“Crypto today is a libertarian paradise. If you send your money to the wrong place, it’s gone. If you send it to a merchant and don’t receive the goods, you have no recourse. This is cash. Treat it as such.” — Gil Penchina
Cryptocurrencies get a lot of bad press though the reasons vary from time to time. Government regulators and big banks don’t like them to begin with.
Governments cannot control the money supply for cryptocurrencies or effectively tax the system. Big bankers hate them because the crypto markets pose a direct threat to their hegemonic control of the financial markets.
But these reasons aren’t really negative if you look at things from the perspective of crypto enthusiasts. For years now, ordinary people have been calling out to break the hold of big banks and government on the financial system.
It all goes back to the financial crisis of 2008 when the big investment banks gambled away the life savings of ordinary people for their own profits and bonuses. It led to the collapse of the markets. Millions of workers around the U.S. were laid off, through no fault of their own.
Many people still remember the time bitterly. Cryptocurrencies were our way out; a way to end the control of banks and make people the masters of their own money.
In many ways, cryptocurrencies are an improvement over the traditional financial markets. Crypto markets are decentralized with P2P authentication ensuring that no single operator can take control of the markets.
The number of tokens for different currencies is usually high as well. This is a built-in mechanism that ensures no single investor can take control of the markets.
However, this does not mean that cryptocurrency manipulation isn’t a major issue. Traders have been manipulating the various cryptocurrencies from day one. Most of this cryptourrency manipulation involves quick “pump and dump” to drive the market prices and make short term gains.
The issue first came to prominence in 2014 when a trader named Fontas made profit through “pump and dump” trades.
Pump and Dump
“Pump and dump” operations are relatively straightforward to explain. These scams usually involve artificially inflating the price of a less popular token by spreading false news in an attempt to hype, or “pump” it.
The scam usually involves two parties. The first party, usually a crypto-whale with big wallets, pumps a token which isn’t popular and/or isn’t doing well in the market. The scammers buy up a significant amount of tokens, then begin spreading news around crypto media about how well the cryptocurrency is doing.
The coin keeps getting pumped until the second party, the external investors, take notice and begin to invest their own money into it. Most external investors are small and buy a relatively low amount in hopes of making a profit.
The aggregated effect is that the coin price rises even further.
Once the price has soared significantly higher, the original pumpers throw their holdings in a coordinated move. The dumping of large amounts of token catches other, smaller investors off guard.
Before they can react, the massive dump of token causes the price to plummet. The original pumpers walk away with huge gains they’ve made for buying low and selling high. Yet another example of cryptocurrency manipulation.
This is another tactic used by a trader, or a pool of traders, with lots of money to manipulate the markets. The crypto whales set a very large sell order at a specific price to prevent higher sell orders from executing.
Let’s use a simplified example. Suppose that there is a particular token that is currently selling in the market at $3 per token. A group of traders want to buy 1 million of these token at $2.2.
However, since the price is higher than $2.2, they cannot buy it at their desired prices.
These investors slowly start buying tokens at different prices as the coin fluctuates to accumulate a total of 200,000 tokens between them. Once they have enough tokens, they set a very large sell order in the market, 1 million tokens at $2.3 for instance.
Since the order is so large, it becomes impossible for anyone to successfully sell their tokens at a price higher than $2.3. Other crypto traders would be forced to sell their tokens at $2.2.
It would take another big whale to bring a big buying pressure in the market to undo the sell order. Yet another example of cryptocurrency manipulation.
Dark pools are not scams, per se, but they are aimed at manipulating the markets. A dark pool is a private trading forum where major institutional investors and traders come together to purchase digital assets.
The trades are conducted at specific prices while keeping the identity of the investors secret. The exchanges do not affect the value of cryptocurrencies significantly.
However it allows the whales to accumulate a significant amount of coins without making the knowledge public. The investor can then set up predatory trading activities and gain control of the market.
So, price manipulation has always been a part of financial markets. The traditional stock markets are full of examples where major investors band together to move the markets in one direction or another.
We cannot fully eliminate these tactics. Cryptocurrency manipulation will always exist.
What we can do is be aware of them and take precautionary steps to guard our financial interests.