Market manipulation

The financial markets provide an opportunity to make significant amounts of money, but if you are unaware of the basic principles of the market, you can also suffer significant losses. 

One of the basic principles is that the market is not always fair and is often irrational. Because it is created by people and traded by people, emotions play an important role. Big players and market makers are aware of this and use various methods to induce the right emotions in market participants and use them in their favour to make profits. This phenomenon is called manipulation.

The cryptocurrency market is particularly susceptible to manipulation due to its low capitalisation and liquidity, which is one of the reasons for its high volatility. Therefore, in order to successfully make money from cryptocurrencies, you need to learn how to recognise and resist manipulative actions.

Basic types of market manipulation

Market manipulations are dishonest acts carried out in the market to distort asset prices in an artificial manner in order to gain a profit. Such manipulation may include spreading false information, mass selling or buying of assets to create the illusion of supply or demand.

Four tools of market manipulation are particularly frequent and effective in cryptocurrency markets:

1. Wash Trading:

This trading method involves the sale and purchase of a particular asset by the same large holder to create the illusion of activity and attract the attention of retail investors. The essence of this approach is simple: sell an asset, creating a red candle on the chart, and then buy it again to create a green candle. It helps to create the illusion of active trading and demand. Wash trading is used for two main reasons: firstly, to create the appearance of activity or demand for a particular currency or trading pair, and secondly, to artificially increase trading volumes to pay the exchange, disguising it as a commission.

Understanding these types of manipulation allows traders and investors to be more aware and cautious in the market and prevent potential financial losses.

2. Pump&Dump is the dissemination of information by pampers (persons engaged in market manipulation) that creates the illusion of a promising asset and stimulates demand for it, resulting in a sharp increase in its price. When the price reaches the desired level, pampers sell the pre-acquired assets, unloading them on "greedy" investors.

The main methods of Pump&Dump provocation:

- Creating hype: posting statements like "It's the next bitcoin", "Ethereum's killer" and other high-profile claims that inspire optimism in investors. However, in most cases, such claims are more often speculation and presented as red flags rather than reasons to buy.

- Price jump: if a certain little-known token rises sharply and rapidly in a short period of time, it should raise caution. Parabolic growth may be just the bait for retail investors.

- News cycles: positive news coincides with big buys from whales, which creates the impression of "smart-money", successful event-driven trading and "whale insiders", which in turn incentivises retail investors to buy, mimicking the whales.

3. Bear raid is a manipulation in which large players open short positions (predicting a fall in price) and spread negative news about the asset (FUD - Fear, Uncertainty, Doubt), contributing to panic among investors and forcing them to close their long-term positions, which in turn amplifies the fall in price. Thus, retail investors become the "fuel" for short positions.

To counter bearish attacks, it is important to diversify sources of information, be able to distinguish between valid negative news and FUD, and be aware of market developments.

4. Spoofing is a market manipulation technique based on placing fake orders that are later cancelled before they are actually executed. Such fake orders create the illusion of great interest in certain assets and can influence the decisions of traders and investors.

For many traders, the number of buy and sell orders is an important indicator of market trend. Manipulators take advantage of this knowledge and place large fake buy or sell orders that create the illusion of strong supply or demand for a particular asset. This can lead to other traders making quick decisions based on these fake orders, which can ultimately be favourable to the manipulator.

However, when market conditions change and prices approach the fake orders, manipulators cancel them, avoiding actual execution. Thus, fake orders contribute to the creation of an illusion and can influence the behaviour of other market participants. Spoiler: this practice is illegal and is regulated by the relevant market manipulation laws.

How do we confront manipulators in the market?

While the existence of manipulators may seem disconcerting to retail investors, it is heartening to know that manipulators do not necessarily have to be directly fought and eradicated in order to profit. It is more important to learn how to defend yourself at your own level. To do so, the following rules should be followed:

- Verify information: use multiple independent sources to obtain and verify information. Monitor prices on various platforms such as TradingView, Coingecko and Coinmarketcap, and for news, consult reputable publications, Telegram feeds and Twitter accounts. Check every piece of news that could influence your investment decisions.

- DYOR (Do Your Own Research): thoroughly research the assets you plan to invest in and follow related news. Careful independent analysis will help build trust in your chosen assets and filter out negative information (FUD). Use news according to the previous rule to make informed decisions.

- Portfolio diversification: diversify your portfolio with stablecoins or strong assets to reduce the impact of price manipulation on weaker coins. However, do not overload your portfolio with too many assets to avoid diluting both capital and attention.

- Be rational: the main goal of manipulators is to provoke emotional reactions. Therefore, keep your cool and healthy scepticism. News and rumours aimed at emotional rather than rational perception should be viewed with caution.

- Use the DCA (Dollar-Cost Averaging) strategy: market manipulations are usually aimed at speculators and short-term investors. Applying a DCA strategy over time will help you create an optimal entry price for strong assets and resist manipulation.

- Work according to a strategy: develop a clear decision-making strategy, identify entry and exit points, consider short and long term horizons, fundamental analysis and faith in the chosen asset. Make decisions according to your strategy.

Following these simple defence techniques will reduce the influence of manipulators on your investment decisions and make emotional provocations less effective.

Conclusions

The main goal of participants in financial markets, including cryptocurrency markets, is to generate income. However, different players take different approaches to achieve this goal. Some succeed by honest methods through research, learning from mistakes and developing long-term strategies, while others deliberately deceive investors by manipulating prices and getting easy and quick profits.

To successfully exist in the cryptocurrency sphere, it is important to be able to resist manipulation and rely on verified information and in-depth analysis when making decisions. A retail investor's main defence tool is a well-defined strategy and the ability to stick to it. These "lifelines" will help avoid diving into a sea of fake news (FUD) and irrational price movements in the cryptocurrency market.

By relying on common sense, analysis and thorough preparation, every investor can increase their chances of successfully investing in cryptocurrency and achieving their financial goals.