Market manipulation is a common practice used by many large capital traders and institutions, even if no one of its users would say so.
The reason is that it is not a legal practice: it implies illegitimate profits made at the cost of unsophisticated and naive investors.
The crypto market is one of the most manipulated environments nowadays because it still lacks regulation, being it relatively newborn.
Moreover, the potential profits from illicit practices here are huge. These can appear both in high-frequency trading and in an investing perspective.
It is at the discretion of the wise trader to know how to identify market manipulation techniques and associate them with the right timeframes.
The purpose of this article is to provide general information and incentivize the awareness of the dangers in financial markets, especially in a relatively newborn one like crypto.
News
The most used, efficient, and known means that can be used for market manipulation. Effectively, more than just a technique – it can be a whole financial tool. This is not only crypto-related: news can be used in every type of market.
News is not just a means of information. It’s very powerful when it comes to manipulating the psychology of markets. The reason why news is efficient has its root in the human psyche itself. However, the news is the most impactful source of information for the average trader.
Remember, everything that is directed to the average trader is not to be looked upon, unless with the right perspective, which is that of the market maker or sophisticated investor.
Through the news, the manipulators can induce certain reactions and cause a large retail movement in the markets. By establishing a herd bias, enough liquidity is available in the opposite direction and manipulators can take advantage of it by filling their orders.
But the news is also used by illicit traders for other reasons, such as deviating interest. At the end of the day, this can be considered a gateway to enhancing any market manipulation techniques.
The impact of news on price action varies on gravity. Some may last short-term, and some may induce a long-term trend.
Ramping
In the case of crypto, ramping means buying a large amount of a coin or token to push the price and induce market interest. The manipulators use this technique to raise demand and boost the business for the targeted asset, bringing the price to an overbought state; in other words, the asset is overpriced. After enough demand has grown, they sell the coin to make quick profits at the expense of the unsophisticated investors that got greedy and attracted by the large price movements.
Such practice can be done by whoever can buy large shares of that particular crypto. Both by the team behind the asset or currency, that can use their treasury to buy its own developed asset, or by outside traders that just want to make quick profits by selling at the overbought price.
It is important to notice that the profits made from this technique are based mostly on the incongruence between value & productivity and price.
It is important to notice that the profits made from this technique are based mostly on the incongruence between value & productivity and price.
If the productivity of the asset doesn’t justify the price, it is considered overbought/overpriced. It is important to always verify the intrinsic value and productivity of the asset before engaging with it.
Ramping may happen in higher timeframes, or as long as it is needed to induce enough market interest for the business and to push the price at profitable sell levels.
Spoofing
Spoofing is the act of placing large limit orders without the intention of filling, but only to make them appear in the order book and to give an illusion of buying or selling pressure. Such a technique is widely considered illegal because it intends to mislead investors about market interest.
When spoofers operate, they use fake orders that are large enough to induce a market reaction. These limit orders will be seen in the order book by market participants, which will react consequently, driving the price to the direction intended by the spoofer. When the price has reached sufficiently unbalanced levels, he cancels the fake orders and trades in the opposite direction.
This technique is mostly used for short-term trading since the spoofer is supposed to remove the orders. Moreover, the order book is particularly used as an indicator by day traders and intra-day traders.
Anyway, it is important to point out that not every canceled order comes from spoofing. For example, some may come just from legitimate large buyers or sellers that rethought their position. As you may have noticed, it may be difficult to distinguish manipulation from natural occurrences in the markets: this is why one should constantly improve his awareness and distinguish natural movements from unnatural ones.
Pump & Dump
P&Ds are one of the most famous market manipulation practices in crypto, because of the large number of low-cap environments. This technique is most efficient in non-liquid markets, such as tokens and coins with little capitalization, therefore easy to manipulate.
P&Ds are one of the most famous market manipulation practices in crypto, because of the large number of low-cap environments. This technique is most efficient in non-liquid markets, such as tokens and coins with little capitalization, therefore easy to manipulate.
The profit behind it comes from the timing. The managers of P&D groups choose in advance the coin or token to pump. They buy before they communicate to participants, then they sell as the participants buy. The latter will inevitably end up with no counterpart to sell, as they are selling altogether.
It’s important to understand that every time you want to make a trade you need two parts: one that buys and one that sells. If you are buying, there has to be someone that is selling. If selling, someone that is buying.
When the participants are buying, the P&D managers are selling. But to whom the participants are going to sell? They will find no buyers, forced to sell at much lower prices.
Pump & Dumps can happen in a very short time, or can either be very well organized strategies and last long in the market. After all, everything without intrinsic value can be considered a long P&D scheme.
Runs
Runs happen when a group of traders or an individual with sufficient following create activity and rumors with the intent of driving the price of an asset. It is common among influencers with not very legitimate intentions.
An influencer is an individual or entity that can play a role in the opinion of a consistent amount of people. In crypto, there could be figures of which contents and visions can be taken as valid insights by their followers.
Malicious runs happen when such entities create activity and rumors just to drive the price, without any actual interest in the asset itself, but only to speculate at the cost of the believers.
This technique helps us understand that it’s always our responsibility to check and verify for
intrinsic value, do our own research with due diligence, and never accept investment advice from non-official professional figures.
Wash Trading
Wash trading is also very common in crypto markets. It involves a large trader or investor, alone or in cooperation, that buys and sells assets to himself without any risks or changing his overall position.
Essentially speaking, wash trading means taking both the part of the buyers and the sellers, without losing any money in the process, just to give an illusion of trading activity and volume or to manipulate the asset price.
Cryptocurrency exchanges may use this to manipulate prices. Other possible users can be insiders. A project can use its own funds to wash trade, or they can recycle the funds raised from crowdfunding for this purpose.
The orders basically cancel each other out, but they are actually filled. An individual can do this by using different accounts, or in cooperation with a trading firm or exchange.
Wash trading may belong to short-term timeframes, but this depends on how much it is used in the environment. Most of the price action of an asset, especially when low-cap, may be a result
of wash trading.
In conclusion
As a conclusive statement, we can say:
Market manipulation intends to mislead traders, especially unsophisticated ones, in the wrong direction. It is a form of abuse, financial and psychological.
The most vulnerable markets have low capitalization and liquidity, since manipulators can easily influence volume and price.
The cryptocurrency market is still too exposed to illicit practices because of a lack of regulation. Hopefully, a large part of these techniques will be handicapped once regulators join the space.
However, this does not exclude that traders must be aware of these practices in every situation.
Distinguishing market manipulation can be difficult, but with the right understanding of what defines a natural movement and what doesn’t, traders can protect their money from malicious intentions.
Everything described in this article has the sole purpose of being informative and providing general information. The author has no intention of providing any financial advice, legal advice, or tax advice. Do not rely on this article to make investment decisions. Seek professional help before making any such decision. The author does not take any responsibility for loss or damage of any nature. The use you make of the information contained in this article is your sole responsibility.