When it comes to the crypto markets, most people describe them as volatile, unregulated, and think that they are easier to manipulate than the traditional markets since their market caps are smaller. In this article, we will talk about how a market manipulation works, give some related news and possible prevention against them.
Types of Market Manipulation
Before we get down to business, we will first explain the types of market manipulation to give you a general understanding of what those are and how they work. Three of the main ways to do conduct manipulations are Pump and Dumps, Wash Trading, and Dark Pool Trading. All three operate in different ways but share the same purpose of misleading the market sentiment and profiting from it.
Pump and Dumps are a common crime in both traditional markets and crypto markets. By gradually buying coins at higher prices to drive up the market price in the course of several days, the manipulators attract more new investors to step into the market and further increase the price. Once the price reaches the desired height, the manipulators cash out their accumulated assets. Additionally, some investors might think it is a temporary drop in price and continue to buy in; making a second dump possible for the manipulators. This tactic is more effective in crypto markets with low market caps as the price can change very quickly and they are historically very volatile.
Another tactic called Wash Trading consists of buying and selling, with one’s own funds, to create a deception in the trading volume, this is usually conducted by exchanges wishing to fake their trading volume or originator of an asset to create a buzz around their assets. In 2017, Bitfinex users found out that trades between the same account were possible and accused the exchange of faking its trading volume.
This type of practices are quite common in the cryptocurrency markets and only a few exchanges like Bybit or Binance are known to not fake their volumes.
The third market manipulation scheme called Dark Pool Trading refers to private exchanges allowing large capital traders to trade with one another without this being known, or available, to the public market. Because of this, the market is not changed as it normally would, and fewer opportunities are provided to the general public; effectively making it a form of market manipulation.
Market Manipulation Examples
Many such cases happened before, we are now going to talk about the epic rise of Bitcoin in 2017. According to an independent research conducted by John Griffin, at least half of the price rise in 2017 was due to manipulations done through the use of another cryptocurrency called Tether, or USDT. It was reported that Tether was used to buy Bitcoin at key points when the Bitcoin price was declining, helping to stabilize and manipulate its price.
In the research conducted by John Griffin, a finance professor of the University of Texas who has been tracking financial fraud for nearly a decade, he found that Tether was used to buy Bitcoin after large price falls to create price support for Bitcoin. Some people are worried that the lack of transparency surrounding Tether may have helped. Another concern about the coin is that the Tether company might not actually hold enough USD to back all of its digital coins in circulation.
Nobody knows the exact story behind it all, however, the professor stated that there were rumors surrounding some suspicious activities.
Recent news about a Bitcoin market manipulation was reported on January 11. It is said that it caused the BTC price to drop twice in 24 hours from $4000 to $3600. The sudden crash raised doubts on possible manipulations. Meanwhile, the drop was believed to have connections with a significant activity of the USDT, indicating that the previous trading may be related to a liquidity injection of Tether.
For starters who just entered the crypto market, it is hard to recognize whether or not you have encountered these schemes because even for experienced traders these can be very tricky to spot. What we can suggest, to avoid losses from such practices, is to always keep up with the price of the cryptocurrency you are trading from several reputable sources, do some research before you invest in a new coin, and learn about the fundamentals of these assets.
This concludes today’s article on market manipulation and some related news. We hope you learned a lot, enjoyed the read, and stay tuned for more great content.