Traps of market manipulators

The ways and methods of manipulation in the cryptocurrency market were not invented; they migrated from commodity, currency, and stock markets, where they had been perfected for decades. On the contrary, all markets are under strong regulatory pressure, and such actions are subject to strict criminal liability.

Regarding the cryptocurrency market, things are a little different because it is more free and decentralized than the stock market is. Regulators are only looking for ways to control it, just as they do with the stock market. Freedom can, however, be interpreted by some as permissiveness, so machinations and manipulations happen here almost on a daily basis. Therefore, you need to learn to detect them and be able to counteract them. Further information will be focused on the types of cryptocurrency market manipulations.

What is manipulation in the cryptocurrency market?

Market manipulation is a planned action by some market participants within a defined strategy to artificially increase or decrease the value of a specific asset in the entire market or one exchange for their own benefit. Fraudsters (this term best describes such “dealers”) use manipulative methods to mislead investors, spread panic among them, or, on the contrary, create hyped demand in order to force them to sell assets at the lowest possible price. These price manipulation techniques cause sudden price increases and create ideal circumstances for scammers to purchase cryptocurrency assets and make large profits.

Any kind of market manipulation or insider trading is illegal in most countries. The issue is that it is challenging for regulators or law enforcement agents to identify and prove the fact that fraudsters used planned actions that artificially changed the quotations of one or more assets. 

Types of traps used by manipulators

Active traders and retail investors should know and learn to recognize the most common methods of market manipulation. This knowledge will aid in the early detection of manipulation, prompt refusal of trades, avoiding the traps of fraudsters, and capital preservation.

Let's review the most popular types of market manipulation aimed at destabilizing the market and misleading traders.

Pump&Dump

This method involves a group of rogue traders “pumping” the price of a specific asset and then simultaneously selling it, making huge profits while leaving those who bought at the peak of the price with losses. This manipulation can be carried out on a single exchange as well as on the entire market (with the participation of “whales”).

Fraudsters frequently try to involve novice traders in their manipulative attacks in order to increase the value of the asset (you can still find a lot of Pump&Dump channels on Telegram). These traders are attracted to the opportunity for a large and quick profit and agree to join the manipulation. However, as a result, they will be duped and will stay in losses. The only people who will profit from this manipulation are the organizers who designed and carried it out. A separate article goes into greater detail about Pump&Dump.

An example of “Pump&Dump” manipulation on the chart.

Spoofing

This type of manipulation entails creating a large number of buy/sell orders for a specific cryptocurrency with no intention of executing them. Orders are canceled as soon as the price gets close. This manipulation aims to create the impression that there are a large number of sellers or buyers on the market for this exact asset and at this very moment. It's a way to persuade other investors to make a false transaction by creating the illusion of hyped demand or a total sell-off.

Trading bots are typically used to implement this kind of manipulation. Robots can open numerous orders quickly (in a matter of seconds), giving the impression that there is a lot of activity in the market.

Flashing

This is a short-term demonstration of the intention to carry out a trade (placing positions in an order book for a split second with instant cancellation, which resembles flashing, hence the name). This is how a false impression of current crypto-asset market prices is created artificially.

Layering

This is very similar to spoofing. The manipulator also places numerous buy/sell orders at various price levels. Naturally, orders are canceled later. However, the presence of orders for significant amounts in order books affects traders' moods and frequently results in changes for lower or higher prices. It is simple to deduce that in this way the “crowd” is encouraged to purchase assets at higher prices and sell them at lower ones.

Whale moves

Whales are large-scale investors (often institutional) who own significant amounts of a specific cryptocurrency. Therefore, any “whale” operations conducted on public platforms (not through the OTC) result in significant price and market fluctuations. The only time such actions can be deemed manipulative, though, is when they are taken to artificially alter the rate of a cryptocurrency. This does not apply when existing assets are urgently sold off without regard for any direct impact on the market (though it will not make things any easier for other traders). 

An example of whales selling off an asset, resulting in a significant drop in the rate

Wash trading

It is an interesting type of fictitious trading in which trades are conducted without any genuine change in asset ownership. The manipulator places a sell order while simultaneously placing a buy order for the same asset at a similar price. Thus, a certain movement occurs, the number of trades increases, the volume of trades goes up, but the owner of the asset remains unchanged. Several dozen such wash traders can significantly improve the statistics of any exchange, even if no assets are moved. This manipulation is frequently used by market makers who work for the benefit of a specific exchange or project (we have already covered who they are and what their actions are for). 

An example of Wash trading in the stock market.

When such actions are taken by two traders who are acting in collusion, it is referred to as matched orders.

The manipulation carried out with the assistance of bots is dubbed “ping pong“. 

Fake news

Manipulation is carried out through the spread of various false information related to a specific asset: rumors about a collaboration with a well-known brand, possible listings on top exchanges, the criminal prosecution of one of the project's co-founders, the unlocking of a significant number of coins that have been in the pool for a long time, and so on.

Such information drives can serve as catalysts for a tangible change in the asset's value. For example, as soon as there are rumors about a token (even some shitcoin) being listed on a crypto exchange like Binance or Huobi, traders rush to buy it, hoping for its price to rise. In contrast, as soon as news of a token's delisting from well-known exchanges, traders begin actively selling, and the price falls.

An example of media manipulation

There are other types of manipulation, such as front running (trading based on insider information that may be false), bear raid, and so on. However, they are not as relevant to the cryptocurrency market as the examples given above.

Trade wisely and avoid manipulators' traps!