Market manipulation makes crypto investing risky

If you’re concerned about paying for items in crypto because of price volatility, it’s worth noting that a good portion of that price volatility isn’t just the herd stamping in one direction or another.

Just as there are good reasons why many cryptocurrencies can see prices rise or fall quickly – a successful step in development, a major new use case or simply signs of user adoption can drive prices very quickly in the volatile industry – there are many ways they can be manipulated.

Here’s a look at how it happens, and why it’s important.

What manipulation?

In some ways, crypto market manipulation is similar to manipulation on traditional exchanges – pump and dumps, wash trading, spoofing, stop hunting and simply spreading false rumors (which can be quite easy to do in crypto).

Then there are tactics more peculiar to crypto, especially the buying and selling of 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 do many of the so-called “alt coins” – although in the last couple of years ether, which has a market capitalization of about 45% of bitcoin, has been largely carved out into its own category.

In some ways, market manipulation is much easier in altcoins. Apart from a few dozen of the largest coins, they often receive very little scrutiny, price-wise, and the sums involved in manipulating the market are not as large.

But just like bitcoin, crypto market manipulation has several unique characteristics that make it easier to do, and harder to stop, than in the stock and commodity markets.

First, cryptocurrencies are pseudonymous – not completely anonymous, as all transactions can be viewed on a publicly accessible blockchain – so the identity of a manipulative trader 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 computing firms such as Chainalysis and Ciphertrace, which have an extensive history of working with law enforcement, say that in some ways the public nature of blockchain makes tracking criminals easier than regular off-chain investigations.

Second, there are many bitcoin “whales” who bought or mined large amounts of bitcoin when the price was pennies or a few dollars. The same goes for Ether and virtually all altcoins: People had the ability to buy a lot for very little, and now have the power to move markets.

Third, while the vast majority of major cryptocurrencies are currently traded on large, well-known and well-regulated exchanges, there are hundreds, if not thousands, of small exchanges where smaller altcoins — as well as bitcoin and ether — are traded , many of questionable honesty and with thin liquidity.

And fourth, the volatility of the crypto market means that tokens really do see rapid price increases. It is hardly unheard of for bitcoin to rise or fall 10% in a day, a few hours or even a few minutes. It can happen anytime, day or night, since crypto is 24/7 and global.

Pump and dump

Starting with the obvious, there’s the 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 such as Twitter, Medium, Discord and Reddit forums. A series of buys drive prices up, sometimes triggering buying algorithms and bots, until the manipulator sells, causing the price to crash—both from market pressure and rumors that turned out to be false. In the highly volatile crypto market, this can take minutes.

More to the point, legitimate price increases from legitimate news do happen. The jump in ether’s price when a developer set a tentative date for a very important blockchain update in the transition to environmentally 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 is – indirectly – the news last week that a Coinbase manager was arrested for alleged insider trading by buying tokens before the large and respected exchange lists them, which for years has triggered a price spike called the “Coinbase effect”, which was based on the exchange’s reputation for doing due diligence on the tokens it lists. The spikes were legal in these cases.

Read more: SEC turns up the heat on Coinbase

The insider version is to simply create a project, create a new token and talk about how big it’s going to be to encourage people to buy, all while insiders sell their own tokens and then leave. Crypto makes this easier because creating a new token or even a decentralized finance (DeFi) project can pretty much be cut and pasted.

Laundry trade

As crypto gets bigger and more people move to the bigger exchanges that have tools and teams looking after it, wash trading is declining, but it’s far from gone. This involves either one person or a group buying and reselling a token for progressively higher prices, then dumping it.

It’s much more common on smaller exchanges, some of which are shady or simply don’t bother looking for it. The pseudonymous nature of crypto means it’s fairly easy to do this among a number of exchanges, making it harder to spot if you’re not looking for it. That said, it’s also much easier to spot once it’s happened.

Stop hunting and whale wall counterfeiting

The stop hunt is another one that relies on crypto traders’ techniques, specifically looking for stop-loss orders, which are often set at a specific level, based on a variety 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. That selling pressure can push prices down temporarily, providing the opportunity to buy at a price that is likely to bounce back.

In particular, big crypto moves often happen overnight when many traders are asleep – which is why day traders close out 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 variety of day trading techniques closely monitor orders and move prices. They then cancel the orders before they are filled.

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