In traditional financial markets, price manipulation is a serious charge that often brings down heavy fines and years of jail time on offenders. Cryptocurrency markets are the Wild West, however, and so crypto market manipulation is perpetrated on a daily basis with little to no repercussion for offenders.
While accusations and common refrains about market manipulation may seem all too common in the crypto marketplace, leading many to doubt the veracity of such claims, several studies by reputable organizations and investigators have confirmed it does exist.
What is cryptocurrency market manipulation, and how does it affect the prices that you and I buy in at? This quick guide to crypto market manipulation will explain the most common methods used by manipulators to influence crypto prices, markets, and volatility.
Buy Walls and Sell Walls
Before going ahead with the discussion on buy and sell walls, itʼs important to discuss a term thrown around cryptocurrency quite a lot: whales. In crypto-speak, whales are high net-worth individuals holding on to a market-influencing amount of coins. Imagine that a single person owns 10% of the circulating supply of a token. That person will hold a serious amount of sway in terms of the way that token moves because theyʼll be able to position their holdings for or against price rises.
That brings us into the topic of buy and sell walls. Often times, whales will have insider information about upcoming news for the token theyʼre holding. Itʼs likely that if theyʼre holding a significant supply of the token, then they invested at presale and are on personal terms with the team.
If, for instance, the whale receives information that in two weeksʼ time the token will be listed on a major exchange, then they will be incentivized to suppress the tokenʼs market price in order to accumulate as much of the token at cheap prices as possible. The most common price suppression tactic employed by whales is the sell wall.
Sell walls are massive market sells that force the price of the token down for one simple reason: anyone wanting to sell the token will have to sell under the massive sell wall if they hope to exit the market. As traders sell the coin for lower and lower prices, the whale is also on the
buyer side scooping up the coin at discounted prices. Buy walls work in the same way but for different reasons. Perhaps the whale knows of impending bad news, or simply wants to influence the price positively for their own reasons. Buy walls go up, and buyers wanting to enter the market will be forced to buy above the massive buy wall. By inching the buy wall up bit by bit, the whale drives the market value higher as well. This method works particularly well when there is bullish sentiment around a coin.
Pump and Dump
We have created an exhaustive look at pump and dump price manipulation in another article.
Pump and dumps are basic forms of market manipulation perpetrated by mostly private groups who suddenly pour large amounts of capital into a coin to draw other traders in at higher prices. The appearance of a sudden bull-run on a given coin brings more and more traders in until those at the very bottom – the pump and dump group – pull the plug and exit their positions at a significant profit, initiating a cascade of selling that leaves the majority of traders who got in selling at a loss.
The Wall Street Journal reported that in 2018 alone, pump and dump groups had generated nearly $1 billion in profits using the method described above.
Shady Exchange Practices
Many of the most frowned upon tactics used to create fake market price action are completely banned from traditional asset exchanges. However, this being crypto, many of those practices are blatantly used and are even encouraged by certain exchanges.
- Spoofing is the use of huge buy and sell walls to create the appearance of positive or negative sentiment around a coin. The thing is, once the price goes near the buy or sell wall, the owner removes it.
- Wash trading happens when someone trades with themselves, buying and selling an asset repeatedly to create the illusion of significant price action. This is usually employed a person or group want to give the impression that there is lots of trading activity happening with a coin, making it look like an attractive market.
- Insider trading is a common occurrence on cryptocurrency exchanges. Exchange operators have knowledge about coin listings before the public does and can trade on that information and often do