryptoactive Portfolio Balancing

Another strategy for dealing with market manipulation is to reduce risk by not investing all of your assets in a single cryptocurrency.

Cryptocurrency portfolio balancing is advised to any investor to ensure that their portfolio includes a healthy mix of cryptoassets.

In this case, even if one of your crypto-assets is affected by market manipulation, it will only be a limited part of your total assets.

Select a Trusted Exchange

Lastly, make sure you are always trading in a trustworthy bagle with good reputation.

New exchanges or exchanges that have less commercial activity are more susceptible to market manipulation.

Summarizing About Manipulation in the Cryptocurrency Market

Like any other investment, investing in cryptocurrencies involves risks. However, any kind of market manipulation that takes place in cryptocurrency mainly depends on the fact that cryptography is a new industry that is inconsistently regulated.

Market manipulation will become more difficult as technology improves and traders become more informed.

The best thing any cryptocurrency investor can do is always perform due diligence on any cryptoactive and exchange before negotiating.

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