Education

How Can You Identify and Protect Yourself From Crypto Market Manipulation?

Introduction

Manipulation of market prices has existed since the beginning of asset trading. Regulation of mature markets has made manipulating prices — and punishments that come with being caught — less enticing than in the new, wild cryptocurrency markets. In this article, we’ll cover how to identify crypto market manipulation and how to protect yourself from it.

Stock, bond, and mutual funds — long-standing “mature” markets — have strict regulation covering all who work in those systems. Stringent monitoring, reporting, and auditing standards also apply, along with fines and jail time for those who would flaunt the rules.

New markets — especially those of Bitcoin and popular “altcoins” — are unregulated, populated by anonymous participants (by design) who may have large holdings and not much crypto experience. (Attempts at regulation are currently underway, worldwide.)

Bad Actors are the Threat

Every day, bad actors attempt to influence the movement of market prices. The most prevalent action is scaring new and inexperienced investors, to sow panic, to influence the fearful to buy or sell at times advantageous to the price manipulators.

This sort of market price manipulation is referred to as cryptocurrency spoofing.

Cryptocurrency Spoofing

“Cryptocurrency spoofing is the process by which criminals attempt to artificially influence the price of a digital currency by creating fake orders. Spoofing is accomplished by creating the illusion of pessimism (or optimism) in the market.” – Twitter user @YouCantBuyFate

Spoofing requires that manipulators sow fear, uncertainty, and doubt (FUD) that causes others to buy or sell as best benefits the bad actors. Typically, they’ve gambled on these price movements by “short selling” (betting the price will go down) or “spread betting” (that the price will go up).

One method to spread FUD is a coordinated social media campaign, where seemingly unrelated posters influence investor sentiment with positive or negative messaging.

Another method is to place large buy or sell orders without any intention of executing them. When bad actors do this they trick others by making it appear that there’s a great demand for cryptocurrency (or a great glut of unwanted currency); in a free market the price will adjust accordingly, in a manipulated market the reaction drives the price as the bad actors want (and the orders are canceled).

Wash Trading

Similar to cryptocurrency spoofing, wash trading attempts to manipulate the market price by dishonest means. The mechanism is different: In wash trading the bad actors trade with themselves to create an illusion of great market demand for a cryptocurrency, luring unsuspecting investors into entering trades based on this false signal.

Pump and Dump

When wash trading happens between coordinated bad actors  — sometimes the coin creators or other core investors — it’s called a “pump and dump” action. The false appearance of high demand (the “pump”) for a cryptocurrency spurs unsuspecting investors into entering buy trades for this apparently “hot” coin. Then, the bad actors sell en masse (the “dump”), extracting profits for themselves at the expense of all others (who lose as the market price plummets).

Pump and dump existed in the penny stock market for decades, but the lack of regulation and the ease of digital trading has given this scam a new lease on life.

Protection From Manipulation

An abundance of caution is your best protection from cryptocurrency manipulation. Understanding that social media posts may not be as they appear, that an obscured motive might be the cause of exuberance or despair, may retard your knee-jerk reaction to buy or sell.

Just as stock market investors have been warned about placing too much weight on unsubstantiated “hot tips,” cryptocurrency investors must become used to the truism that once you — the general public — hear about something, the insiders have already taken action. 

Having a plan and understanding your risk tolerance goes a long way to prevent morning-after remorse.

The idea of trading in cryptocurrencies, trying to time the highs and lows to extract profit, and trying to gain advantage from hot tips is eschewed by a large group of HODLers.

HODLers — those who believe that a cryptocurrency will increase over time — incrementally buy that currency without any intention of selling, they hold. (HODL is an acronym for “Hold On for Dear Life”; the term has an interesting backstory all its own.)

Conclusion

This blog post covered some of the ways bad actors manipulate cryptocurrency market prices to benefit their plans, rather than the investment community at large. 

Be advised that certain social media posts (and even news) may be biased, and continue to practice due diligence when evaluating your crytpo strategy. 

HODLing, incrementally buying a cryptocurrency without selling prompted by outside forces, is a widely-adopted strategy to escape the influence of bad actors.

Come back for more educational content about the cryptocurrency market.

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