Cryptocurrency markets are known for their high volatility and a market cap that, while growing, remains small; this is a concern for many traders as such markets have the potential to be manipulated. In this article, we will explain what is market manipulation and give some suggestions to avoid suffering losses from such action.
What is Market Manipulation
In general, a market manipulation is an intentional act of altering the market and take advantage of it, oftentimes at the expense of others. The purpose of such action could be competition, profit, or other malicious intentions. Several types exist: spoofing, short and long squeezes, pump and dumps, and wash trading.
Spoofing is putting a large number of orders to affect market sentiment but with the intent of canceling the order before their execution. Usually, the spoofers do so by setting large buy or sell orders in the order book and canceling them when a buy or sell wall is formed. Spoofers use them to manufacture demand and supply in the market. As a result, a fake buy wall can lift the price up, and a fake sell wall will drag the price down.
Short and long squeezes happen when a large amount of short or long positions are called at a certain price range, making other traders follow the trend and thus drive the price further in a fixed direction. In this case, more new traders will be attracted to place an order in the trending price direction, fueling the trading momentum.
The most famous market manipulation is probably the pump and dump. It occurs when a group of traders, or a major trader, get a large number of trades in, for example by buying cryptocurrencies, before selling it all back in one go once the price reaches a new high. After an initial dump of funds, more traders start buying coins, creating a sudden rise in the price. As a result, more traders enter the market. At this time, the manipulators will exit the market and gain huge profits.
Another malicious practice is wash trading or the act of faking trade volume by repeatedly trading an asset among the same traders/users. The main difference of this type of market manipulation lies in the actors and intended purpose. In wash trading, the people doing so would simply buy and sell a commodity repeatedly without making much in the ways of profits or losses. This is done in order to artificially increase the trading volume and as such the appeal of said commodity or to artificially increase the trading volume of an exchange.
How to Avoid Losses From a Market Manipulation
As we all know, the crypto market is still quite nascent and lacks the regulations and scrutiny that other markets enjoy. Therefore, it is very important to know how to avoid losses due to market manipulation and assure your assets’ security. Here are some tips for you.
First of all, do not follow the trend blindly or place your orders merely based on rumors. Market manipulators use various tactics to reach their purposes and the market trend can be deceptive. If you are new to cryptocurrency trading and think that it is safer to follow other people’s choices, you might have fallen into a trap set by a manipulator.
Secondly, make sure to do enough background research before investing in a new cryptocurrency. Its price history and the liquidity can be good indicators for you to decide whether or not it is worth investing in. Find some related news or big events on major websites about this market and take the feedback into consideration. After all, the news is harder to fake than the price.
Thirdly, compare the price of that coin on several exchanges to know its current value in case that you pump into an exchange that is being manipulated. Getting more references would do you no harm when it comes to forming a good judgment, so do not rush it before placing an order and make sure to do proper research.
Last but not least, study the fundamentals of the crypto market you plan to invest in. Analysis from experienced investors are also useful, but it will do no harm if you learn how to make the strategies and analysis yourselves.
This concludes today’s article on what is market manipulation and the various ways to protect yourselves from it. Cryptocurrency markets are relatively new and unregulated. Be careful of the different ways of market manipulations, choose a trustworthy exchange and never risk more than you can afford to lose. We hope you learned a lot, enjoyed the read, and stay tuned for more great content.