Lately, the market moves have been stressful and confusing for many investors, representing an opportunity for many people to express their more or less valid opinions and beliefs in the online medium about the crypto market in particular. Regardless of our experience in the financial markets, it is easy to turn our attention to negativity, exaggerated hype, or not to observe the entire context behind price action shown on charts. Markets can sometimes suffer from attacks or market manipulation, which independent individuals or institutional investors can conduct, mainly affecting active traders.
What is Market Manipulation?
Market manipulation influences market prices to mislead other market participants for market makers’ profit. It is an illegal practice, and technically we can talk about the declaration of incomplete or false information related to assets, pump and dump schemes (which are famous in the crypto space), spreading rumors regarding a project, or falsifying quotes to influence the price chart.
On the other hand, many states are not officially giving investment advice, or the actions by which an asset is pumped were accidental. That’s why it’s hard to prove when market manipulation occurs, especially in large and volatile markets like crypto. Although market manipulation is illegal, crypto is not a regulated market, so it’s less likely for bad actors to end up in jail for such fraudulent actions.
What exactly is happening in a Market Manipulation?
Market Manipulation happens mostly through spoofing or rigged buy orders of assets (which cause the price to rise) and then canceling the orders before they are filled. On a large scale, the impact can be significant on the prices of an asset, and the people who end up buying at artificially inflated prices are the ones mostly affected. In addition to spoofing, we also mentioned pumps and dumps that can happen over groups of people from the same Reddit group, YouTube channel, and Telegram group – where the insiders and organizers can make a lot of money if they know the scheme in advance. Order falsification or similar techniques tempt many people to resort to such practices.
What would be a recent example of Market manipulation?
In April 2022, Bill Hwang, a private hedge fund manager from Archegos Capital Mgmt, was arrested. He borrowed money from banks for substantial leveraged transactions, and these banks lost him around $10 Million. With this money, he bought shares that grew enormously by about 1,400% in just 8 years, which in the stock market is an unimaginable performance. This aggressive buying drove the stock market artificially high without the companies’ fillings reporting huge earnings or sales.
How does Market Manipulation happen in Crypto?
In addition, to pump and dump schemes and spoofing, other variants are used on crypto, such as wash trading. Like spoofing, wash trading projects a false volume and interest by having someone buy and sell the same asset simultaneously. This process is mainly done through automated trading bots. “Stop loss hunting” done by cryptocurrency whales is also a trick that forces the price down to hunt visible stop losses. Once the price gets low enough, the retail traders are taken out of their positions, and the whales can buy that asset at a lower price, thus creating their own liquidity.
How can we protect ourselves against Market Manipulation?
Sometimes we can’t protect ourselves from whale attacks or a speculatively over-indebted fund manager, but we can prevent our portfolio from falling prey to pump and dump schemes. First, when we do a technical analysis of an asset, we mainly look at historical highs and lows and make an average. It’s fundamental not only to consider recent prices because whales and market makers inflate the volume for manipulators, and it’s possible to fall into traps.
In addition, we should constantly inform ourselves and research several sources to ensure that the information retrieved does not exist only for profit. That’s why it’s essential to form our own mindset and ideas about what price is worth getting into – which must never be too high.
Anyone can be an investor. On a global scale, crypto remains a relatively young asset class with an investor base still growing. At IXFI, we’re building a community where everyone is welcome. We mean it when we say that anyone can be an investor. Try it for yourself: join IXFI Crypto Exchange today and see where you fit in.
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