What goes through your mind when the price of a cryptocurrency suddenly soars and then plummets nearly instantly? Rarely is it caused by the normal volatility of the market. Many times, market manipulators will produce a sudden surge and decrease in market prices in order to mislead customers like you. These dishonest actors will go to any lengths and employ a variety of shady strategies in order to accomplish their goal of putting you in a precarious position in the market.
In this piece, we will expose some of the strategies that market manipulators use, as well as show you some steps you may take to lessen the impact that manipulated cryptocurrency prices have on your overall trading balance.
What Is Meant by the Term “Manipulation of the Crypto Market”?
The act of intentionally attempting to impact the value of assets and disrupt a trend in the crypto market is referred to as crypto market manipulation.
In cryptocurrency manipulation, dishonest players create illusions to artificially inflate or deflate market prices in order to make illicit profits. They might, for instance, disseminate false news, run a series of pressing tweets, place phony orders, provide misleading market signals, speak adversely about an asset to induce panic in traders, or take any of a number of other such actions. Therefore, you need to be aware of how to recognize and counteract the manipulative methods that you will learn about as you continue.
The manipulation of the market has resulted in significant losses for cryptocurrency investors and the cryptocurrency sector as a whole. As a result, the market becomes unduly volatile and risky for investors, a problem that is responsible for many traders and investors losing their faith in cryptocurrency.
There are 4 ways that one could manipulate the cryptocurrency market.
The following is a list of the most common methods of manipulating the cryptocurrency market.
1. Pump and Dump
Pump and dump is one of the market manipulation methods that is utilized the most frequently. It takes place when a single person or a group of people work together with the intention of artificially driving up the price of a crypto asset. The price inflation generates a lot of noise and encourages people to purchase the item. The dishonest parties then conduct a precipitous withdrawal of their funds in an effort to make a rapid profit. The removal causes a dramatic deflation in the price, which results in unexpected losses for many people who were misled. Pump and dump schemes mostly target cryptocurrencies that have low trading volumes.
2. Spoofing
Crypto whale spoofing is a method for manipulating the cryptocurrency market that involves the creation of bogus orders. This strategy entails making significant purchase or sell orders with the intention of later canceling them. The market is made to appear as though it is beneficial for trading, and as soon as retail traders send in their orders and the market moves in the direction they want, the perpetrators of the spoofing take their profits and leave the market.
Spoofers strive to create an atmosphere of fear, uncertainty, and doubt (FUD) in order to convince you to trade in their favor. They can accomplish this goal in a different method as well, and that is by making numerous postings on social media that appear to have no connection to one another in the hopes of swaying people’s decisions and the way the market feels. During Bitcoin’s early days, spoofing was a persistent problem, and even now, it is widespread on exchanges that are not adequately regulated.
3. The Wash Trading System
The term “wash trading” refers to when a group of traders quickly buy and sell a cryptocurrency in order to generate high trade volumes. This action is carried out in order to entice traders and to assist such an asset in gaining notice. The multiple entries cause the market to send out misleading signals, which in turn distort the value of an asset and further entice investorss to trade based on the false signal.
In order to engage in market manipulation, wash traders require access to many accounts. They buy cryptocurrency with one account and sell it with a another one. Consequently, wash traders conduct business with one another. This deed is feasible with less well-known cryptocurrencies and lesser-used exchanges, both of which have lower levels of liquidity and transaction volume due to the lower levels of trading activity at those two types of platforms. They can increase their trade volumes and their earnings from commissions with the use of wash trading.
4. Do not go hunting
Stop hunting is an attempt to coerce traders into closing their trade positions against their will. It is possible for the movement to drag an asset below the price at which many traders have placed stop-loss orders. In order to drive the price of a cryptocurrency down and “hit the stops,” bad actors place repeated sell orders. This leads to considerable crypto volatility, which in turn provides the attackers with the opportunity to buy at a lower price.
