In this article, we will look at the basics and mechanics of crypto market manipulations, how to identify them, and give you some tips on how to deal with them. So let’s dive in!
What is crypto market manipulation?
Before we begin, let us define market manipulation: market manipulation is the intentional attempt to artificially influence either overall market behavior or the value of specific assets.
Since we’re talking about the crypto market, in that case, an actor or group of actors typically create an illusion or spread rumors to deflate or inflate market prices, so they can end up with profits while everyone else is left with losses. Anything goes here: fake news, false market signals, a huge number of fake orders, etc.
Sometimes, such actors even go that far; they pay the influencers and celebrities to use their fame for promoting specific assets, pump their price and then sell when they are at the peak price level.
However, market manipulation wasn’t born during the crypto era, and it’s been around since the market was born, so most of the types of crypto market manipulation can be applied to any kind of market.
Four ways of crypto market manipulation
Now, let’s take a closer look at some of the common and well-known ways the crypto market can be manipulated.
Pump & Dump
Pump and dump is one of the most frequently used market manipulation strategies you can encounter. You’ve probably seen Martin Scorsese’s movie “The Wolf of Wall Street,” right? Or, at the very least, you’ve definitely heard the story of Jordan Belfort and his Stratton Oakmont company; their case is just one of the many examples of how pump and dump schemes work. The crypto pump and dump does not differ much from the one that can be found in the stock market. A group of people (usually the developers of a cryptocurrency themselves) purchases a significant amount of a specific cryptocurrency, usually unknown ones with low trading volume, then spreads the “news” and “rumors” on social media (especially targeting Reddit, Telegram channels, and Discord servers, where most crypto enthusiasts dwell), and waits for the word to reach every gullible investor possible, while continuing to buy a specific cryptocurrency in large amounts to imitate heightened interest. When the price is raised to its potential maximum, the traders who participate in this manipulation strategy quickly cash out, dumping the coin’s price and leaving all other traders out of pocket.
Whale Wall Spoofing
Spoofing is a tactic that is usually used on minor CEXes. This strategy refers to a trader or a group of traders placing large orders to create the illusion of huge buy-sell walls in the order books, hence the name “whale spoofing.” For instance, if the goal is to create a bearish sentiment and drop an asset’s price, a “whale” sets large sell orders to kick off panic selling. The moment the selloff happens, a “whale” removes his or her sell orders and proceeds to buy that specific asset at a discounted price.
The same goes for creating a bullish sentiment; the only difference is that “whales” set a wall of buy orders, thus forcing other investors to quickly buy an asset. The price got pumped sky high, and the whales sold their coins for a big profit, while others were left with nothing.
Stop hunting is a strategy used to get traders to quit their trade positions: it involves “whales” to drive a currency’s price to a level where market participants have set stop-loss orders. To cause a decrease in the price of cryptocurrencies and trigger stop-loss orders, “whales” initiate a wall of sell orders. This results in high volatility and gives the bad actors a good chance to rebuy assets at a lower price. Stop hunting is usually used to make short-term profits.
Wash trading is somewhat similar to spoofing, since it also refers to creating a false signal about market sentiment. Wash trading is a strategy in which a group of traders rapidly buy and sell crypto assets in order to generate high trade volumes. The main goal here is to attract other traders’ and investors’ attention and thus draw as much attention to a specific asset as possible. Numerous entries provide the market with deceptive signals that inflate the value of an asset and further entice investors to make trades based on the deceptive signal. Wash trading usually occurs on minor and unregulated exchanges: people associated with such exchanges may engage in wash trading to increase trading volume, generate more commission, and attract more users.
How to protect yourself from market manipulation?
Since we’ve covered the main crypto market manipulation strategies, a logical question arises: is there any way to guard against these manipulations? Is there anything you can do beforehand? And the answer is yes, you can. Let’s take a look at five different tips you can apply for your protection:
Do Your Own Research aka DYOR
This golden rule should be applied to almost every step that is taken when dealing with digital assets. That is, if you see someone promoting some shady and unknown “hidden crypto gem” on your favorite social media platform, don’t just blindly rush to buy it. Read the whitepaper first (if there is one, of course), check the social media accounts, and find out who is behind it and what goals these people are trying to achieve. Ask yourself if this coin has long-term potential and if there is anything real behind the hype.
Furthermore, it is best to compare the prices and data of assets from various trustworthy crypto exchanges. For instance, if a price is pumping on one exchange, cross-checking against another can reveal the true price and help you avoid a pump and dump scam.
Check historical price trends
Historical price trends cannot fool you; even if a group of whales decides to perform wash trading on an exchange, you can always check an asset’s previous price history and base your decision on it instead of getting into a market manipulation trap. If the coin has long been dead and suddenly starts pumping out of thin air, then something fishy is going on here. Even if the coin is still alive but has never seen such spikes in interest that result in a significant price increase, something is wrong and needs double checking.
Again, checking the price of an asset on multiple exchanges to find out its true worth works here as well.
Don’t trust small exchanges and shady coins
Make sure you do your trading on major and reputable exchanges. Market manipulation is typically more likely to occur on new or small exchanges and currencies with low trading volumes. Certainly, even major exchanges like Binance or Coinbase are not protected from market manipulations; however, in the case of minor exchanges, whales can manipulate prices with ease.
The same rule applies to coins with low trading volume: make sure that your selected asset is reliable and has a use case. Typical pump and dumps happen mostly with shitcoins and memecoins, making them a very risky investment.
Consider long-term investments
If you HODL, you don’t need to be that worried about market manipulations. The majority of them are carried out by whales in order to drive prices to a certain level in order to gain short-term profit, so if you’re longing, you’ll have fewer things to worry about.
If you’re a day trader, consider trading only coins that have a strong track record of surviving bearish sentiments while maintaining high trading volume and liquidity.
Diversify your portfolio
Don’t put all your eggs in one basket. If your portfolio is diversified, then market manipulation can only affect a small percentage of your digital assets. It is best to turn your portfolio into a healthy mix of cryptocurrencies that can be classified as long-term and short-term assets. For example, low-market-cap coins are much easier to manipulate, so it may be smarter to use them for your day trading routine, while high-market-cap coins are the ones that fit better for long-term investments since they cannot be so easily manipulated.
Thus, combining high market cap assets and low market cap assets might be your best choice.
There is no way you can avoid crypto market manipulation in any way, unfortunately. The crypto market is notoriously volatile, so you must always invest and trade with a strict game plan and utilize multiple risk-management strategies.
Still, even though you cannot avoid market manipulation, you can reduce its negative impact on your investments by following a few simple rules and keeping your head cool. After all, the crypto world is about investing smart, not hard.