5 Myths about Crypto Market Manipulation
Juan Villaverde is an econometrician and mathematician devoted to the analysis of cryptocurrencies since 2012. He leads the Weiss Ratings team of analysts and computer programmers who created Weiss cryptocurrency ratings.
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Last week, an insightful email hit my inbox with a bang. It delivered a story of widespread crypto market manipulation.
To paraphrase …
Big-money whales sell off their crypto to buy Tether. Prices tumble, retail investors scramble to sell, and the whales scoop up the bargains. Rinse and repeat, ad infinitum.
Without regulation, the whales continue to manipulate the market and feast on the plankton. For the rich, the manipulation is all about concentrating wealth with growing efficiency. For the average investor, it’s daylight robbery.
What do you think?
Is this word-picture of the crypto marketplace true or false?
Read it again. Come up with your answer. And then read on for mine …
The Sad Truth about Crypto Markets
Yes, there are big-money whales that make waves. And yes, entire schools of average investors often get swallowed whole. But beneath the surface are deep currents and cross-currents that most people are unaware of. Out of that darkness, we see the emergence of five myths …
Myth #1. “Because of the whales, crypto markets are unique.” Not so! We see the same kind of price behavior in almost every thinly traded financial market that has ever existed.
Back in the early 1630s, for example, the speculation of that era drove up the price of tulip bulbs to nosebleed heights. Just one bulb, named Semper Augustus, changed hands for 12 acres of land. Another was sold for a massive collection of goods, including 160 bushels of wheat, 160 bushels of rye, 4 oxen, 12 swine, 2 hogsheads of wine, 4 cases of beer, 2 tons of butter, 1,000 pounds of cheese and more.
Then the masses began to exit, and it all came crashing down.
In the 1700s, it happened again. The master whale this time around was the South Sea Company. It was given a virtual monopoly to trade in the South Atlantic, mostly in slaves from Africa to South America. Insiders and big money investors came in, and as shares began to rise, the masses jumped on board — driving those shares from 125 to 960 pounds in just six months.
Fast-forward to the late 1800s. One of the sectors subject to the most shenanigans was gold mining shares. Hoards of small investors lost so much money that the new definition of a gold miner was “a liar with a hole in the ground.”
Even today, investors in illiquid markets such as penny stocks, are still vulnerable to insider trading, pump-and-dump schemes and other scams.
Myth #2. “Whales are to blame for big losses that small investors suffer.” No matter how greedy or calculating whales may be, small investors are in the market for exactly the same reason — to make as much money as they can. No one twists the arm of small investors to buy near the top; and no one forces them to sell near the bottom. They do so of their own free will. This was the case in the markets of yesteryear; it’s true today in crypto as well.
Myth #3. “Whales control the market.” It’s true that a few individuals hold a disproportionately large share of most cryptocurrencies. But holding such big positions in the coins is not the same thing as controlling their price. Quite to the contrary, it’s more often a curse than a blessing.
Let’s say you’re a big stakeholder in the Ripple company, which holds the lion’s share of XRP tokens. That may make you a billionaire, but on paper only!
Reason: You’ve got no one to sell to. You’re a big fish in a small pond. And you’re trapped holding a highly volatile asset.
Unload too much, and the price plunges. And when the price plunges, you kill your own golden goose.
Myth #4. “Whales know more about the market than smaller investors.” Bah!
Case in point: Even Mike Novogratz, a savvy institutional investor, recently said he regretted going public in the crypto bear market.
Coming from one of the highly influential institutional investors in this space, his admitted lack of foresight says more about whale myths than it does about Mr. Novogratz.
Or if you think average investors are the only ones who get scammed, consider all the Wall Street “experts” and giant financial institutions that fell for the Bernie Madoff $65-billion pyramid scheme that went on for decades and collapsed in 2008!
Pension funds, sovereign wealth funds, major stock exchanges and government institutions all praised Madoff’s stellar track record and welcomed him with open arms, while billionaire families lost entire fortunes.
Myth #5. “Regulation will solve the problem.” The reality: The authorities can’t outlaw the fear and greed that cause markets to sink or soar any more than they can freeze the cycles that propel the universe. And as a practical matter, there’s simply no way they can chase down the majority of penny stock manipulators or Initial Coin Offering scams.
That’s why the U.S. Securities and Exchange Commission is a big promoter of FULL DISCLOSURE and INVESTOR EDUCATION.
So are we!
“Don’t tell me what I can or cannot buy!” says the average investor. “Just disclose all the facts, warn me of the scams, and give me some guidance on how to make my own prudent decisions.”
In my next article, I’ll do just that.
