Because the cryptocurrency market is highly unregulated compared to something like the forex market, it is, unfortunately, subject to issues like price manipulation, as well as influencers and industry figures manipulating the masses via their tweet storms and other discussions.
This type of crypto market manipulation can wipe out a portfolio in months, as crypto investors have recently learned the hard way.
What Is Manipulation?
Manipulation by the standard definition is “to control or play upon by artful, unfair, or insidious means especially to one’s own advantage” and that definition is also applicable to finance. In markets, however, manipulation more specifically references high wealth individuals, such as whales, CEOs, or people with influence like the media, who use their size, power, or wealth as an unfair advantage to move the market as they wish.
It takes serious capital to move the market in such a way, so typically it is reserved for just major players or big fish. However, the advent of communities like WallStreetBets has created decentralized liquidity pools who all go in at once to create a bigger impact. Done at a smaller scale, it is called a pump and dump scheme.
Manipulation comes in a lot of shapes and forms, and doesn’t just involve capital as we’ll explain below.
Why Is Manipulation Possible In Crypto?
Manipulation is possible in crypto for a variety of reasons. The largest reason is the fact that the market isn’t regulated. Traditional markets have all kinds of guidelines in place that prevent and look for evidence of price manipulation and serious charges can be brought up.
It also exists more prominently in crypto because these emerging assets are a lot more illiquid than forex, commodities, stock indies, and other assets. Only when trading volume is at the highest does crypto behave like a normal market. Other times result in massive movements in price in a short time and creates the perfect environment for volatility.
Examples Of Manipulation
There are all kinds of types of manipulation in the crypto market. There’s spoofing, which involves placing large orders such as sell or buy walls only to later pull them as a means to influence the direction of the market.
There are also pump and dump schemes which involve traders with large followings calling for their audience to buy a certain coin. The price of the coin pumps as the followers listen – a type of behavioral manipulation – and then later dumps when the original trader begins taking profit. Even the followers know this is the plan, but all try to not to be the last buyer left holding the bag.
Other types of manipulation involve what’s been going on with Elon Musk, where he’s used his soapbox on Twitter to pump and dump the crypto market at will over the last several months. Unfortunately, crypto investors bought into the manipulation at first when Musk was pumping prices. But later when Musk turned his back on Bitcoin, he’s been crushing the market ever since and getting a kick out of it.
Elon Musk has even made jokes and shared memes poking fun at crypto losses, all at his own hand. If this was the stock market, Musk would have received a fine from the SEC or much worse.
How To Protect Against Manipulation In Crypto
There are a few ways to project against manipulation in crypto, but there’s no way to avoid it entirely. Within the crypto market there are some advanced trading platforms such as PrimeXBT that offer advanced trading tools such as built in technical analysis software, stop loss orders, and long and short positions on more than 50 different trading instruments.
Using the charting software, traders can get a read on where support and resistance may be, which is also where liquidations exist. Placing stop loss orders around these areas of interest can protect against wild market moves due to manipulation. Long and short orders let traders switch positions on the fly, and profit no matter which way the market moves.
Using Covesting copy trading can also be a tool for protecting oneself against manipulation, by relying on more experienced strategy managers who know how to survive in the waters along with whales and other manipulative players.