The tactic known as stop hunting is employed by financial institutions and market-makers in order to generate short-term profits. They will press the market through the stop-loss orders in order to displace traders from their positions as soon as they detect a cluster of stop-loss orders clustered at the same price.
There are 6 ways to safeguard yourself against manipulation of the cryptocurrency market.
The following is a list of several ways that you can protect yourself from manipulation of the cryptocurrency market.
1. Conducting Research and Engaging in Numerous Consultations
Before you engage in trading, it is important to do some research and verify pricing using a variety of reputable sources. You can compare the prices of different assets and the data associated with them by using many different cryptocurrency exchanges. Cross-checking the price on one exchange with the price on another exchange can, for instance, expose the genuine price and assist you avoid being the victim of a rug pull or a pump and dump.
2. Educate Yourself About Past Tendencies
They say that you should always go with the flow of things. Trading with historical trends might provide greater precision because the data tend to be stable and accurate. Bad actors frequently take advantage of current market patterns, but they may have a harder time manipulating historical market trends. Trading based on existing trends may assist in lowering the pace at which market manipulation has an effect on prices; manipulated patterns do not persist.
3. You should always stick to your trading plan and the practices you established for risk management.
Trading based on impulse and the buzz generated by social media can be avoided by following a trading plan and sticking to it. Your trading plan has to incorporate your recommendations for carrying out deals as well as your tactics for risk control. Now that this is in place, you are able to trade depending on a market condition that you have already identified.
This is not to claim that doing so can completely insulate you from the effects of market manipulation. On the other hand, doing so will put you in a better position than someone who trades on whim.
4. Go for investments with a longer time horizon.
Almost all market fads die out quickly, and investors who hold on to their cryptocurrency for the long term are immune to the negative effects that are felt by traders who engage in short-term trading.
5. Make Use of Coins and Exchanges That Can Be Trusted
Be sure to conduct your business on reliable exchanges that have a solid track record. Markets that are less active, such as those for newly launched exchanges and cryptocurrencies, are typically more prone to being manipulated. Attackers are still able to manipulate market prices on exchanges that have high trade volumes; the difference is that their chances of success are lower compared to those on more recent exchanges.
6. Make Sure Your Investments Are Diverse.
Putting all of your eggs in one basket might not be the best strategy when you take into account the problem of market manipulation. It is a good idea to study the prices of various crypto assets in order to extract predicted patterns from the way they react in order to diversify your portfolio. If you do this, you will not only be able to lessen the impact of any potential market manipulation, but you will also be able to lower the risks associated with investments.
Your investment portfolio should consist of a diverse range of assets, each of which you have some level of confidence in. For instance, we have discussed how coins with low market capitalization are more prone to being manipulated. Combining low-market-cap cryptocurrencies with high-market-cap cryptocurrencies can be a safer choice to consider if you are required to trade low-cap cryptocurrencies.
On the other side, let’s say that in order to trade a specific currency, you are forced to use exchanges that have low trade volumes and liquidity. If this is the case, we strongly suggest that you build another portfolio that consists of exchanges that have higher transaction volumes.
You Cannot Completely Stay Away From Manipulated Prices.
Price manipulation is not the sole cause of all sudden and significant fluctuations in market prices. The market is notoriously unstable, and a great deal of activity takes place each minute. Consequently, it is imperative that you always trade with a robust trading plan and employ a variety of tactics for risk control.
The cryptocurrency market is still in its infancy and has only a limited amount of oversight. As a consequence of this, when new cryptocurrencies are created, they are typically propelled by market hype; nevertheless, some creators also employ various ways, both ethical and unethical, to popularize their coins.
Do not let yourself be swayed by the market noise when you are trying to trade or invest in cryptocurrencies; instead, focus and remain steadfast in your analysis and trading tactics. It is preferable to avoid the market altogether rather than attempt to trade consistently in a hyped up and chaotic market.
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