The cryptocurrency market is often considered the wild west of trading due to low regulations and that it’s perceived to be a haven for price manipulators.
In the not-so-distant past, market participants were mainly crypto miners and anarchists who stuck with smaller trades. Some might say it was a more for recreation than for profit. As times changed and more people saw opportunity in the crypto space, the injection of institutional investment and valuation lured more players in. Experienced Forex traders saw that digital markets worked in the same way; in essence, feeding off the trends behind supply and demand.
High market volatility is like air for traders of different asset classes, and cryptocurrency traders are no exception. It enables them to make huge gains and place multiple trades within a relatively short amount of time.
It’s important to note that a sudden rise in volatility is often the result of market manipulating techniques, which can often lead to huge losses as trading is a zero-sum game.
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Now, we must stress that market manipulation is an illegal act. It can drives the price of an asset in a bullish or bearish direction. And with that kind of foresight, market manipulators can potentially garner huge profits. Here are some manipulation techniques that you should be wary of.
Beware of shillers
While shilling is not illegal, many times a group of people will be planted in the market’s trollbox or on social media platforms to spread false information or hype up (or down play) a token, project, or their developers.
It turns into a very slipper slope when shilling crosses the line to falsify quotes or prices to create an inflated picture of the demand for a particular altcoin. Deploying deceitful techniques to pad numbers or manipulate confidence can and does affect the price of cryptocurrency.
Churning
Churning is a manipulative practice that is carried out by unscrupulous brokers who make discretionary trades on behalf of a client only to make money through commissions due to excessive trading.
Wash Trading
Another price manipulation technique, wash trading involves buying a cryptocurrency from one broker and immediately selling it on another exchange without ever owning the share.
Pump and Dump
A popular term for market watchers, pump and dumps involve spreading exaggerated, false information to coerce whales or big time investors into buying in (or dumping) interest in a particular asset. When the whales are on the move, it often catches small-time investors who want in on the action, except they might not realize the price is being driven up (or down). Then the whales reverse action because they’ve reached their profit margins.
Bear Raiding
Here is an illegal practice where a group of investors come together to force the price of a cryptocurrency into a bearish trend through combined short sell orders, while at the same time shilling false news about the target cryptocurrency.
Market Cornering
In the cryptocurrency market, cornering is common among cryptocurrencies with very low market capitalization. Any actor, good or bad, can buy huge amounts of tokens in an unregulated ICO to then manipulate and control price later on.
The battle against crypto market manipulation
According to SEC’s record, cryptocurrency markets is ranked high among manipulated asset classes and countries like Japan are taking steps to protect their consumers.
Japan looks at setting a global benchmark law in the area of regulating cryptocurrencies. As such, on May 31, 2019, the Japanese House of Representatives amended two crypto-related laws which include the Payment Service Act and the Financial Instrument and Exchange Act; both effective in April, 2020.
FIEA addresses market manipulation by stating that it is unlawful, by any individual or entity, from the dissemination of rumors, usage of fraudulent means to sell or purchase any crypto asset.
A further move by Anderson Mori and Tomotsune was set to outline areas that constitute a breach of law:
- Engaging in fake sales and purchases
- Engage in collusive sales and purchases
- Entrust with or accept any entrustment of counterfeit sales and acquisitions or deceitful sales and investments
- Engage in market manipulation through representation and similar acts
Here are a few ways you can avoid market manipulation.
Turn a deaf ear to mob mentality. They shill fear, uncertainty, and doubt (FUD) and mess with your psyche to play on FOMO, your fear of missing out. The best way to avoid FUD an FOMO is to follow a strict mechanical trading strategy.
Stick with trading cryptocurrencies that are among the top 15 to 20 rankings by market capitalization; these are less likely to experience manipulation.
Keep a reasonable amount of your cryptos in cold storage and avoid margin calls on exchanges. There are two sub lessons in this: 1. Only trade what you’re willing or able to lose, and 2. If it’s too good to be true, it probably is. Keep your assets on ice and trade responsibly.
Do plenty of research and be objective. You’re not in the market to fall in love. You’re in it to make money. Don’t let the market manipulators convince you that making bad decisions is a good idea.
