Market Manipulation in Crypto Exposed: 6 Proven Techniques of Defending Your Assets

The cryptocurrency market attracts a diverse range of investors and is becoming increasingly susceptible to manipulation. The lack of stringent regulations and decentralized nature of crypto has created an environment where some deceptive practices can flourish, often at the expense of unsuspecting retail investors.

A report by the Financial Stability Board estimated that up to 90% of trading volume in some cryptocurrencies could be attributed to wash trading and other manipulative practices, raising serious concerns about market integrity.

It is now more essential than ever to be aware of these manipulations and to know how to protect yourself. Let's get straight in!

What is Market Manipulation?

Market manipulation refers to intentional actions taken by individuals or groups to deceive investors by artificially affecting the price of securities or commodities. This practice creates a false impression of supply or demand, misleading other market participants into making decisions based on distorted information.

According to the U.S. Securities Exchange Act of 1934, market manipulation encompasses any transactions that create or maintain an artificial price for a tradable security.

Market manipulation can take many forms, from pump-and-dump schemes to spoofing and bear raiding, each designed to exploit market inefficiencies and traders' emotional responses.

Market manipulative tactics have been shown to distort prices significantly. Due to coordinated manipulation efforts, some cryptocurrencies experience price fluctuations of over 200% within a single day.

Understanding these strategies is not merely an academic exercise; it is essential for anyone looking to find their safe way around this crowded crypto investing world.

To simplify this so you can detect any form of manipulation in any market segment, here are key characteristics they often have. If you pay attention to them, you will see them there.

Key Characteristics of Market Manipulations

• Intentional Deception: Market manipulation involves deliberate actions aimed at misleading investors. The most common way it is used in the crypto market is by spreading false information or engaging in misleading trading activities.

• Artificial Price Movement: The primary goal is to influence the price of a security or commodity, either by inflating it (as in pump and dump schemes) or deflating it (as in bear raids).

• Illegal Activity: Most forms of market manipulation are illegal in many jurisdictions, including the United States, where regulatory bodies like the Securities and Exchange Commission (SEC) actively monitor and prosecute such activities.

Why Market Manipulation is a Big Thing in Crypto

Market manipulation is particularly prevalent in cryptocurrency due to several factors, including the lack of regulation, the high volatility of digital assets, and the presence of influential players known as "whales." These conditions create an environment ripe for deceptive practices that significantly impact market dynamics. One of the most notable incidents illustrating the dangers of market manipulation in crypto is the collapse of FTX, which serves as a cautionary tale for investors.

Market Manipulation And FTX Collapse

The downfall of FTX, once one of the largest cryptocurrency exchanges globally, is a stark example of how manipulation can lead to catastrophic consequences. The exchange was founded by Sam Bankman-Fried in 2019. FTX experienced rapid growth, attracting millions in investments and endorsements from high-profile celebrities. However, its collapse in November 2022 revealed deep-seated financial mismanagement and manipulation issues that surprised the entire crypto market.

The crisis began on November 2, 2022, when CoinDesk published a report revealing that Alameda Research, a trading firm founded by Bankman-Fried, held a significant amount of FTX's exchange token (FTT). This raised concerns about the financial health of both entities and their interdependencies. Alameda's balance sheet relied heavily on FTT and other speculative tokens rather than stable assets.

As news spread, customer withdrawals surged on November 6, triggering a liquidity crisis at FTX. Investors rushed to withdraw their funds, leading to a dramatic drop in the value of FTT and other cryptocurrencies. In an attempt to stabilize the situation, Binance announced on November 8 that it would acquire FTX. However, after conducting due diligence, Binance withdrew its offer on November 9, citing concerns over FTX's financial practices. This decision further exacerbated panic among investors, causing Bitcoin to plummet nearly 13% in value following these announcements.

The situation escalated quickly; on November 11, FTX filed for Chapter 11 bankruptcy protection, revealing that it owed approximately $8 billion to customers and investors. Bankman-Fried resigned as CEO amidst mounting scrutiny and allegations of fraud. Shortly after filing for bankruptcy, FTX reported unauthorized transactions amounting to around $477 million, which was suspected to be part of a hack or internal mismanagement.

