What do you think when a crypto price rises and falls almost instantly? Only sometimes is it a result of normal market volatility. Often market manipulators cause a sudden rise and fall in market prices to trick you. These bad actors use various tricks to achieve their goal, putting you in a bad market position.
In this article, we will expose some market manipulators’ tricks and show you some measures you can take to mitigate the effects of crypto price manipulation on your trading balance.
What is crypto market manipulation?
A deliberate attempt to influence the value of assets and interrupt a crypto market trend is known as crypto market manipulation.
In crypto manipulation, bad actors create illusions to inflate or deflate market prices to extract profits. For example, they can spread fake news, run a series of urgent tweets, create fake orders, release fake market signals, talk negatively about an asset to induce fear in traders, etc. Therefore, you need to know how to detect and combat these manipulators. tricks, which you will discover as you proceed.
Market manipulation has caused a lot of damage to crypto investors and the crypto market at large. It makes the market unnecessarily volatile and unsafe for investors, a problem that has caused many traders and investors to lose confidence in crypto.
4 ways the crypto market can be manipulated
Below are popular ways the crypto market can be manipulated.
1. Pump and dump
Pump and dump is one of the most widely used market manipulation strategies. It occurs when an individual or group of people conspire to increase the price of a crypto asset. The price increase creates noise and attracts people to buy the asset. The bad actors then withdraw their funds heavily to make a quick profit. The withdrawal greatly deflates the price and leads to sudden losses for many who were deceived. The main targets for pump and dump are cryptos with low trading volume.
2. Spoofing
Crypto whale spoofing involves manipulating the crypto market by initiating fake orders. This method involves placing large buy or sell orders intended to be cancelled. Spoofing makes the market look favorable for trading, and as soon as retail traders submit their orders and the market moves in the desired direction, they extract their profits.
Spoofers try to sow fear, uncertainty and doubt (FUD) to get you to act in their favor. Another way they can do this is to try to influence people’s decisions and market sentiments through various seemingly unrelated posts on social media. Spoofing was a constant problem in the early days of Bitcoin, and it is still common in less regulated exchanges.
3. Laundry trade
Wash trading is when a group of traders quickly buy and sell crypto to generate high trading volumes. This action is taken to attract traders and help such an asset gain attention. The multiple listings feed the market with misleading signals that distort an asset’s value and further entice investors to trade based on the false signal.
Wash traders need multiple accounts to perform market manipulation. They sell crypto with one account and buy it with another account. That’s why laundry dealers deal with themselves. This action is possible with unpopular crypto and smaller exchanges with low liquidity and trading volume since their trading activities are not that much. Wash trading can help them increase trading volumes and earn more commissions.
4. Stop the hunt
The stop chase is an attempt to force traders out of their trading positions. The action can drag an asset below the price where traders have placed many stop-loss orders. Bad actors initiate multiple sell orders to get a crypto price drop and hit stops. This results in high crypto volatility and gives the attackers a chance to buy at a lower price.
Stop hunting is a strategy used by financial institutions and market makers to make short-term profits. When they spot a cluster of stop-loss orders around the same price, they will force the market through the orders, displacing traders from their positions.
6 Ways to Protect Yourself from Crypto Market Manipulation
Below are some ways you can protect yourself from crypto market manipulation to some extent.
1. Research and more consultations
Do your research before trading by verifying prices from various reliable sources. By using multiple crypto exchanges, you can compare asset prices and relative relatedness data. For example, if a price is pumping on one exchange, cross-checking against another can reveal the true price and help you avoid a blanket move or pump and dump.
2. Study historical trends
The trend, they say, is your friend. Historical trends offer precision in trading as the data can be consistent and reliable. Bad actors often prey on emerging market trends, but may find it difficult to distort historical trends. Trading based on prevailing trends can help reduce the speed at which market manipulation affects prices – manipulated trends do not last.
3. Always follow your trading plan and risk management practices
Following a trading plan can save you from trading based on impulse and social media hype. Your trading plan should include your trade execution guidelines and risk management strategies. With this in place, you can trade based on a predetermined market condition.
This is not to say that this can make you completely immune to market manipulation. However, it will put you in a better place than someone who acts on impulse.
4. Choose long-term investments
Most market hypes are short-lived, and those who HODL their crypto do not experience the negative impact short-term traders experience.
5. Use trusted exchanges and coins
Be sure to trade on trusted exchanges that have a good reputation. New exchanges and coins with less trading activity are usually prone to market manipulation. This is not to say that attackers cannot manipulate market prices on exchanges with large trading volumes; they are only reduced compared to newer exchanges.
6. Diversify your portfolio
Considering the issue of market manipulation, it may not be a good idea to put all your eggs in one basket. It is a good idea to study different crypto asset prices to get predictive patterns from how they behave in order to diversify your portfolio. Doing this not only helps you reduce the effects of possible market manipulation; it also helps to reduce investment risk.
Your portfolio should be a healthy mix of assets you have some faith in. For example, we have mentioned that coins with a low market value are susceptible to manipulation. Therefore, if you must trade low-cap cryptos, combining them with high-market-cap cryptos may be a safer option.
On the other hand, suppose you also have to use exchanges with low trading volume and liquidity for the need to trade a particular coin. In that case, we recommend you to have another portfolio with exchanges with a higher trading volume.
You cannot completely avoid price manipulation
Not all sudden and large market price swings are the result of price manipulation. The market is generally volatile and a lot happens every minute. So make sure you always trade with a solid trading plan and implement various risk management strategies.
The crypto market is still young and largely unregulated. As a result, as new cryptocurrencies are introduced, they are usually pushed by market hype, while some developers also try various ethical and unethical methods to popularize their coins.
When trying to trade and invest in cryptocurrencies, prioritize and stick to your analysis and trading strategies – don’t follow market noise. It is better to stay out of the market than try to trade a hyped and noisy market consistently.
The information on this website does not constitute financial advice, investment advice or trading advice and should not be considered as such. MakeUseOf does not provide advice on any trading or investment matters and does not recommend that any particular cryptocurrency should be bought or sold. Always perform your own due diligence and consult a licensed financial advisor for investment advice.
