If you’re concerned about paying for goods in crypto due to price volatility, it’s worth noting that a good chunk of this price volatility isn’t just due to the herd stomping in one direction or another.
Just as there are good reasons why many cryptocurrencies can rise or fall rapidly – a successful development move, a big new use case, or simply signs of user adoption, prices in the volatile industry can soar very quickly drift – there are many ways they can be manipulated.
Here’s a look at how it happens and why it’s important.
In a way, manipulating the crypto market is similar to manipulating traditional exchanges – pump and dumps, wash trading, spoofing, stop hunting, and just spreading false rumors (which can be pretty easy in crypto).
Then there are tactics more characteristic of crypto, in particular buying and selling walls created by “whales” or owners of huge blocks of cryptocurrencies. This is not limited to Bitcoin. Ethereum’s ether has the same problem as many of the so-called “altcoins” – although ether, which has a market cap of around 45% that of bitcoin, has largely been dragged into its own ethereum category in recent years.
In a way, market manipulation is much easier with altcoins. Apart from a few dozen of the largest coins, they are often priced very little and the sums required to manipulate the market are not that large.
But just like Bitcoin, manipulating the crypto market has several unique characteristics that make it easier and harder to stop than the stock and commodity markets.
First, cryptocurrencies are pseudonymous—not entirely anonymous, as all transactions can be viewed on a publicly accessible blockchain—so a manipulative trader’s identity is hidden behind the key codes needed to send a crypto transaction.
See also: Crypto Basics Series: Is Bitcoin Really Anonymous and How Can Law Enforcement Track It?
However, it is not impossible. Blockchain data firms like Chainalysis and Ciphertrace, which have a long history of working with law enforcement agencies, say the public nature of blockchain makes tracking criminals somewhat easier than regular off-chain investigations.
Second, there are many bitcoin “whales” who bought or mined huge amounts of bitcoin when the price was pennies or a few dollars. The same is true for ether and virtually all altcoins: people had the ability to buy a lot for very little and now have the power to move the markets.
Third, while much of the trading of the major cryptocurrencies currently occurs on large, well-known, and well-regulated exchanges, there are hundreds, if not thousands, of smaller exchanges that trade smaller altcoins — as well as bitcoin and ether — many of them questionable honesty and with low liquidity.
And fourth, the volatility of the crypto market means tokens experience really quick price spikes. It’s hardly uncommon for Bitcoin to rise or fall by 10% in a day, a few hours, or even a few minutes. It can happen at any time of the day or night as crypto is 24/7 and global.
Pump and Dump
Starting with the obvious, there’s Pump and Dump, which comes in two flavors: traditional and insider.
In a traditional pump and dump, a manipulator spreads rumors about a token on social media communities such as Twitter, Medium, Discord, and Reddit forums. A flurry of buying drives prices up, sometimes triggering buying algorithms and bots until the manipulator sells, causing the price to crash – both due to market pressures and rumors that turned out to be false. In the highly volatile crypto market, this can take minutes.
More specifically, legitimate price spikes happen through legitimate news. Ether’s price jump when a developer set a tentative date for a very important blockchain update as part of the move to eco-friendly Ethereum 2.0 is one example. Tesla CEO Elon Musk’s ability to move his favorite memecoin Dogecoin is also a good example of this.
So, indirectly, is last week’s news that a Coinbase executive was arrested for alleged insider trading by buying tokens before the big and reputable exchange lists them, sparking a price spike dubbed the “Coinbase Effect” for years based on the exchange’s reputation for carefully scrutinizing the tokens it lists. The spikes were real in these cases.
Continue reading: SEC turns up the heat on Coinbase
The insider version is to just create a project, mint a new token and talk about how big it will get to encourage people to buy while insiders sell their own tokens and then walk away. Crypto makes this easier as creating a new token or even a decentralized finance (DeFi) project can largely be done with cut and paste.
As crypto continues to grow and more people switch to the larger exchanges that have the tools and teams to pay attention, wash trading is declining, but it’s far from gone. This means that either an individual or a group buys and resells a token at higher and higher prices and then discards it.
It’s much more common on smaller exchanges, some of which are dodgy or just don’t bother to look for it. The pseudonymous nature of crypto means it’s fairly easy to do so on a number of exchanges, making it harder to spot if you’re not looking for it. However, it is also much easier to spot once it has happened.
Stop the hunt and Whale Wall Spoofing
Stop Hunting is another method that draws on crypto traders’ techniques and specifically looks for stop-loss orders, often set at a specific level, based on a series of highly technical trading strategies.
A whale executes a series of sell orders, driving the price of a cryptocurrency to a certain level, and triggering the buy orders. This selling pressure can temporarily push prices lower and provide an opportunity to buy at a price that is likely to rise again.
In particular, large crypto moves often happen overnight when many traders are asleep — which is why day traders close at the end of the day.
Whale wall spoofing — essentially order book spoofing — involves placing buy or sell orders, creating an illusion of optimism or pessimism that prompts many traders to react, as a number of day trading techniques place orders accurately watch and move the prices. They then cancel the orders before they are fulfilled.
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