Five Common Cryptocurrency Price Manipulation Tactics Investors Should Know
Pump and dump, whale wall, wash trading, stop-loss hunting, FUD.
Original Title: 《 Spotting the 5 Common Crypto Price Manipulation Patterns 》
Author: Nitin Kumar.
Compiled by: Chain Catcher.
Manipulation is not unique to cryptocurrencies; these strategies have been banned by the SEC in mature markets with established regulations. Strict monitoring, reporting, and auditing rules pose risks for those engaging in such behaviors. Mature markets also have robust mechanisms to quickly identify and prosecute wrongdoers. This is far from the current crypto world, where unregulated, anonymous individuals holding large amounts of assets, known as whales, can act with impunity.
Many forces are at play in the crypto market every day, aiming to manipulate prices, scaring novice investors and inexperienced traders into panic and directly into the hands of these manipulators.
While this may seem chaotic, supporters of the new economic system do not share this view. Cryptocurrencies are about financial freedom, breaking away from the structures and barriers of the opaque old economy. This also means users have the opportunity to take personal responsibility for their finances, so they must manage risks themselves. However, no one wants to be manipulated, and people need proper education about strategic and tactical manipulation methods to defend against them.
Let’s take a look at the common manipulation techniques used in the cryptocurrency market.
1. Pump and Dump
The most commonly used manipulation tactic in today’s crypto market is pump and dump. Insiders or other core market participants attempt to drive up the price of a token until it attracts attention. Once traders and investors enter the market, the organization sells off the tokens for a substantial profit.
This tactic was previously deployed on penny stocks, but low liquidity altcoins are perfect targets in the cryptocurrency space. Low market cap altcoins can be easily pumped, and much of this manipulation is well-coordinated among thousands of users who gather on platforms like Reddit and Telegram to plot schemes. The exact timing of pump and dump is also unpredictable, which can indeed harm latecomers. Various patterns need to be analyzed to identify pump and dump schemes.
First, most surges and crashes occur in low market cap tokens outside the top 100, although exceptions can occur in high market cap coins, albeit rarely. Specifically, tokens listed on limited exchanges are particularly vulnerable, allowing for greater manipulation, and victims often have only one or two exchanges to enter and exit. Significant price fluctuations on only a few exchanges indicate a coordinated action rather than normal market behavior.
Second, volume is a good indicator. Manipulators of surges and crashes are likely to have accumulated a large amount of tokens and then start pumping from a specific price until the buying price moves to a point that creates FOMO (Fear of Missing Out) for the masses. Therefore, if we cannot understand why a token is being pumped, it’s best to stay away.
2. Whale Walls
Whale wall techniques have been frequently seen in crypto market cycles, though less commonly, they still occur in shady exchanges. In the old economy, this technique was previously known as order book spoofing. It is a strategy where market participants place large orders on the order book without the intention of executing them, intending to create the illusion of significant demand or supply in the market.
In the past, commodity markets used order book spoofing techniques, and even reputable old economic institutions have found themselves in trouble for implementing these tactics. I observed this in the crypto market during the cycles of 2013 and 2017 when whales built large buy and sell walls on the order books of exchanges. When I saw these, I tended to react, for example, seeing a sell order of 3000 BTC deceived my analysis.
What may happen is that whales secretly accumulate BTC while placing sell orders in the market, and once the whales complete their trades, the large sell wall suddenly disappears. This can also happen when whales build buy walls to deceive analysis in the opposite direction, making you think there is support to maintain selling pressure. The trigger of optimistic sentiment leads people to take long positions, followed by massive liquidations. Whale walls and spoofed order books can create exponential profits for whales, as the same individuals also hold positions in the futures market. They profit from the volatility of the derivatives market by manipulating the price discovery in the spot market. Given all the data, trading features, and alerts available now, it has become easier to capture and mitigate this.
This tactic successfully drove Bitcoin down from around 32K to just below 30K. Newbies panicked and sold, but many of these Bitcoins were picked up by smaller retail buyers, and more on-chain accumulation would continue.
On July 19, about 79,000 BTC were transferred by whales to Coinbase Pro to create a sell wall, causing the price to drop. Typically, this amount of BTC is traded over-the-counter (OTC). However, when the price does not drop to the expected level, the sell wall will be forced to execute.
