Cryptocurrency Market Manipulation

Let me tell you something you already know. The [cryptocurrency] world ain’t all sunshine and rainbows. It’s a very mean and nasty place, and I don’t care how tough you are it will beat you to your knees and keep you there permanently if you let it.” — reference to Rocky Balboa. 

Indeed, the cryptocurrency market is perceived by many traditional investors and traders as the territory of the Wild West, with unpredictable and intense volatility, including potentially manipulated price action. In this article, we will have a look at different kinds of manipulations that take place in the cryptocurrency market.

Pump and dump schemes

“Pump and dump” schemes are sharp manipulative increases in the price followed by its collapse. In essence it boils down to pumping up the price of a little-known low capitalized crypto asset, in order to subsequently sell it as high as possible to a large volume of investors who came at the final stage (usually enticed by FOMO). These schemes are initiated by particular groups of traders, whose main activity is crowd manipulation. Often, access to early information about such planned asset pumps can be provided for a certain fee. This is usually the primary business model for the organizers of certain groups. Also, such schemes are often used to execute the so-called “exit pumps” — variations on the “dead cat bounce” themes when a project makes the last pump so that the organizers can withdraw money before hitting a dead-end or pulling the plug on the asset.

The scheme itself is as old as financial markets. It was actively used even during the Great Depression, and then in the early 2000s. This practice is now illegal on the stock market, but with the advent of an unregulated cryptocurrency market, it’s gotten a second wind. Greed and FOMO (fear of missing out), which are the two most significant strengths of the market, allow such schemes to flourish.

According to the studies, tens of thousands of “pump and dump” schemes are sold annually at the crypto market, and the profit of the organizers reaches millions of dollars. Most investors lose their funds while participating in such schemes, so we highly recommend that you exercise maximum caution and evaluate all risks while trading any assets, especially if you see the growth of several hundred percent.

A vivid example of a “pump and dump” scheme is the situation that occurred with the Parallel Coin project, when on November 5, 2019, the asset grew by thousands of percent from $1.60 to more than $2,200, which triggered the FOMO machine and the rumors about the emergence of the “New Bitcoin”. A few hours later, the price returned to the $2 level.

Media manipulations

It is well known that markets can be manipulated by spreading the rumors, insider information about events, or appeals that significantly affect the decision making of the investors. Such manipulations in the stock markets are a direct violation of the laws of nearly any developed country. However, in the unregulated cryptocurrency market media space, this practice is quite common, and there are no explicit prohibitions yet.

Separate groups thrive on the market, specializing in insider listings, and are using bots to detect assets listings on major exchanges. The news of assets listing on large exchanges often positively affects the price of an asset, triggering its intensive growth, sometimes reaching several hundred percent. Of course, in order to receive such information early, many traders are willing to pay a decent amount of money:

TFUELUSDT after the announcement of listing and the start of trading on the Korean Exchange Upbit on March 22, 2019.

Often, the “manipulators” try to attract the attention of participants in the crypto market with various informational campaigns in support of particular positions (long/short). As an example: on May 7 and 8, 2020, the entire media space of the crypto industry was covered by the news that the largest whale (a holder of a significant position) on the Bitfinex exchange, known under the nickname of Joe007, went bankrupt after the liquidation of a large short position when Bitcoin reached $10,000.

He then deleted his twitter account and was gone from the top list of Bitfinex traders. All media sources repeated that this was a sign of victory over the bears and the start of a new bull run. However, already on May 10, the picture was changed to the blood, tears and angry cries over the manipulation, as Bitcoin lost 15% in just 15 minutes without any apparent reason:

BTCUSD Bitfinex

Sometimes the top officials of states involuntarily become manipulators as well. A vivid example is the speech of Chinese President Xi Jinping when he spoke about the blockchain as one of the key technologies and called for increasing investments and accelerating the development of the industry. After the president’s speech, Bitcoin and cryptocurrencies created and based in China grew by several dozen percent in a few days. However, the Chinese government quickly specified that the president talked about developing the state digital currency, and classic cryptocurrencies were still banned in China, which caused the prices to drop even lower than the previous levels:

BTCUSD Bitfinex

Market maker

All of the above are classic examples of manipulation. However, there are more methods of manipulating the market, when buying/selling, or placing the buy/sell orders with significant positions of assets. To stop the price movement, an order is often placed with a large asset position, or an aggressive (large volume) sale or purchase is carried out, including the executions using special algorithms.

At first glance, such manipulation methods seem very complicated and costly, but if there are sufficient resources, they turn out to be very effective and profitable. The peculiarity of such manipulations is that they are very difficult to prove illegal. Therefore these methods are the primary tool for market manipulations. The media space and “convenient” news are used as additional tools, providing a reliable cover.

Everyone who has somehow encountered trading knows about the concept of a market maker. This term has several flavors to it. These may be institutional participants who have concluded an agreement with exchanges and companies which issue the assets. In this case, market makers are working on filling the market with liquidity and ensuring the stability of trading. Market makers can also be large market participants that can create price swings. There are legends among traders about mysterious puppeteers, market sharks, the invisible hand of the market — market makers who secretly and undividedly act on various financial platforms.

Large participants are a narrow circle-alliance of exchanges, major investment companies, and funds that manage the market/asset. Everyone uses algorithms and infrastructure controlled by these parties. They create trends, support, and resistance levels, also determining ranges of price fluctuations. They are the ones who decide which support and resistance will be broken and at which levels, and which levels will hold.

Market makers cannot simply sell assets to lower prices, especially in the conditions of positive news. Neither can they raise the price by simply buying, as it is quite a costly endeavor. The primary strategy of the market maker is to psychologically push the small traders out on the emotional level and make them sell low and buy high. Therefore, the intraday traders themselves are the main driving force of the markets, but the movement occurs in the direction specified by the market maker.

There are many methods of psychological impact that a market maker can have on a trader: holding a level, gaining a position with a subsequent impulse to a particular side, squeezes/helicopters, large buy/sell walls, free falls, and others. Company executives often hire market makers, who provide liquidity and make good profits in the long run.

There are certainly a lot of rumors and denials about the existence of a global market maker and certain market manipulations. A scandal in the crypto industry regarding Bitfinex and Tether broke out recently, which caused the start of the investigation. The entities were suspected in market manipulations and forced growth of Bitcoin to $20,000 in 2017. Given that the beneficiaries of the companies are common, this raises even more questions.

Education is the key to success

In any case, the more of an expert you are, the better your results are. The same applies to cryptocurrency trading. Novice traders are often the only ones to worry about the presence of any manipulation. The issue is the lack of experience, strategy, and risk management, which prevents them from understanding the price movements of an asset and working with any situation. Education, both theoretical and practical, is exactly what will help you become a professional, stop paying attention to manipulations and earn from any price movements in any direction.

The information above contains an analysis and forecast of the cryptocurrency market, which are associated with high risks. This information is presented for informational purposes only and in no way should be construed as a recommendation for the purchase or sale of the assets. Any person considering trading digital assets should seek independent advice on the suitability of any particular digital asset.

Cryptocurrency

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