The opportunities for investing in cryptocurrency keep growing, but one thing that participants need to be aware of is the potential for market manipulation. Attempts to game the system and maximize profit are nothing new to investors, and the world of cryptocurrency markets are no different.
While market manipulation in traditional financial markets is often investigated and sometimes prosecuted, crypto markets are just now coming into focus. In fact, a number of government agencies are taking a closer look lately at market manipulation in cryptocurrency. Investors should become familiar with some of the more common manipulation attempts at profiteering, so they can better protect their investments.
Pump and Dump
Taken from a similar manipulation of the stock market, a pump and dump is one way of boosting both holdings and profits. It happens when traders artificially inflate the price of cryptocurrency coins (pump) through false and misleading statements. They sell most or all of their low-value cryptocurrency coins to investors at a higher price. Once the traders who engaged in the pump sell their overvalued coins (dump), the market corrects downward and the new investors lose.
The key to a successful pump and dump is that traders use false and misleading statements and information to sell their low-value crypto coins. The campaign to pump up the value of coins is based on hype and artificial information. The messaging takes many forms, like communication posted online in forums, email campaigns, and even fake press releases.
In crypto, Telegram groups and other social media channels are sometimes formed to organize pumps, with “signals” being sent to traders to trigger buy and sell activity. There are frequently multiple layers or circles that make up pump groups, with the inner circle getting signals earlier than members being manipulated into participating in the outer circles. The traders in these outer circles often falsely believe they are getting early information about a pump.
When a pump campaign is successful, and enough hype is generated, unknowing investors buy coins at the increased price. As the promotion slows down, so does the demand and then the value tumbles from its artificially pumped levels to a more authentic value.
Whenever someone uses non-public work-related information to make investment decisions, it’s known as insider trading. Because they have access to confidential information before the public does, they can make financial decisions regarding their investments that benefit themselves, knowing what will happen in the future.
One example of insider trading would be when a popular exchange is about to list a new coin and some team members buy or sell their coins because of that info. As more groups attempt to manipulate the market with insider trading, there will be more scrutiny. For example, a currency exchange recently had a class action lawsuit filed against it for engaging in insider trading.
One type of market manipulator is known as a whale, named because they are often the biggest member in the investment “ocean.” In the world of cryptocurrency, whales are those with large quantities of coins that use their percentage to manipulate the market. When they try to unload these large quantities, it results in a drop in the value of the coin. The price is lowered for everyone else as well. Often, when investors see the value of their coin drop, they quickly sell. The whale can then snap up large quantities of the coin at a lower price and wait for it to increase in price again.
Investing in cryptocurrency is all about looking for clues within the market that indicates when the best times to buy and sell are. With spoofing, an investor sends out false signals of large buys or sells to come, hoping to manipulate the market to their advantage.
Spoofing is making an offer to buy or sell with a plan of cancelling before following through. With cryptocurrency, the investor places very large sell or buy orders but has no intention of fulfilling them. They wait for other investors to see, panic and either buy or sell according to what they think is happening. The spoofer cancels the sale and then creates a real purchase or sale at the manipulated value.