Cryptocurrency Market Manipulation: How to Protect Investors and Safeguard the Market

In 2023, with cryptocurrencies cementing their position in the global financial landscape, both individual and institutional participants are increasingly turning to this decentralized digital currency realm. Yet, as its prominence surges, so do the concerns about market manipulation.

It's crucial for traders, investors, and regulatory bodies to remain vigilant. The unique nature of the crypto market—its round-the-clock operations, heightened volatility, and lower liquidity compared to mainstream financial markets—renders it susceptible to manipulation. Familiarizing oneself with the diverse techniques of crypto market manipulation not only empowers sound investment choices but also bolsters market integrity and cultivates trust within the cryptocurrency domain.

In the following discourse, we'll delve deeply into the various facets of cryptocurrency market manipulation, shedding light on its potential repercussions and the proactive strategies that can be employed to shield both investors and the market at large.

What is Cryptocurrency Market Manipulation?

Cryptocurrency market manipulation refers to measures taken to intentionally influence the price or trading volume of a cryptocurrency for financial gain. It comprises different deceptive methods that individuals or groups use to manipulate market conditions, generate information, or exploit weaknesses for personal gain. Such manipulation may have an impact on supply and demand dynamics, deceive investors, and result in losses.

Cryptocurrency market manipulation is a serious issue that can have serious consequences for investors and the market as a whole. As a result, retail investors may incur financial losses, the market may become unstable, and the credibility of the crypto ecosystem may be affected. Market manipulation is an illegal practice, and anyone found guilty may face regulatory and legal consequences.

Types of Cryptocurrency Market Manipulation

Authorities and investors alike need to be aware of the different crypto market manipulation methods to maintain the integrity of the cryptocurrency market. Here are some of the common types of cryptocurrency market manipulation:

Pump and Dump Schemes

Pump-and-dump scheme is a popular method that is used in manipulating the cryptocurrency market. In this method, manipulators artificially raise the price of a specific cryptocurrency by creating excitement among investors and making them feel motivated to buy. After the price reaches a high point, these manipulators sell their assets for a huge profit, causing the price to fall. Investors that bought the cryptocurrency during the hype typically suffer significant financial losses.

Real-world examples of this type of crypto market manipulation include VikingsChain, Space Vikings, and Viking Swap. Following Musk's tweets about the moon and Vikings in early November 2021, the value of these coins surged by around 350%, 600%, and 3,700% respectively. Elon claimed that the Vikings were the first to set foot on the moon. However, there was no evidence that his tweets had any connection with these coins.

Wash Trading

Wash trading is another type of cryptocurrency market manipulation in which individuals or institutions arrange trades among themselves to wrongly inform retail investors about the trading volume and activity. During these trades, the perpetrators simultaneously buy and sell the same cryptocurrency. This is done to deceive other investors into believing that there is real market liquidity and interest, thereby attracting more buyers.

Wash trading can give the illusion of a thriving market, thereby causing unsuspecting investors to believe that cryptocurrencies are in high demand. This form of manipulation can artificially increase prices and provide a false picture of the condition of the market, luring investors into making uninformed investment decisions.

Spoofing and Layering

These cryptocurrency market manipulations involve placing and canceling large buy or sell orders to artificially cause market imbalances. Manipulators place large orders at specific price points to control how the market perceives supply and demand. The manipulators cancel these orders and then execute smaller orders at more favorable prices after other market participants respond to them.

In spoofing, large orders are placed on one side of the order book to look like a strong buying or selling interest.

Layering, on the other hand, involves creating different layers of orders at different price levels to deceive unsuspecting traders.

Insider Trading

Although insider trading is illegal in traditional financial markets, it occurs in the cryptocurrency market. In insider trading, people with access to private information take unfair advantage of the other market participants by using the information they have access to to place trades.

An example of insider trading was seen in Coinbase and Bitcoin Cash in 2017. Coinbase stated in December 2017 that it would start supporting Bitcoin Cash on its network. However, just hours before the formal announcement, the price of Bitcoin Cash skyrocketed on other platforms. As a result of the price increase, there were rumors of insider trading.

It was later discovered that Coinbase employees and subcontractors who were aware of the upcoming Bitcoin Cash listing may have engaged in insider trading. They may have purchased Bitcoin Cash ahead of time to profit from the price increase that would occur once the news became public. As a result, they obtained an unfair advantage over other traders that did not have access to this private information.

After an internal investigation that was conducted by Coinbase, several employees were fired for violating the policies of the company.

Effects of Cryptocurrency Market Manipulation

Cryptocurrency market manipulation may have consequences that extend beyond the immediate financial impact on individual investors. It is important to understand these effects so that we can see the need to prevent crypto market manipulation and safeguard the overall integrity of the cryptocurrency space.

Financial losses for retail investors

Cryptocurrency market manipulation techniques (such as pump-and-dump) can result in significant financial losses for retail investors. These techniques involve artificially increasing the price of a cryptocurrency through mass purchases and then immediately selling it off as the price reaches a peak. Retail investors who fall victim to these schemes typically pay high rates for cryptocurrencies, only to see them lose value within a short period. These losses might have serious financial consequences and undermine public trust in the cryptocurrency industry.

