The Unknown Dark Side: Unveiling Market Manipulation in Web 3.0

Author: Slow Mist Technology

The Web3.0 market and traditional financial markets stem from the same financial logic, and thus, they are equally susceptible to market manipulation. Many manipulation tactics that plague stocks and other financial products, such as wash trading, creating panic, and pump and dump schemes, also appear in the Web3.0 market. Notably, due to the decentralized nature of the Web3.0 market and the lack of regulatory rules, these manipulative behaviors are easier to execute. Manipulators operate behind the scenes, using various means to manipulate prices for their own profit.

This article will explore common manipulation tactics in the Web3.0 market and analyze how these behaviors affect the entire industry. It is hoped that investors can better understand and identify market manipulation behaviors to protect their assets.

Common Manipulation Tactics in the Web3.0 Market

Wash Trading

Wash trading is one of the most notorious market manipulation tactics. Manipulators create a false impression of high trading volume by repeatedly buying and selling the same asset, exaggerating the trading situation of digital assets. This misleads investors into believing that the asset has high liquidity or value.

In 2019, a report by Bitwise Asset Management[1] stated that approximately 95% of Bitcoin trading volume on unregulated exchanges was fabricated through wash trading. This figure indicates that a significant portion of trading activity in digital assets may be driven by market manipulation rather than genuine market demand.

Spoofing

Spoofing refers to traders placing one or more buy or sell orders for a specific asset (usually with a large scale relative to the total order volume) to create a false impression of demand or supply, thereby manipulating market depth.

In other words, spoofing means that manipulators place large buy or sell orders in the market without the intention of executing them, creating a false supply and demand scenario. Through these false signals, manipulators can cause price fluctuations and profit from market reactions.

Bear Raiding

Bear raiding is typically used to maliciously drive down asset prices. Manipulators short-sell or heavily sell a particular asset to trigger panic selling in the market, causing a chain reaction that leads to a continuous price decline.

Bear raiding often occurs during periods of heightened market uncertainty, where manipulators further amplify market panic, prompting investors to sell their holdings. Therefore, in the highly sensitive and volatile environment of the Web3.0 market, this manipulation tactic is particularly effective, as any action can trigger unexpected and significant price drops.

Creating Panic (FUD)

FUD involves spreading negative or misleading information to instill doubt in market participants and incite panic. Common forms of FUD include rumors, such as impending government crackdowns on crypto assets, fabricated news of exchange hacks, and exaggerated reports of project failures.

For example, JPMorgan CEO Jamie Dimon once referred to Bitcoin as a "scam"[2]. Although his company later ventured into blockchain technology, this still triggered market panic. While this may not be a direct act of market manipulation, such public comments can lead to panic selling and price volatility.

Sell Wall Manipulation

Sell wall manipulation refers to manipulators placing a large number of sell orders at a specific price level, creating a virtual "wall" that prevents the asset price from breaking through that level. These massive orders may intimidate other traders, making them believe that breaking through that price barrier is difficult.

However, once manipulators have purchased enough tokens at a lower price, they will withdraw their sell orders, causing the price to rise rapidly. This tactic is often used by market makers and high-frequency traders to accumulate assets at a low price.

Pump and Dump

Pump and dump is one of the oldest market manipulation tactics, artificially inflating asset prices through coordinated buying (pumping) and then selling once prices are high (dumping). This behavior is typically initiated by a group of traders or influencers on social media who hype low liquidity tokens in private chat groups or on social media, enticing retail investors to buy in. Once the price rises, manipulators sell their holdings, leaving later investors to bear the losses.

In October 2024, the FBI launched "Operation Token Mirror"[3], creating a fake token called NexFundAI to catch criminals engaged in fraud. The operation uncovered a $25 million pump and dump scheme where traders manipulated the token's trading volume and price to attract unsuspecting investors. Once the price rose, the orchestrators sold their holdings, causing the price to plummet. Ultimately, 18 manipulators were charged with market manipulation.

The Role of Market Makers

In the Web3.0 market, the role of market makers is to provide liquidity and market depth through continuous buy and sell orders, ensuring smooth trading. However, some market makers exploit their position to engage in manipulative behaviors, particularly wash trading and spoofing. With access to substantial asset liquidity, these unscrupulous market makers can manipulate prices for their own benefit, thereby influencing price trends.

While market makers play a crucial role in any trading ecosystem, the decentralized nature of the Web3.0 market, along with the lack of transparency in certain areas, provides them with more operational space. As a result, regulatory bodies like the U.S. Securities and Exchange Commission (SEC) have begun taking action against some Web3.0 companies in an attempt to curb such abuses. However, regulatory enforcement remains challenging at this time.

How to Prevent Market Manipulation

Although market manipulation can be difficult to identify, the following steps can help reduce risk:

Investigate token backgrounds: One of the simplest ways to avoid becoming a victim of pump and dump manipulation is to investigate the trading history of tokens. For example, you can check the historical information of tokens through Skynet[4]. Tokens with only a few days or weeks of trading history are riskier due to their low liquidity, making them more likely to be targeted for manipulation. Be particularly cautious of sudden price surges in new or low liquidity tokens.

Choose exchanges with high transparency: Some exchanges actively curb market manipulation by enhancing information transparency and reviewing trading volumes. These exchanges regularly monitor trades and provide transparency reports to ensure that trading volumes are not artificially inflated. Choosing well-known exchanges that offer market safety measures can help reduce the risk of suffering losses from market manipulation.

Stay vigilant and analyze cautiously: Pay attention to large orders that are suddenly withdrawn, trading volume spikes without reliable news support, and unverified rumors from dubious sources. Use tools like blockchain explorers to help track trades and verify the authenticity of trading volume spikes. Additionally, try to avoid making impulsive investment decisions based solely on social media trends or rumors.

Building a Safer Future

As the Web3.0 market matures, the landscape of market manipulation may undergo significant changes. The evolution of the market is inseparable from enhanced regulation. For instance, the European Union's recent Markets in Crypto-Assets Regulation (MiCA)[5] aims to provide a comprehensive regulatory framework for digital currencies, enhancing transparency and protecting investors. By addressing issues like market manipulation and ensuring fair operations of exchanges, MiCA serves as a model for how regulation can foster trust and integrity in the Web3.0 ecosystem.

Moreover, the rapid development of decentralized solutions also paves the way for creating a safer trading environment. Decentralized finance (DeFi) platforms typically use smart contracts to automatically execute and ensure fair trading rules. These advancements make it easier to detect manipulative behaviors, thereby reducing instances of market manipulation. As industry technology progresses, mechanisms to protect the market from manipulation are continually improving.

Despite the ongoing improvements and advancements in these regulatory frameworks and technologies, participants in the Web3.0 space must remain vigilant. Due to the dynamic nature of the market, manipulation tactics may evolve just as quickly as they do in traditional markets. At all times, investors should carefully identify signs of manipulation and understand regulatory measures to better protect their assets and contribute to the market's development toward a healthier and more transparent direction.