Financial markets are lands where you can earn a lot of money. But it would help if you fought against manipulation to achieve success.
Big entities and market makers know how to exploit the full potential of people's emotions; therefore, they manipulate the market. Market manipulation is indeed conduct designed to deceive investors by artificially controlling or affecting the prices of assets. As you can imagine, the crypto market is the most manipulated one as liquidity is minor and easier to control.
What is Market Manipulation in Crypto?
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 the market prices to snatch up profits. For example, they could spread fake news, run a series of pressuring tweets, create fake orders, release false market signals, speak negatively about an asset to induce fear in traders, etc. Hence, you must know how to spot and combat those manipulative tricks, which you will discover as you proceed.
Methods Used to Manipulate the Market
1. Wash Trading
In the wash trading manipulation, investors simultaneously sell and buy the same financial assets to create misleading activity in the market and confuse retail investors.
This activity can be done for two main reasons:
Increase the volumes to give an impression of more demand than reality.
Use it to pay an exchange with trading fees from this practice directly.
Case Study: NFTs
2021 will always be reminded of the NFT hype year, and plenty of manipulation opportunities have happened. ChainAnalysis have reported that at least $44.2 billion worth of cryptocurrency was sent to ERC-721 and ERC-1155 contracts.
With these huge volumes, both wash trading and money laundering come out. Sales of NFTs to addresses were self-financed, meaning they were funded either by the selling address or by the address that initially funded the selling address.
2. Pump and Dump
In a pump-and-dump scheme, tricky investors start spreading misleading information through social media or websites to create a frenzy that will strongly increase buying pressure on an altcoin so they will be able to sell at an inflated price.
Three ways to do it:
Massive Hype- "This is the next Bitcoin," "This is the Ethereum killer," or similar slogans create an unjustified optimism that 95% of the time translates into a big red flag.
Huge spike in price- A parabolic rise of a coin during a short-time period (especially unknown coins) is another ringing alarm.
Round of news- Positive news started to match with insider purchases, and retailers continued to feed them by buying higher until the crash.
3. Bear Raid
When a bear raid occurs, investors take big short positions and start to bash or spread negativity around the asset they purchased. The aim is to spread panic and inject a liquidation cascade that fills their short positions.
Entities with a big following could easily drive a bear raid:
Spread negativity around an asset.
Open big short positions
Continue the fudding
Profit
4. Spoofing
Spoofing is placing fake orders and canceling them before they are executed. Investors gauge the market's movement depending on the number of buy/sell orders, while mockers induce them to follow a certain path and do the opposite.
Case study: 6 May 2020
The day started in a normal way, with slight decreases conveyed by bad news on the spread of the Greek crisis in the euro area. However, at 14.42, there was a sudden collapse of the American indexes, which lost 10% in a few seconds.
The delirium lasted a few minutes, and that flash crash settled itself in an equally inexplicable way, and prices immediately returned to normal levels. Navinder Singh Sarao manipulated the market by placing and canceling a $200 million short order.
Defensive Framework Against Manipulation
Never rely on a single source of information- For prices, you can rely on tools such as TradingView, Coingecko, and CoinMarketCap. For news, you can follow real-time news accounts and have different sources of information. Always verify the news.
Do solid research and stay updated- If you do proper research on an asset and believe it is a strong one, market manipulation is something you can handle with lightness. Do not forget to stay updated on assets news, as things can change over time.
Diversification- A well-made diversification with healthy assets gives you an edge on manipulation that could affect some assets. Make sure to do not to make too much diversification, as it is very hard to manage multiple coins. Balance is everything.
Be rational- Financial markets require cold blood to make it. Never fall for narratives or situations that involve emotions or mass belief. Read every single piece of news with skepticism. This ensures you stay rational and have control.
Use DCA Strategy- Market manipulation mostly affects short-term traders rather than long-term investors. DCA allows you to get better entries on your strong assets while suffering less from market manipulation.
Final Thoughts
Everyone is in financial markets to make profits, which is the main target of every person involved. Someone prefers to take the honest path of time, sacrifice, research, and effort. Someone instead prefers to mislead people in favor of quick gains.
This is a rough land; you must prepare yourself to survive difficulties and thrive long-term. Manipulation is one of the difficulties involved in the market and many others.
You cannot expect to reach big goals without some pain. So having a plan and strictly following it becomes crucial to get around market manipulation and its volatility. Moreover, constantly updating market news is key, verifying all sources.
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