In Crypto, Market Manipulation Remains a Problem (2024)

If you’re concerned about paying for goods in crypto due to its price volatility, it’s worth noting that a fair bit of that price volatility isn’t just the herd stampeding in one direction or another.

Just as there are good reasons many cryptocurrencies can see prices rise or fall rapidly — a successful step in development, a big new use case or simply signs that it’s being adopted by users can drive prices very rapidly in the volatile industry — there are many ways they can be manipulated.

Here’s a look at how it happens, and why it matters.

What Manipulation?

In some ways, crypto market manipulation resembles manipulation on traditional exchanges — pump and dumps, wash trading, spoofing, stop hunting and simply spreading false rumors (which can be fairly easy to do in crypto).

Then there are tactics more distinctive to crypto, notably buy and sell walls created by “whales,” or owners of huge blocks of cryptocurrencies. This isn’t limited to bitcoin. Ethereum’s ether has the same problem, as do many of the so-called “alt-coins” — although in the last couple of years, ether, which has a market capitalization of about 45% of bitcoin, has largely been pulled out into its own category.

In some ways, market manipulation is a lot easier in alt-coins. Aside from a few dozen of the biggest coins, they often receive very little scrutiny, price-wise, and the sums involved in manipulating the market are not as great.

But just the same as bitcoin, crypto market manipulation has several unique characteristics that make it easier to do, and harder to stop, than in the stock and commodity markets.

First, cryptocurrencies are pseudonymous — not quite anonymous, as all transactions can be viewed on a publicly accessible blockchain — so the identity of a manipulative trader is hidden behind the key codes needed to send a crypto transaction.

See also: Crypto Basics Series: Is Bitcoin Really Anonymous and How Can Law Enforcement Track It?

It isn’t impossible, however. Blockchain data firms like Chainalysis and Ciphertrace that have extensive history working with law enforcement say that in some ways, the public nature of blockchain makes tracking criminals easier than regular off-chain investigations.

Second, there are many bitcoin “whales” who bought or mined huge numbers of bitcoin when its price was pennies or a few dollars. The same applies to ether and virtually all alt-coins: People had the opportunity to buy a lot for very little, and now have the power to move markets.

Third, while a large majority of trading on the major cryptocurrencies currently occurs on large, well-known and well-regulated exchanges, there are hundreds, if not thousands, of small exchanges on which smaller alt-coins — as well as bitcoin and ether — are traded, many of questionable honesty and with thin liquidity.

And fourth, the crypto market’s volatility means tokens really do see fast price spikes. It’s hardly unheard of for bitcoin to rise or fall 10% in a day, a few hours, or even a few minutes. It can happen at any time, day or night, as crypto is 24/7 and global.

Pump and Dump

Starting with the obvious, there’s pump and dump, which comes in two flavors: traditional and insider.

In a traditional pump and dump, a manipulator spreads rumors about a token on social media communities such as Twitter, Medium, Discord and Reddit forums. A spate of buys drives prices up, sometimes triggering buying algorithms and bots, until the manipulator sells, causing the price to crash — both from market pressure and whatever rumor turned out to be false. In the highly volatile crypto market, this can take minutes.

More to the point, legitimate price spikes from legitimate news do happen. The jump in ether’s price when a developer set a tentative date for a very important blockchain update in the switch to environmentally friendly Ethereum 2.0 is one example. Tesla CEO Elon Musk’s ability to move his favorite memecoin, dogecoin, is also a good example of this.

So is — indirectly — the news last week that a Coinbase manager was arrested for alleged insider trading by buying tokens before the large and well-respected exchange lists them, which has for years triggered a price spike called the “Coinbase effect,” which was based on the exchange’s reputation for doing due diligence on tokens it lists. The spikes were legit in those cases.

Read more: SEC Turns Up the Heat on Coinbase

The insider version is to simply create a project, mint a new token and talk about how big it’s going to get to encourage people to buy, all while insiders sell their own tokens and then walk away. Crypto makes this easier because creating a new token or even a decentralized finance (DeFi) project can be largely cut-and-paste.

Wash Trading

As crypto gets bigger and more people move to the bigger exchanges that have tools and teams watching for it, wash trading is declining, but it is far from gone. This entails either one person or a group buying and reselling a token for progressively higher prices, then dumping it.

It’s a lot more common on smaller exchanges, some of which are shady or simply don’t bother to look for it. The pseudonymous nature of crypto means that it’s fairly easy to do this among a number of exchanges, making it harder to spot if you’re not looking for it. That said, it’s also a lot easier to spot once it’s happened.

Stop Hunting and Whale Wall Spoofing

Stop hunting is another one that relies on crypto traders’ techniques, specifically looking for stop-loss orders, which are often set at specific level, based on a number of highly technical trading strategies.

A whale executes a number of sell orders, driving the price of a cryptocurrency to a certain level and triggering the buy orders. That selling pressure can drive prices down temporarily, giving the opportunity to buy at a price likely to rebound.

Notably, big crypto movements often happen overnight when many traders are asleep — which is why day traders close out at the end of the day.

Whale wall spoofing — essentially order book spoofing — involves placing buy or sell orders, creating an illusion of optimism or pessimism which leads a lot of traders to react as a number of day-trading techniques watch orders closely, moving prices. They then cancel the orders before they are filled.

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