With its great potential, cryptocurrency has taken the finance industry by storm—becoming a global phenomenon that enables projects to be crowdfunded through Initial Coin Offerings (ICOs). Like stock market launches, also known as Initial Public Offerings (IPOs), Initial Coin Offering (ICOs) act as fundraisers of sorts, opening projects and selling shares to the public. Interested individuals would then invest to support and fund the projects using either digital tokens or a fiat currency such as USD, EUR, and JPY. In turn, investors would receive a cryptocurrency token distinctly for the ICO.
Much like Forex trading, the value of each currency is determined by market demand—or how much investors are willing to pay for a share. When the demand goes up, prices rise with it. In turn, when the demand drops, so do prices.
But what happens when people try to artificially and deliberately manipulate the demand of a cryptocurrency in a self-serving or malicious way? How can you protect yourself and your digital assets?
In this post, we’ll talk about crypto market manipulation, how it’s affecting traders, and how you can be proactive about protecting yourself.
What is Crypto Market Manipulation?
Due to widespread anonymity, along with the immature and unregulated nature of cryptocurrency markets, manipulation can easily be a recurring issue.
Similar to stock market manipulation where brokers, traders, analysts, and bankers misrepresent market values and predictions—crypto market manipulation is the intentional act of deception carried out by altering the market to induce an exponential increase/decrease in a digital asset’s value and price. At the heart of market manipulation is the desire for financial gain, often at the expense of other investors.
Thankfully, there are measures that you can take to protect yourself from the effects of it, starting from knowing and understanding the different manipulation strategies in today’s crypto markets.
1. Pump and Dump
It’s one of the oldest tricks in the market manipulation handbook. Pump and dump are often carried out by a group of traders or by a single wealthy investor, also known as a whale. Either way, it is a tactic that ‘pumps’ a certain coin by accumulating massive quantities of this particular digital asset over the course of a short period. This will inevitably create a sudden and significant surge in the coin’s price, luring new traders to invest in it. Once the trap has been set, the whales will simply wait until the price of the coin soars even more, then as it reaches a high-point, the dumping process begins.
Whales often dump in waves to maximize profits—because some investors would look at it as a temporary drop, it encourages them to buy the bottom, also known as bottom fishing. At the end of the dump, whales get a high return on investment while leaving the rest with nothing.
Spoofing is when a trader pretends to perform a specific trade to influence the market sentiment. This tactic is employed by whales by setting a large buy or sell order knowing all along that they will eventually pull out once the news is bought or sold into. Placing a high-volume order on the order book affects the price, either driving it up or down. A fake buy order pushes the price of the digital asset to increase, while a false sell order forces the prices to drop—ultimately manipulating the market.
3. Wash Trading
Wash trading is a form of market manipulation in which traders simultaneously and repeatedly buy and sell the same digital asset among themselves, for essentially the same price within a given period—creating a misleading and artificial trade volume. Inflating the trade volume increases investor interest which may lead to a favorable price increase.
4. Dark Pools
Dark pools are forums that allow whales to trade digital assets privately and anonymously. Because dark pools essentially fly under the radar, trading activities processed do not affect the official volume and value of crypto-assets. By engaging in dark pools, whales can gain a significant profit through predatory trading. This is effectively the opposite of wash trading.
How Crypto Market Manipulation Affects You and How to Protect Yourself
Actually, according to the chief executive of the Kraken crypto exchange, Jesse Powell, crypto market manipulation doesn’t really matter to most crypto traders—neither do regulatory approval, licenses, and protection from risky investments. Powell even went as far as mentioning what truly matters to crypto traders, including security and privacy, wider token selection, and faster uptime and trade execution.
That said, due to the market’s volatility, it’s still vital to know some of the precautions you can take to avoid huge losses:
Don’t blindly follow trends
Blindly following other trader’s investment choices can be tempting, especially to people who are new to the cryptocurrency market. Unfortunately, not all market trends are organic, some are manipulated by whales to make a hefty profit from your rookie mistake. It’s important that you study and understand the fundamentals of the cryptocurrency market you’re eyeing before deciding on buying in.
Do your research
If you are interested in investing in a new cryptocurrency, make sure to go through its price history, trade history, and assess its liquidity to help you weigh whether or not it is worth your money. Aside from this, you can also read up on some related news relevant to the specific cryptocurrency to gain more insight into the market.
The value of crypto tokens can vary on various exchanges, by comparing the prices, you can make an informed decision. Analyzing the price differences is one way to help you determine the actual price of a token and evaluate whether a cryptocurrency is being manipulated.
We’ve all heard of the phrase “buy low, sell high” in the stock market, but because cryptocurrency markets are relatively new, it’s also important to be aware of the top tactics used by market manipulators to avoid falling into their traps and actually making a hefty return on investment later on.
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