Cryptocurrency Price Manipulation: How It Works and How to Spot It
Cryptocurrency markets are known for their high volatility. As such, they can sometimes be susceptible to price manipulation. The nefarious practice involves artificially inflating or deflating the price of a cryptocurrency in an attempt to deceive traders or investors for personal gain.
You can easily spot it if you know what to look for. You can stay up to date with the latest developments and conduct price analysis according to data on Binance or other crypto exchanges. This guide aims to illustrate how price manipulation works and how you can identify it to protect yourself.
Methods of Price Manipulation
First, it’s worth looking at the different ways prices are manipulated in the crypto industry. Here are the most common ways nefarious traders manipulate crypto prices:
Spoofing and Layering
If you’re a tech wiz, you’ve likely heard of spoofing before. In the context of the cryptocurrency market, it involves buying or selling orders with the intention of canceling them before they are executed.
The idea is to create a false sense of supply and demand to influence the decisions of others. Layering is a step beyond that, where multiple instances of spoofing are done at different price levels to make it seem more natural.
In wash trading, a trader will simultaneously buy and sell the same asset. Similar to how spoofing creates an illusion, it creates an image of genuine trading activity. Its most common use is to give the impression of high liquidity in a particular cryptocurrency.
Pump and Dump Schemes
This is one of the most malicious schemes out there. In this two-stage attack, the price of crypto is inflated through false or misleading statements, often spread through social media or other channels.
Once that has been achieved, the attackers will sell off all of their holdings at a lower price, forcing others to follow suit. This leaves all of the other investors at a loss.
Similar to stock trading, it’s possible to perform insider trading in the world of cryptocurrencies as well. As information can spread rapidly, those with insider knowledge can exploit this advantage.
With this confidential information, these traders can make huge sums of money with information available to no one else. Think of it like cracking a safe. You already know the combination, so you can open it before anyone else.
How to Spot Price Manipulation
Now that we know about the common ways how the price is manipulated let’s talk about some of the indicators that tell you of this occurrence. Here’s what we could come up with.
Unusually High Volume
An easy indicator is sudden spikes in trading volume without any clear news or events associated with a particular cryptocurrency. This is an indication that someone might be pulling the strings and manipulating an asset’s prices.
Abnormal Price Movements
If you come across rapid and unnatural price movements within a short window, it might suggest manipulation. Keep in mind that prices generally move in response to genuine market forces, such as news, technological developments, or changes in sentiment.
Lack of Corresponding Fundamentals
An increase in price without any significant improvement in its underlying technology could be a clear sign that something is fishy and may indicate manipulation.
Watch for Wash Trading Indicators
As mentioned above, with wash trading, market participants should be on the lookout for large buy and sell orders originating from the same source. If the trading volume feels high compared to the market capitalization, you might be looking at a case of wash trading.
Protecting Yourself Against Price Manipulation
So, the important question is, how can you remain safe against manipulations of cryptocurrency prices? Here are some steps to consider:
Choose well-known and regulated exchanges. These will have better safeguards against price manipulation.
Be wary of promises of guaranteed returns or quick profits. Be skeptical before making investment decisions, and verify everything yourself.
Spreading your investments across different cryptocurrencies. This will help you manage the impact of price manipulation on any single asset.
Price manipulation in the world of cryptocurrency can lead to many traders losing some serious money if they’re not careful. That’s why it’s so vital to read up on how these schemes work and how to spot them to better protect yourself in the market. Consult with price predictions and other crypto-related news to make sure you’re always in the loop.