If you invest in crypto, you naturally want to make a return. In doing so, it is important that you know the prices of crypto. It is also important that your data gives a fair picture of developments in the market and interest in your favorite crypto. Unfortunately, cryptocriminals know this too. They apply certain techniques to manipulate the price of crypto in order to lure investors. We list 5 ways of crypto manipulation and explain how you can recognize them.
This is what you need to know about cryptomanipulation
Before we dive into the ways of cryptomanipulation, we first list 3 things the important to know.
First, of course, it is important to know what cryptomanipulation is. In short, it comes down to crypto investors trying to show, through fictitious actions, that there is much more or much less interest in a crypto currency than actually exists. Because they initiate those transactions, they know whether the price for a particular coin will rise or fall. By capitalizing on this (for example, by buying crypto cheaply or speculating on a drop in the price with short options) they can make huge profits. The honest investor enters or exits based on a false representation of the situation and often literally pays the bill.
To manipulate the stock price you need a fair amount of power. With that, market capitalization (how much capital of a currency is in circulation) and trading volume (how much is traded per day, week or month) are important. For both triggers, the lower the easier the manipulation.
Finally, many manipulation techniques for crypto are prohibited in other investments. Because crypto regulation is still in its infancy, these techniques are often not prohibited in crypto trading. This is expected to change when Europe and America come up with crypto regulations, but until then, manipulated crypto trading is a big problem. In fact, earlier this year Forbes research found that more than 50% of Bitcoin transactions are fake. Fortunately, you can find out for yourself if rates are being manipulated. We list the 5 most commonly used methods.
As we will see, live Bitcoin and cryptocurrency quotes are important to detect manipulation. Live Bitcoin and cryptocurrency prices can of course be found 24 hours a day on Tradeincrypto.com.
Crypto pump and dump: this is how it works and how to recognize it
One of the most common ways of crypto manipulation is pump and dump. The party setting up such a program cheaply buys a good number of coins of one crypto. Then he makes sure that there is a lot of attention for the coin, for example through influencers and/or social media.
This makes many investors think the coin is becoming popular, so they also buy in, causing the price to rise (pump). While the last investors are still buying, the initiator has already started selling (dump). Once the profits are in, he stops the marketing campaign and the price drops again.
How to recognize a crypto pump and dump?
First of all, people are not exactly being secretive. Many special groups for pump and dump can be found on social media. In addition, it is important to look at the history of the coin. Has there always been attention, do we see a natural pattern in attention or is there sudden hype? You can also use on-chain metrics to see if a lot of coins of one crypto are concentrated in a small number of wallets and if large sell orders are being placed from those wallets.
FUD: often combined with pump and dump
Whereas with a pump and dump one tries to get the cryptocurrency up it can also be interesting for traders to get the price down first. If one does not have the crypto market along for the purpose, it is a well-known manipulation trick to start a negative rumor stream. The expectation of the manipulators is then that investors will be spooked by bad news and sell. So they deliberately create fear (in English, Fear, Uncertainty and Doubt) to drive down the price. They then buy up the panic sales, after which the price recovers or after which they set up a pump and dump to make profits even bigger.
Here too you can detect manipulation. For example, you can check whether reputable news channels also report on the negative developments you read. It also helps to check the official communication channels of the currency. In addition, you can check more and more claims (big sales, etc.) through on-chain metrics.
Wash Trading: trading crypto without trading
Another technique for manipulating the price is faking interest in the currency. Here the crypto crooks are not concerned with manipulating the price but with trading volume. After all, a frequently traded currency is more liquid and therefore more interesting to buy. Wash Trading is then a distinct possibility to substantially increase the volume of trading in ‘your’ crypto by doing many trades with yourself.
This technique is a bit trickier to execute on the larger crypto exchanges, but is still widely used. The execution is simple. By placing buy and sell transactions, you are basically trading with yourself. To the outside world, however, it appears at first glance that there is considerable interest. Interest leads to interest (and thus a rising price) and volatility (or the illusion thereof) also attracts traders. The moment the originator sees that interest is rising he is already working on his exit strategy. Again, the unsuspecting investors suffer. The originators stop ramping up trades and place short orders, maximizing their profit from the stalled trade.
This form of manipulation can also be recognized. Here the order books and on-chain metrics play a role in particular. Do we see sales orders being “mirrored” in the purchase order book? Is the order book full of trades to and from the same wallets? Do we see other patterns where buying and selling are aligned? If so, someone is Wash Trading and caution is advised.
Whale walls offer a Bitcoin illusion
Some crypto like Bitcoin are too big to manipulate the price directly. Yet even here, there are privateers on the coast who manipulate the market. A well-known strategy is to lay a so-called whale wall. This game is played mainly by large investors. These manipulators place a large number of buy and sell orders in the form of options at a certain price, which (depending on the plans of the manipulator), is above or below the current price. This creates a so-called wall of orders, or whale wall, at this price level.
Thus, because the smaller investors analyze the market, they see particularly high (selling) interest at a certain level. Consequently, the market tends to drive the price to that level. The manipulator obviously knows this and makes sure he profits from that price movement towards the target he himself has copied. The moment the price is near the level of the whale wall he lets his options expire. The market quotes a fake out and the manipulator feeds his bank account. By the way, there are also ways to profit from whales’ manipulations. One of the crypto investing trends that is now hype, whale spotting, focuses on this among other things.
Again, you can check for such a whale wall. So you can analyze the walls. How many different wallets place orders at that level? Are those wallets more often involved in a whale wall? Are there logical arguments why people would want to enter or exit en masse precisely at that price level?
Finally, chasing the stop loss
Again, as a manipulator, you have to have somewhat deep pockets to make the trap work, but the returns can be great. This method of crypto manipulation is aimed at cautious traders who work with a stop loss. A stop loss is an automatic sell order at a certain price level. With this order, you can sell (a large part of) your crypto using a crypto-trading bot to ensure that your losses do not become too large.
Many smaller investors often choose a psychological or technically relevant price (for example, a round number, a Fibonacci retracement or a 5% drop within 24 hours) for their stop loss. In this manipulation, the manipulator sets about pushing the price below the stop loss levels of many smaller investors through FUD or a hefty sell order.
If this succeeds, a selling wave is triggered, often causing the price to fall a little further. The manipulator has already anticipated this with short options and a buy order for the floor price. So he earns both from your panic selling and from the price recovery that occurs when the artificial selling wave is over.
Protecting your stop loss from stop loss hunting
This form of manipulation is not to be scoffed at, especially as prices continue to change 24 hours a day. However, there are ways to guard against the consequences of such a stop loss hunt. For example, instead of the static stop loss, you can place a dynamic trail stop or a stop-limit order. You can also use a trading bot to set automatic buy orders, allowing you to benefit immediately from price recovery.
Want to learn about the crypto market?
Despite these stories about crypto manipulation, there are of course plenty of opportunities to profitably invest in crypto. If you want to test whether crypto investing is for you without financial risk, you can paper trade crypto to gain experience. To do so, simply create a free account on virtualinvestment.com.
Stay up to date with the latest price developments?
You can always follow the developments yourself with our WANT analyses and overviews. Of course, you can also follow the BTC and live cryptocurrencies 24 hours a day if you want to stay updated in real time.
Note: We never give financial advice, so you can’t interpret our contributions that way either. Always do your own research and decide on rational grounds if, when, what and how much you want to invest.