What Is Crypto Market Manipulation, And Its Dangerous For Investors?
Key Points:
The late 2022 crash of FTX has brought crypto and market abuse to the forefront. It was the world’s third-largest cryptocurrency exchange by volume at one time during its three-year existence. Sam Bankman-Fried, the founder and CEO of FTX, is now charged with conspiracy to conduct commodities fraud and securities fraud, as well as conspiracy to defraud the United States and commit campaign financing crimes. Bankman-Fried is accused of defrauding investors out of $1.8 billion, according to the indictment. Since November of last year, FTX has been in Chapter 11 bankruptcy proceedings in the United States.
Because of the large-scale and high-profile nature of FTX’s collapse, many people are wondering how crypto exchanges work and the potential of market manipulation – the effort to intentionally influence the price of an asset and/or the behavior of markets. Market manipulation is not limited to cryptocurrency exchanges. It is an illicit technique that has been practiced for generations. Yet, Deloitte said in its 2021 study “Market Manipulation in Digital Assets” that cryptocurrency’s market capitalization had reached $1 trillion two years ago. It cautions that market manipulation might affect up to 90% of transactions.
If you’re apprehensive about paying for things with cryptocurrency owing to price volatility, it’s worth understanding that a significant portion of that volatility isn’t just the herd stampeding in one way or the other.
There are various reasons why many cryptocurrencies’ values might increase or fall suddenly, such as a successful step in development, a large new use case, or simply indicators that it’s being embraced by people, and there are many ways they can be manipulated in the volatile company.
Crypto market manipulation refers to a purposeful effort to impact the value of assets and disrupt a crypto market trend.
Pump and dumps, wash trading, spoofing, stop hunting, and just circulating false information are all examples of cryptocurrency market manipulation (which can be fairly easy to do in crypto).
Then there are crypto-specific methods, such as buy and sell barriers built by “whales,” or owners of large blocks of cryptocurrency. This isn’t only for bitcoin. Ethereum’s ether, like many other so-called “altcoins,” suffers from the same issue, however, in recent years, Ether, which has a market valuation around 45% of that of bitcoin, has been largely separated into its own category.
Market manipulation is simpler in several ways with alt-coins. Apart from a few dozen of the largest coins, they frequently get less pricing attention, and the quantities involved in market manipulation are not as large.
Yet, much like bitcoin, crypto market manipulation has numerous distinct features that make it simpler to perpetrate and more difficult to detect than in the stock and commodities markets.
To begin, since cryptocurrencies are pseudonymous — not entirely anonymous because all transactions are visible on a publicly available blockchain — the identity of a manipulative trader is disguised behind the key codes required to conduct a crypto transaction.
Yet, it is not impossible. Blockchain data organizations with substantial experience dealing with law enforcement, such as Chainalysis and Ciphertrace, claim that the public nature of blockchain makes tracing criminals simpler than traditional off-chain investigations.
Second, there are numerous crypto “whales” who purchased or mined massive amounts of cryptocurrencies when it was worth pennies or a few dollars. The same is true for ether and almost other alt-coins: people were able to acquire a lot for very little and now have the potential to change markets.
Third, while the vast majority of trading on the major cryptocurrencies currently takes place on large, well-known, and well-regulated exchanges, there are hundreds, if not thousands, of small exchanges on which smaller alt-coins, as well as bitcoin and ether, are traded, many of which are of dubious honesty and have limited liquidity.
Fourth, the volatility of the crypto market implies that tokens see rapid price increases. It’s very uncommon for crypto to climb or decrease by 10% in a single day, a few hours, or even a few minutes. That may happen at any time of day or night since crypto is available 24 hours a day, 7 days a week.
In cryptocurrency market manipulation, unscrupulous actors create illusions in order to inflate or deflate market values in order to benefit. They might, for example, circulate fake news, send out a series of pressing tweets, construct bogus orders, provide misleading market signals, talk critically about an asset to instill panic among traders, and so on. As a result, you must be aware of and battle manipulative techniques, which you will uncover as you go.
Crypto market manipulation has harmed both crypto investors and the crypto market as a whole. That makes the market needlessly volatile and dangerous for investors, which has caused many traders and investors to lose faith in cryptocurrency.
