Author: Doumkou Stefani
Publication date: 26.08.2024
In the wild West of crypto, with a lack of regulations, market manipulation is rife. Big players are in cahoots with whales to create spikes and dips in order to fleece small and unsuspecting investors. An understanding of these strategies is the only way one can navigate through the super-volatile crypto landscape safely.
In the following article, we will explore how market manipulation in the cryptocurrency world unfolds, examining the tactics used by whales and other players to sway prices and take advantage of less experienced investors.
The Power of Whales
In the cryptocurrency world, "whales" are those holding a huge amount of a certain cryptocurrency. With such large holdings, whales can easily move the market price by their trading behaviour. Unlike in conventional financial markets, where regulators are really on top of their game regarding large transactions, the crypto market is largely unregulated and hence allows more scope for the power of whales to be expressed.
Whale Tactics
Whales utilize a variety of tactics to manipulate the market in their favour. Understanding these strategies is crucial for smaller investors to protect themselves. Let’s see one by one the three major tactics.
Pump and Dump Schemes: Inflating Prices for Profitable Exits
Whales can buy large amounts of a cryptocurrency to raise the price to an unrealistically high level (the pump) and then sell off their coins at peak prices, causing the money to plummet—the dump—to leave the smaller investors with huge losses while the whales walk away with overwhelming gains.
Example
Start: Whale owns 10 million units at $0.01 each ($100,000).
Pump: Whale buys more, price rises to $0.10. Holdings now worth $1,000,000.
Dump: Whale sells 9 million units at $0.10 ($900,000). Price crashes to $0.02.
Result: Whale has $920,000 ($900,000 cash + $20,000 remaining holdings). Small investors lose.
Spoofing: Creating Illusions of Market Demand
Another of the techniques whales use involves spoofing, a technique whereby large buying or selling orders are created but never intended to be executed. These phantom orders create an illusion of demand or supply that suckers other traders into reacting in ways that benefit the whale.
Example
Start: Bitcoin at $50,000.
Spoof: Whale places fake buy order for 100 BTC at $49,950.
Effect: Price rises to $50,500. Whale cancels order and sells 100 BTC at $50,500.
Profit: Whale makes $55,000.
Sell Walls: Setting Psychological Barriers in the Market
Whales may place a massive sell order at a specific price, creating a psychological barrier known as a "sell wall." This tactic discourages buying above that price, effectively suppressing the cryptocurrency's price and allowing the whale to control market movements.
Example
Start: Crypto at $100.
Sell Wall: Whale places 50,000 units sell order at $105 ($5,250,000).
Effect: Price stagnates. Whale buys more at $100.
Remove Wall: Price rises to $110. Whale's new holdings increase in value by $100,000.
Other Manipulative Schemes
Beyond whaling, the crypto market is rife with other forms of manipulation:
Wash Trading: This involves buying and selling the same cryptocurrency to create artificial trading volume. This can mislead investors into thinking a cryptocurrency is more popular or liquid than it actually is.
FUD (Fear, Uncertainty, Doubt): Spreading false or exaggerated negative news can cause panic selling, allowing manipulators to buy at lower prices.
Rug Pulls: In decentralized finance (DeFi), developers or malicious actors suddenly withdraw all the liquidity from a project, leaving investors with worthless tokens.
Bear Raiding: This tactic drives down cryptocurrency prices by spreading rumours or selling large amounts quickly. Manipulators and competitors use it to accelerate price declines, maximize profits, or weaken rivals.
Conclusion
Market manipulation in cryptocurrencies is a complex issue that can have severe consequences for unsuspecting investors. Therefore, protection from market manipulation in cryptocurrency is based on being one step ahead. Staying ahead mean avoid making impulsive decisions driven by hype FOMO (Fear of Missing Out) and use stop-loss orders carefully as they can be exploited. In general, awareness is essential for anyone involved in cryptocurrency trading or investment.
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