The fallout from the FTX collapse extended far beyond its immediate stakeholders. The event triggered a significant downturn across the cryptocurrency market; Bitcoin's price dropped to its lowest level in two years. Other platforms like BlockFi halted operations due to their exposure to FTX's collapse, creating a domino effect that impacted liquidity across various exchanges. The incident also prompted calls for increased regulation within cryptocurrency as lawmakers sought to prevent similar occurrences.

Do Kwon and Terraform Downfall- Another Instance of the Dangers of Market Manipulation

In addition to the FTX collapse, the Do Kwon and Terraform Labs saga serves as another glaring example of market manipulation in cryptocurrency. Do Kwon, the co-founder of Terraform Labs, gained notoriety for his role in creating the algorithmic stablecoin TerraUSD (UST) and its sister token LUNA. The ambitious project promised high yields and stability, attracting billions in investments. However, it ultimately unraveled spectacularly, leading to significant financial losses for investors and raising serious questions about the integrity of Kwon's operations.

From April 2018 until its collapse in May 2022, Terraform Labs raised billions by marketing UST and LUNA as secure investments. The company claimed that UST would maintain its peg to the U.S. dollar through a complex mechanism involving LUNA, which was supposed to absorb volatility. However, the reality was far different. The UST depegged from the dollar in May 2022, leading to a catastrophic drop in value for both UST and LUNA. At its peak, LUNA had a market capitalization of around $40 billion, but it plummeted to near zero almost overnight as confidence evaporated.

The U.S. Securities and Exchange Commission (SEC) charged Kwon and Terraform Labs with orchestrating a multi-billion dollar fraud scheme. According to the SEC's complaint, Kwon repeatedly misled investors about the stability of UST while promoting it as a "yield-bearing" stablecoin that could pay up to 20% interest through its Anchor Protocol-the SEC described Terraform's operations as "neither decentralized nor finance" but rather a fraud propped up by misleading claims and deceptive practices.

In June 2023, Kwon settled with the SEC for $4.5 billion, marking one of the largest settlements related to securities fraud in history. He was found liable for defrauding investors through unregistered crypto asset securities transactions.

These are just a few key incidents and characteristics they often have. They go beyond the obvious and dubious as this FTX collapse. They also involve manipulations like pump-and-dump, spoiling, washing trading, bear riding, and selling walls. In the coming section, we will examine what all these mean.

But before that, why should you understand these common forms of market manipulation? It is pretty simple: to protect yourself from becoming a victim.

Understanding these characteristics and forms of market manipulation is crucial, especially for day-to-day traders and investors looking to protect their portfolios from deceptive practices that could lead to significant financial losses.

Why Understanding Market Manipulation is Key to Self-Protection

Manipulation is a psychological and logical attack on investors' intelligence. Without a nuanced understanding of how these manipulations work, investors may adopt a naive approach, believing that price movements are driven purely by market fundamentals. This ignorance can lead to significant financial losses, as manipulative tactics often exploit the unprepared.

The consequences of failing to recognize market manipulation can be dire. For example, a 2018 study by researchers at the University of Texas found that $865 million worth of Bitcoin was manipulated through Tether transactions, artificially inflating Bitcoin's price during significant market rallies. Investors who were unaware of these manipulative tactics ended up buying at inflated prices, only to suffer losses when the price corrected.

Now let's explain what these common strategies are with popular victim case studies and the scenarios they take form;

Common Types of Market Manipulation Strategies Explained

1. Pump and Dump Schemes:

Pump and dump schemes involve artificially inflating the price of a cryptocurrency through misleading information or coordinated buying efforts. Once the price reaches a peak, manipulators sell off their holdings for profit, causing the price to plummet.