Crypto market manipulation raises volatility in the cryptocurrency market, giving the impression that it is chaotic and dangerous to novice investors. If there are still murky areas in the crypto market, authorities and governments will continue to investigate the embryonic industry. The limited volume of some currencies makes them simple to manipulate, and huge surges followed by sharp drops are all too typical, particularly on smaller crypto exchanges. Whales don’t always need to acquire or sell an asset. They may make a cryptic tweet that causes an asset to soar or, worse, plummet.
Data may be disseminated and synchronized using the distributed ledger technology (DLT) used in crypto trading. It does not, however, prohibit market manipulation. In the crypto company, there are a number of reputable and well-regulated exchanges. Yet, many tiny exchanges are less well-known and less regulated. Many people want to use cryptocurrencies as a cover for criminal activity.
One method that cryptocurrency might be utilized to earn unlawful profits is through crypto market manipulation. Such manipulation may be accomplished in a variety of ways. Some utilize techniques employed in more conventional asset markets, while others are specific to crypto.
This is the artificial inflating of an asset’s price, which has been practiced for many years on numerous markets. It entails a succession of crypto sales and purchases to provide the appearance that the asset’s value is growing. Those behind this then sell the asset when their manipulated price rise attracts purchasers who have been deceived into thinking that the cryptocurrency in question will continue to rise in value.
While Bitcoin was new, the technique of spoofing whale walls was common. It is currently most often seen on less well-regulated marketplaces. It entails a person or group placing a big order in order to build phony buy or sell barriers in the order books, which might fool other parties into panic selling (because they feel a certain asset is losing value) or rushing to purchase (as they believe huge demand for an asset is pushing its value up). A whale, for example, may place massive sell orders, tricking investors into panic selling. Stop hunting occurs when a whale pushes the price to where established stop-loss orders, which are intended to limit an investor’s loss if the value of an asset falls, are activated. The consequent market instability allows assets to be purchased at a reduced cost.
This is akin to whale wall spoofing in that inaccurate information is supplied into the market to cause quick purchasing and selling of an asset, causing the price to be distorted to an unnaturally high level. This might increase the number of users and, as a result, the commission earned by tiny exchanges.
Fake information is often distributed to traders or investors on forums in an effort to cause a market move that those doing the spreading want.
Before trading, do research by validating prices from many credible sources. You may compare asset prices and data for relative relatedness by using several crypto exchanges. Cross-checking a price on one exchange against another, for example, may disclose the genuine price and assist you avoid a rug pull or pump and dump.
Concentrate on long-term objectives rather than short-term changes. You may invest in Bitcoin in part, but you should also diversify into other assets to reduce risk. You must also examine the dangers of Bitcoin investing and deploy funds accordingly to mitigate them.
Emotional pressures such as fear, worry, or greed are common throughout the investing process. Nonetheless, in order to achieve investing success, it is critical to have a level head and avoid making investment choices based on emotions.
Rather than depending on emotions, make financial judgments based on rigorous study and market data. Plan and adhere to your investing plan, and don’t modify your investment strategy based on short-term market volatility.
Be careful you trade on reliable exchanges with a solid reputation. Market manipulation is common with new exchanges and currencies with little trading activity. This is not to claim that attackers cannot influence market prices on exchanges with high transaction volumes; they just have a smaller margin of error when compared to younger exchanges.
Skilled individuals can assist you in gaining a better grasp of the market and providing useful forecasts and financial recommendations. But, before making any financial choices, you should ensure that they are trustworthy and use caution in accepting their advice.
Price manipulation does not cause all unexpected and large market price movements. In general, the market is volatile, and a lot occurs every minute. Therefore always trade with a sound trading strategy and use multiple risk management tactics.
The advancements in cryptocurrency enforcement so far reflect the necessity to address the sharp behaviors and resultant instability in the crypto markets. These developments have not progressed as quickly as happenings in the markets to which they are related. They do, however, constitute a continuing effort to both minimize the possibilities for crypto-related market manipulation and hold its offenders accountable.
The cryptocurrency industry is still in its infancy and is mostly uncontrolled. As a consequence, when new cryptocurrencies are created, they are often driven by market enthusiasm, but some creators also experiment with various ethical and immoral tactics to promote their coins.
Prioritize and adhere to your research and trading tactics while attempting to trade and invest in cryptocurrency; do not follow market noise. It is better to remain out of the market than to attempt to regularly trade a hyped and loud market.
DISCLAIMER: The information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.
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