The market manipulation of cryptocurrency can be a serious problem to the crypto markets. Whether it’s spoofing, wash trading or market cornering, scammers use market forces to rig the price discovery process on exchanges.
Market manipulation doesn’t only occur in cryptocurrency markets, and you’ll be able to protect your investments much more effectively by knowing the mechanisms of their operation. Read on for some of the more common examples.
Pump-and-Dump Schemes
Crypto market manipulation is extremely hard to detect and can make large sums of money for uninformed investors. Those crypto professionals that can detect and learn to identify these techniques can help develop a transparent, functioning crypto market.
Among the most common market manipulations is pump-and-dump (P&D). The practice is a fraud in which assets are overpriced to lure the market and then sold at a low price at a later point – a major financial hit to innocent buyers and a scathing cryptocurrency reputation.
Cryptocurrencies need to be priced carefully in order to avoid becoming victims of P&D gimmicks, and investment should be made on rational basis, not emotional. However, not only being informed about what’s going on in crypto and also being aware of trusted sources are another great ways to stay up-to-date with what’s happening in crypto. Spoofing — Another type of market manipulation that can negatively impact crypto price; spoofing is the act of trying to give the appearance of hope or despair by placing huge buy/sell orders that never come filled in order to manipulate crypto price up or down respectively.
Spoofing
Market manipulation that gives the impression of optimism or pessimism in an asset through mischievous trading. This can be traders ganging up to place large buy/sell orders, which convince the other market players that there’s demand for their asset and increase trading volume; or layering, where multiple false trades are executed and closed to appear as if there was true volume.
Spoofing is against the law in regulated markets and, in the Dodd-Frank Act, it is banned, with a penalty increase. Exchanges of cryptocurrency use tighter security measures and detection mechanisms to prevent this and stop the spoofers.
– manipulation erodes confidence in markets and can lead to artificially high or low prices (which do not reflect the market price as it would in a real-world environment), which will prevent many investors from taking part and even reduce the liquidity in the market.
Market Cornering
Market cornering means taking ownership of a commodity or security in order to control prices by limiting the supply or generating demand artificially. Market cornering is illegal in many nations, because it misrepresents markets and undermines competition, which results in increased costs for other market players.
Pump and dump schemes are a way to price manipulated crypto currencies through stoking a demand for the asset. Inflators make discord groups lie about it, encouraging new entrants to buy it and then sell it at a profit.
There are numerous market manipulations in the cryptocurrency market, whose impact is very damaging to both the price and the integrity of the markets. Fortunately, traders can act to shield themselves and ensure an ecosystem is not subject to such abuses by alerting authorities to suspicious transactions – which means, of course, reporting suspicious trades to the police.
Insider Trading
Market manipulation threatens financial markets and is illegal by default. Cryptocurrency investors can safeguard themselves against frauds by doing research, due diligence and risk mitigation.
Cryptocurrency market insider trading is a rising threat. Similar to the stock market, cryptocurrency exchange markets are susceptible to traders utilizing proprietary data they control to profit from a likely uptick in prices for some crypto-assets – front running and insider trading.
One of the more famous instances of insider trading in cryptocurrency is an exchange called FTX. Jonathan Winans in this case was trading on his own personal information to buy outright hundreds of thousands of his company’s tokens before they were listed on a DEX – an insider trading action that can result in severe losses for the rest of the market. Winans later paid FTX back for the purchase.