3. Wash Trading (Fake Trading)
Wash trading is a variant of the whale wall technique used to create the illusion of an active market for a specific asset. Like other strategies, doing this is illegal in more mature old economic financial markets, but it seems fair game in the current crypto space. Wash trading typically requires one person or a group to simultaneously buy and sell the same asset to create false trading volume. Most traders check the trading volume and liquidity of an asset before entering, and they quickly spot liquidity false alarms when wash trading is prevalent.
The propagators of wash trading can often be traced back to the shady exchanges themselves, deceiving crypto projects and the people supporting these projects. People also exploit this technique, such as developing bots to fake trading volume and pollute websites like Coinmarketcap, attracting novice investors and traders.
Avoiding dark trades is the first step to avoiding wash trading; regularly analyzing the order books of exchanges to see if there is any uniformity in buy and sell order patterns is essential. Check attributes like timestamps, matching pairs, order sizes, etc., to see if any symmetry exists. In high liquidity exchanges, large bid-ask spreads should raise alarms. Nothing is more important than doing your own research, analysis, and community scanning to draw your own conclusions. Remember to verify every hyped token or exchange by crypto KOLs.
4. Stop Loss Hunting
One of the most nefarious strategies deployed by crypto whales is stop loss hunting, which involves searching for all visible stop loss price levels. This is used to force market participants to act by pushing the price down enough to trigger their stop losses. Once multiple participants are forced out of their positions, the whale's motivation is to buy the asset at a lower price.
Most traders set stop losses at key technical levels, and no other manipulation strategy typically targets these levels, which often indicate critical surrender points that show what levels whales are aiming for when pushing the market down. For example, if the stop loss for coin XYZ is at a certain level of ABC, then many sell orders will be executed to push the price down to these stop loss levels. Once these key technical levels are reached, countless automatic sell orders will be executed, and whales will almost immediately buy back into the market, with many others following suit.
Given that the crypto market operates 24/7, unsuspecting traders wake up to find their stop loss points hit and the price back to where they last saw it, but all their positions are lost. Given that setting stop losses is still essential for managing risk if the market drops reasonably, discovering this technique to avoid being ambushed by whales becomes tricky.
One method is to use stop loss limit orders, which are orders executed at a price above the trigger price, ensuring these orders will be a few points below the stop loss level. It provides a moderate advantage to protect oneself from greater downside risk while leaving some room to determine legitimate surrender points.
Many exchanges offer a variety of stop loss orders, such as conditional orders, iceberg orders, etc., and these orders should be analyzed to see if they fit individual needs to avoid being hunted.
5. FUD (Fear, Uncertainty, Doubt)
Fear, uncertainty, and doubt are among the most effective manipulation techniques that can move crypto asset prices without buying or selling tokens. Novice investors and day traders can be shaken by negative news and quickly flee. Traders dislike taking small losses, so if a half-true narrative is created around a specific project or asset, you will see a massive price impact. Some hedge funds frequently use false propaganda with great effect. In many markets, it is very typical to push false information after acquiring a substantial position.
The entire crypto space is filled with a vast amount of junk content from crypto newbies, KOLs, and second- and third-tier media, making it harder for ordinary retail investors to spot fake news. In this case, mainstream media holds sway, forcing people to digest narratives from these sources. Mitigating the impact of this strategy depends on individuals analyzing news and narratives more deeply and calmly.
Data and facts supporting these claims are key to analysis, and the motivations behind those spreading FUD and the individuals behind them should also be scrutinized.
I do not view everything as FUD; sometimes, concerns are legitimate and can cause damage through useless crypto projects. While the dozens of Chinese bans replayed by the media are clearly FUD that needs to be completely dismissed, the fact that Tether does not allow public audits cannot be ignored.
Concluding Thoughts
The crypto market is relatively immature, which is reflected in the ease of use of some of these methods. It is the only asset class that can achieve transparency through blockchain visibility, immutability, and openness. As this space progresses and matures over the decade, the wild manipulation games are diminishing.
Most reputable cryptocurrency exchanges do not allow many of these strategies on their platforms and mark them as filled. Although there are designated crypto regulatory bodies, the CFTC and SEC do occasionally take notice and initiate corrective measures. However, individuals should be aware of the manipulators' arsenal and try to avoid them.
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Further Reading:
《20 Tips from a Veteran Crypto Trader for Newbies》
《Talking about Investment and Speculation: How to Become a Qualified Investor?》