Market instability and loss of trust

Crypto market manipulation causes a significant disruption in the market. Manipulative strategies provide a misleading image of the condition of the market by altering supply and demand dynamics. As a result, investors base their decisions on false signals, thereby increasing volatility and unpredictability.

Market manipulation also undermines trust in the cryptocurrency ecosystem. When investors perceive that markets are constantly manipulated, they become apprehensive and may withdraw from them. This loss of confidence may prevent the crypto market from growing since potential investors will see it as a shelter for fraud rather than a reliable source of investment opportunities.

Regulatory and legal implications

Regulators and law enforcement agencies face unique challenges due to the manipulations in the crypto sector. Since cryptocurrencies are decentralized and pseudonymous, it is difficult to identify and hold manipulators accountable. Hence, finding those responsible for market manipulation schemes becomes a complex task that usually requires collaboration across multiple jurisdictions.

Nonetheless, authorities and regulators have taken action to combat market manipulation. In recent years, regulatory agencies have focused more on the cryptocurrency sector, enacting measures to increase monitoring and enforcement.

However, the global nature of transactions and the ever-evolving nature of the cryptocurrency market make it difficult for regulators to keep up with new crypto market manipulation methods and effectively fight them.

How to Deal With Cryptocurrency Market Manipulation

Although dealing with market manipulation might be challenging, there are several steps you can take. Highlighted are some of the things you can do to fight crypto market manipulation:

Educate Yourself

To effectively deal with market manipulation, you must first have a detailed grasp of the market in question. Learn the principles of trading and investing, as well as different trading strategies and market dynamics. Keep up to date on relevant news, economic information, and price-influencing factors. This will help you recognize potential manipulation attempts and make reasonable decisions.

Identify Signs of Market Manipulation

Pay attention to market activity and watch out for signs of market manipulation. The spread of false rumors, unusual trading volumes relative to historical averages, coordinated buying or selling by a group of traders, and abrupt, large price fluctuations not supported by fundamentals can all be evidence of manipulation. You can increase your ability to detect potential manipulation attempts by staying informed and monitoring market activity.

Diversify Your Investments

Diversification is a risk management technique that involves spreading your investments over many asset classes, industries, and geographic areas. It can help you mitigate the impact of market manipulation on your portfolio. The presence of many investments reduces the impact of a single market or asset manipulation on your overall portfolio. Diversification can lower your risk exposure and protect you from huge losses.

Set Realistic Expectations

Market manipulation typically focuses on creating excitement and false expectations to entice investors. It's important to have a realistic perspective and to avoid schemes that promise huge returns. Understand that markets can be volatile and that consistently significant returns with no accompanying risks are rare. To avoid falling for the hype that the manipulators create, ensure that your financial decisions are based on reasonable analysis and long-term goals.

Conduct Due Diligence

Conduct in-depth research on the assets that you want to invest in. Study financial papers, understand the patterns of the market, and evaluate the fundamental principles of investment. You should also check the reputation and performance history of the parties involved. Due diligence reduces your vulnerability to deception and increases your confidence in making sound investment decisions.

Seek Professional Advice

It is advisable to talk to a financial advisor or seek advice from professionals in the market or asset class in which you are interested. They can help you navigate difficult situations, analyze market signals, and develop an investment strategy that aligns with your goals and risk tolerance. 

Conclusion

In 2023, the dark shadow of cryptocurrency market manipulation looms larger than ever, warranting keen attention and swift action. This discourse unravels the myriad manipulation tactics at play, spanning from pump-and-dump rackets to wash trading, spoofing, layering, and the covert maneuvers of insider trading. These deceptive strategies wreak havoc not just on individual portfolio values but jeopardize the foundational ethos and equilibrium of the cryptocurrency realm.

The fallout from such manipulative tactics is multifaceted. On the one hand, retail traders frequently bear the brunt of financial setbacks, as manipulated price actions erode their investments. This dwindling trust, coupled with market volatility bred by manipulative acts, could stymie new entrants from embracing the crypto arena—curtailing its organic growth and untapped potential.

Addressing these manipulation undercurrents is paramount for the sustained evolution and dynamism of the crypto space. By championing stringent safeguards, amplifying transparency, and fostering an informed investor community, we can pave the way for a robust and trustworthy crypto milieu.

In this continuously metamorphosing landscape, a collective effort—uniting regulators, industry stakeholders, and the investor community—is essential to combat market manipulation. By pooling resources and expertise, we stand a better chance of sculpting a fairer, more resilient cryptocurrency market for everyone's benefit.

Moreover, to fortify our defense against market manipulation, it's vital to probe into manipulation tactics orchestrated across multiple crypto exchanges concurrently. Understanding the challenges these exchanges face in pinpointing and curbing cross-exchange manipulation, and unearthing potential solutions, is pivotal in this ongoing battle.