What is Market Manipulation ?

  • Market manipulation is an attempt to artificially influence an asset’s price or the behavior of the markets. 
  • While crypto exchanges have become more wary of market manipulators, it’s still essential to identify common behaviors in order to spot potential bad actors. 
  • Tracking market manipulation is a deceptive game of catch me if you can. To protect your crypto holdings, we’ve listed the most common manipulation strategies and how you can avoid them.

Market manipulation is an attempt to artificially influence an asset’s price or the market’s behaviour. This typically involves a single individual or group looking to create an illusion in the market, so they can profit from the aftermath. For example, a pump and dump may involve a person pumping a penny stock’s price with fake news and then profiting at the peak. You may recognize that example from Wolf of Wall Street, the true story of notorious stock-market manipulator Jordan Belfort.

In 2018, the US Department of Justice (DOJ) launched an investigation to determine whether spoofing price manipulation had occurred in the Bitcoin network. The crypto market is still young and growing, which means bad actors will find ways to exploit the lack of regulation. Manipulation does not help the market, and it produces more harm than good to its participants. Although it’s illegal in most cases, manipulation is not always easy to spot for regulators and authorities.

Common Market Manipulation Strategies

1. Pump and Dump

The crypto market’s most prevalent offender is the pump and dump, which involves a group of people working together to artificially inflate a coin’s value. Pump and dumps usually target low-market cap coins that are available on limited exchanges. The group’s insiders will buy a coin early and dump it once there is enough attention from traders and investors buying in. In recent years, pump and dumps have become more accessible via social media communities like Reddit, Telegram and Discord. You may have recognized them from names like Moon Pumps. In these situations, the leaders typically profit while most of the participants end up taking a loss.

2. Whale Wall Spoofing

Spoofing was a common tactic used during Bitcoin’s early days and still happens on less-regulated exchanges. This strategy involves a whale placing large orders to create fake buy or sell walls in the order books, hence the name spoofing. For example, if they wanted to create a bearish sentiment and drive a coin’s price down, a whale will set large sell orders to trick investors into panic selling. Once the selloff occurs, the whale removes their sell orders and proceeds to buy more at a discounted price.

3. Wash Trading

Wash trading is similar to whale wall spoofing because they both feed misleading information to the market. This strategy involves a person or group rapidly buying and selling the same cryptocurrency to inflate the volume artificially. The asset’s increased activity gains attention from traders and investors, which distorts the price even more. Smaller, unregulated exchanges will typically perform wash trades to inflate trading volume, generate more commission and entice more users. 

4. Stop Hunting

Stop hunting involves whales driving a cryptocurrency’s price to a level where market participants have set stop-loss orders. Most people set their stop orders around the same key technical levels. The whale executes multiple sell orders to drive the price down and trigger the stops, which causes high volatility and an opportunity to rebuy the asset at a lower price.

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