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What is Market Manipulation in Cryptocurrency?

2021-10-19

Main Takeaways:

  • 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.

In this article, you’ll learn the basics of crypto market manipulation and how to identify and combat common market manipulation strategies.

Market manipulation is an attempt to artificially influence an asset’s price or the market’s behavior. 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. In this article, you’ll learn the basics of crypto market manipulation and how to identify and combat common market manipulation strategies. 

Market Manipulation vs. Currency Manipulation

Crypto market manipulation is not to be confused with currency manipulation. Only government and authorities like central banks can manipulate currency. Currency manipulation is entirely legal, but other countries are allowed to challenge it. For example, governments may want to appear more competitive by decreasing the value of their currency relative to another currency. This is commonly known as devaluation.

Four 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.

How Does Market Manipulation Affect the Crypto Market

Market manipulation increases volatility in the crypto market, making it appear chaotic and unsafe to new investors. If crypto market manipulation continues to have grey areas, regulators and governments will continue to scrutinize the nascent sector. The low volume of specific coins is easy to manipulate, and the large spikes followed by a drastic drop are all too common, especially on smaller crypto exchanges. Sometimes, whales don’t even need to buy or sell the asset. They can send out a cryptic tweet and cause an asset to soar or—even worse—plunge to the bottom. If you want to protect your crypto holdings from market manipulation, keep reading to learn four different strategies you can add to your trading toolkit.

How do I Deal With Market Manipulation

Tracking market manipulation is a tricky game of hide and seek. Remember always to do your research and due diligence before investing money in any asset. We’ve listed four basic strategies you can use to protect your crypto holdings from market manipulation.

1. Double-check with different sources

Don’t rely on a single source of information, like the order book, to verify an asset’s movement. Compare your asset’s data across different sources like Coingecko and Coinmarketcap. 

2. Focus on historical price trends 

Whales will sometimes inflate volume by performing wash trades on multiple exchanges. For example, posting a large trade on a popular exchange while doing the opposite on a smaller one. Traders can avoid this whale tactic by basing their decisions on historical price trends instead of recent movements. 

3. Longer-term contracts vs. perpetual futures

Whales will sometimes drive prices to liquidate their shorts and benefit from a long position of equal size. For an unbiased method, always compare the premium on longer-term contracts to perpetual futures. 

4. Dollar-cost average (DCA) with recurring buy 

If you’re more of a HODLer than a trader, you can use Binance’s recurring buy feature to dollar-cost average (DCA). This strategy will not only lower your exposure to potential market manipulation price swings but also strengthen your crypto holdings. Remember, market manipulation causes more harm to short-term traders since the effects happen quickly before the market corrects itself. If you’re interested in learning more, you can read our recurring buy FAQ guide.

5. Diversify your portfolio

Your crypto portfolio should include a healthy mix of different assets according to your risk appetite. In other words, don’t put all your eggs in one basket—don’t all in. If your portfolio is properly diversified, market manipulation can only affect a small percentage of your assets.

Bottomline

Investing in cryptocurrency comes with risks, like any other investment such as stocks. As more regulations are introduced, market manipulation will become harder to pull off. While crypto exchanges are more wary of market manipulators, knowing how to identify and avoid common market manipulation tactics is an essential tool for any trader and investor. Especially when professional market manipulators will go to great lengths to avoid detection. At Binance, we always encourage users to trade responsibly and do proper due diligence instead of making rash decisions on the one-minute chart. 

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Disclaimer: Cryptocurrency investment is subject to high market risk. Binance is not responsible for any of your trading losses. The opinions and statements made above should not be considered financial advice.

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