Market manipulation happens when an individual or a group tries to deceive investors by influencing the price or behavior in the market.
It happens in stock markets, and cryptocurrency is not an exemption. Due to its growing popularity, cryptocurrency attracts crooks for financial gain.
They accomplish price manipulation in several ways. Here is a list of common market manipulation tactics in the cryptoverse:
Spoofing happens when a trader creates large buy or sell orders to create an illusion of optimism or pessimism in the crypto market.
One of the reasons behind the volatility in crypto prices is market movement. When there is high demand for a coin, the price goes up. When demand for that coin is low, the price goes down.
Spoofy, an unknown trader who intends to commit spoofing, attempts to move the price by creating large buy or sell orders but has no plans of filling them.
The spoofy, for example, creates a large buy order to drive the crypto price up. Once the price reaches his desired price, he cancels the buy order and fulfills a sell order instead.
The spoofy can also create a panic sell by placing a large sell order. Once the vulnerable users sell their assets, the spoofy removes his sell order and buys coins at a profitable price.
Pump and dump
A pump and dump is executed by inflating a coin’s price to get attention.
The individual behind this scheme pumps the value of a coin by buying a large amount. When enough unsuspecting investors join in, the plotter dumps the coins and reap the rich harvest of his scheme.
This ploy usually involves more than one person. Hundreds of users plan a pump and dump in a network like Reddit and Telegram.
The usual targets of the pump and dump scheme are small-cap cryptocurrencies. It is because coins with a larger market are more likely stable.
Wash trading pertains to the creation of fake liquidity in a cryptocurrency. The individual or a group makes it look like the market is active by simultaneously buying and selling the same crypto.
The false volume and liquidity, which lead to the distorted price, attract traders into investing in the same cryptocurrency.
Wash trading happens in shady and unregulated cryptocurrency exchanges. The exchange itself will create false trades to increase the activity and bait traders.
Propagators of this scheme even create bots to penetrate price-tracking websites and other crypto data sites. Traders do their crypto research on these sites before executing a transaction.
It takes a whale (an individual, group, or institution that holds a significant amount of cryptocurrency) to execute a stop hunt.
The whale makes a huge profit by hunting a price where most people set their stop-loss orders. A stop-loss order is a price at which a trader intends to buy or sell a specific stock to prevent huge losses.
The hunter (the whale) drives the price down by creating sell orders. Once the price hits where the stop-loss orders are, the stop-loss orders are triggered. This whale enters to rebuy the coins at a very low price.
Protecting your crypto from market manipulation
Spotting signs of market manipulation can be tricky for beginners in crypto trading. There are, however, precautions you should observe to avoid traps.
The DYOR (do your own research) tip never gets old. Do not base your decisions on the order book alone. Check other reliable crypto data sites to confirm your suppositions.
Check the crypto’s historical price movement. Basing your decisions on recent and sudden price movements often leads to emotional trading.
Not putting all your eggs in one basket prevents your assets from being devoured by greedy and malicious traders.
Having a long-term view works for beginners while still studying the ins and outs of crypto trading. A wise piece of advice from expert traders is to only take risks you can afford.
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