Crypto Market Manipulation: How It Works and How to Protect Yourself

Hand with strings attached to a bitcoin symbol and dollar sign symbol.

Do you sometimes feel that the digital currency markets are manipulated? Do you find some of the Bart Simpson pattern-generating price-swings odd?

A simple Google search will reveal that you are not alone with your suspicions. Scores of “experts” and YouTube talking heads agree that price manipulation is rampant, and yes, that goes for the blue-chip entity, bitcoin too.

Most of the currently occurring manipulation is a direct result of the immature and unregulated nature of these markets. The good news is that there are some measures you can take to insulate yourself from the effects of market manipulation.

You can even completely cut its risks. 

So, What Is Market Manipulation?

Market manipulation occurs when a given entity deliberately and artificially induces a swing in the price of an asset. The primary goal of market manipulation is financial gain at the expense of other market participants. As such, it hurts bitcoin investment and hinders mass adoption.

The practice is illegal and immoral. It also constitutes interference with the fair and free operation of the market.

The unregulated digital currency realm is fertile ground for every type of asset price manipulation.

Some of the most common such practices are:

  • The ever-popular Pump and Dump
  • Wash Trading
  • Long/Short Liquidation Hunting
  • Whale Moves
  • Dark Pool Trading
  • Shilling
  • Spoofing

Pump and Dump – The Oldest Trick in the Book

It is common to pump a digital asset by buying massive quantities of it and then dumping it at the high-point of the resulting price-spike. Anyone with the means to buy up significant quantities of coins can do it.

Some perpetrators will use the basic pump and dump in combination with tactics such as shilling, spoofing, and wash trading.

Sometimes, pump-and-dumpers pool their resources in P&D groups for better efficiency. Despite the apparent simplicity of the technique, it is not easy to make money with it. It lends itself best to well-coordinated entities such as exchanges.

Even most P&D “foot soldiers” end up losing money, as only the top brass knows the exact timing of the dump.

Exchanges Use Wash Trading to Generate Volume

Wash trading refers to the simultaneous buying and selling of coins, for essentially the same price, by the same entity. Since no direct profits or losses result from this “water-treading” activity, why is it done?

The short answer is: volume. Wash trading makes it look like large quantities of an asset change hands over a short time. That, in turn, can mean increased investor interest, which can lead to a price spike.

Being able to show proper trading volumes is important for exchanges prestige-wise too.

Long/Short Liquidation Hunting Is the New Way for Exchanges to Make Money

Following the 2018 crash of the bitcoin and altcoin markets, the notorious volatility of the vertical has lost some of its bite for now. The spot markets no longer offer the sort of gains on bitcoin investment they did during 2017.

Bitcoin investors thirsting for action have thus turned to leveraged trading and high margin bets. Their spot trading fee-based revenues dropping, exchanges have started compensating. Some have increased their trading fees. Others have begun manipulating asset prices. Their goal is to trigger the liquidation of their clients’ leveraged long and short positions.

It may not be the cleanest way to make money, but sadly, it works.

Bitcoin Whales are on a Completely Different Level

Some 4.11 percent of bitcoin addresses own over 96 percent of all BTC in existence. When a true whale begins to throw its weight around, price ripples, or rather, tsunamis follow.

Pumping and dumping bitcoin is a walk in the park for such a whale.

Dark Pool Trading Gives Rise to New Whales

How does one with the proper financial means become a bitcoin whale these days? Wouldn’t the sudden acquisition of massive quantities of BTC send the price to the moon?

The answer is dark pool trading. Dark pools are private trading forums. Digital assets change hands in vast quantities at a set price on these forums. Given that the whole setup flies under the radar, it does not result in any “official” volume. Nor does it move the “official” price needle.

The Golden Era of Crypto Shilling is Still in Full Swing

YouTube is rife with talking heads pushing one altcoin or another. Some projects have massive armies of “fans”. These fans constantly talk up the virtues of these altcoins and attack their competitors.

The oft-declared goal of such shills is to pump the price of their chosen digital asset through sheer hype.

Spoofing May Be a Crude Approach to Manipulation, but It Certainly Works

Manipulators who spoof the markets launch a massive number of buy or sell orders. The “technique” will often result in fake buy/sell walls. These orders are then canceled before execution.

Spoofing is akin to a faked pump and dump. It never really pumps or dumps anything, but it tricks the market into believing that it does.

Manipulation Comes from Unaffiliated Groups as well the Exchanges Themselves

In fact, it is safe to assume that those who can manipulate the market may try at one point or another to do so. It truly is a free-for-all out there.

Unaffiliated manipulating entities may be whales, as well as the mentioned P&D groups.

Exchanges are without a doubt in the best position to manipulate prices. They are also extremely incentivized to do just that. The discussed market manipulation techniques are easy to execute for exchanges.

Let us not forget about trading bots either. Once again, exchanges are in the best position to take advantage of this potent manipulation tool.

What Can You Do to Avoid Losing Out to Manipulation?

The good news is that if you are a long-term bitcoin investor and holder, these short-term shenanigans will likely not affect you in any way. If your adrenaline receptors are only tickled by thoughts of bitcoin’s price in 2025, market manipulation is of no concern to you.

However, if you are a bitcoin trader, you are fully exposed to the possibility of market manipulation.

Reading into the fundamentals and generally doing your homework makes perfect sense and can go a long way toward protecting you from market manipulation. There’s something you can do above that, though.

Keep your eyes on the long and short positions and their ratio at your exchange. Fully expect a price dump or pump if that ratio begins to tip one way or the other. If longs become dominant, look for a dump. If shorts grow too high, a pump may be underway.

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