Source: empirica.io

A notable example occurred with BitConnect, which was heavily promoted through social media channels and online forums. As more investors bought into the hype, the price surged from around $0.10 in early 2017 to an all-time high of $463 in December 2017. The orchestrators eventually sold their holdings at inflated prices, leading to massive losses of over $2.3 Billion for latecomers when the price collapsed back down to nearly zero.

2. Spoofing

Spoofing involves placing large buy or sell orders that are never intended to be executed. This tactic creates an illusion of market demand or supply, tricking other traders into making decisions based on false signals.

For instance, a whale might place a fake buy order for 100 BTC at $49,950. As other traders see this order and react by buying, the price rises to $50,500. The whale then cancels their order and sells 100 BTC at the elevated price.

3. Wash Trading

Wash trading occurs when an investor simultaneously buys and sells the same asset to create artificial trading volume. This practice misleads other investors into thinking there is genuine interest in a cryptocurrency.

In 2020, research indicated that nearly 70% of Bitcoin trading volume on certain exchanges was attributed to wash trading practices. Traders manipulate the market by executing numerous trades back and forth between two accounts they control, giving the appearance of high demand for low-cap cryptocurrencies.

4. Bear Raiding

Bear raiding involves a coordinated effort to manipulate the price of an asset downward. By quickly selling large quantities of the asset, manipulators create downward pressure on its price. This tactic is often accompanied by the dissemination of negative rumors or misinformation, which will incite panic among investors and lead to even more selling.

The goal of bear raiding is twofold: first, to drive the price down significantly, and second, to buy back the asset at a lower price after the panic selling has occurred. This essentially allows the manipulators to profit from the difference between the higher price at which they initially sold and the lower price at which they repurchase the asset. In this sense, it resembles short selling, where traders profit from a decline in an asset's price.

In 2020, allegations surfaced that certain traders were engaging in bear raiding against Chainlink, spreading FUD (Fear, Uncertainty, Doubt) on social media platforms like Twitter and Reddit. This tactic caused panic selling among less experienced investors.

5. Sell Walls

Manipulators can establish massive sell orders at specific prices to create psychological barriers that suppress buying interest.

Let's explain this further: suppose a whale places a sell wall at $105 for 50,000 units of cryptocurrency that are currently priced at $100. This discourages buyers from pushing past that price point, allowing the whale to accumulate more assets at lower prices before removing the wall.

These are the common strategies used heavily in crypto. Knowing this, you, as an investor, should be vigilant for sudden price spikes or drops without corresponding news events or trends. Pay close attention to unusual trading volumes concentrated over short periods and patterns of coordinated online discussions indicating manipulation attempts.

How to Protect Yourself and Recognize Genuine Value in Crypto Projects

To safeguard against market manipulation, investors and traders can employ several protective mechanisms:

1. Research and Staying Informed: Understanding fundamental analysis and keeping up with news in the space is important for recognizing genuine project value and most especially identifying emerging trends. This will help you make informed decisions and avoid falling victim to market manipulation.

2. Utilizing Technology: Tools like CoinBrain provide features designed to help users identify potential red flags in crypto projects.

3. Diversification: Spreading investments across multiple projects can mitigate risks associated with any single asset's volatility.

5. Using Advanced Trading Tools: Platforms offering AI-driven algorithms can help detect unusual trading patterns indicative of manipulation.

6. Community Engagement: Participating in community discussions on platforms like Reddit or Telegram can provide insights into potential red flags.

The Bottom Line

Understanding market manipulation strategies is essential for anyone involved in cryptocurrency investments. By recognizing common tactics, investors can better protect themselves from significant losses.

Utilizing tools like CoinBrain enhances this protection by providing critical insights into market dynamics while enabling users to identify genuine projects amidst rampant manipulation attempts. Investors are urged to remain vigilant and informed about their investments while prioritizing genuine projects over those exhibiting suspicious behavior.

Navigating the complexities of cryptocurrencies requires diligence and awareness of manipulative practices that could jeopardize financial security. But now that you've understood all these pay close attention to them and reverse back anytime to see what and where they fall into.