Spotting the 5 Common Crypto Price Manipulation Patterns

This article sheds light on the common manipulation techniques in the cryptocurrency world, it will educate readers on spotting common trends and analyzes the Bitcoin drop on July 20th, 2021.

Introduction

Market manipulation has existed for as long as tradable assets have existed and cryptocurrencies are no exceptions to it. The cryptocurrency space is also immature with nascent regulations making it vulnerable to market manipulations not easily possible with mature markets. In this article, I will dive into some of the common market manipulation techniques, identify patterns around it and equip people to spot abusive behavior.

There are numerous forces at work every day in the crypto markets targeting price manipulation to spook newbie investors and inexperienced traders to panic and play right into the hands of these manipulators.

Manipulation 101

The manipulation phenomenon is not exclusive to cryptocurrencies, these tactics have been outlawed by the SEC in mature markets where regulations are established. Stringent monitoring, reporting, and auditing requirements create risk for those who perpetrate them. Mature markets also have well-developed mechanisms to quickly identify and prosecute miscreants. This is far from where the crypto world is today, unregulated, anonymous and people with large holdings i.e., whales can act with impunity. While this might appear like a hot mess and a massive problem, it is not viewed that way by the proponents of the new economy. Cryptocurrencies are about financial freedom, free from the structures and barriers of the opaque old economy. This also means it is an opportunity for users to assume individual responsibility for their finances, hence they must manage the risks on their own. However, no one wants to be manipulated and one needs to get properly educated about strategic and tactical methods of manipulation to defend against them.

Let us examine the commonly used manipulation techniques in cryptocurrency markets.

Pump and Dump

The most pervasive technique used in the crypto markets today is pump and dump, it also has one of the highest impacts. It is insiders or other core market participants trying to pump up the value of a coin until it gains attention. Once traders and investors jump into the market, the group dumps the coin for a neat profit. The technique was erstwhile deployed on penny stocks, but low liquidity altcoins are a perfect target in the cryptocurrency space. A low market cap shitcoin can be pumped easily and a lot of this manipulation is well coordinated by hundreds and thousands of users who come together on Reddit, telegram, etc. to hatch the plot – some of these also have obvious names like rocket pump, etc. It is also impossible to predict the exact time of the pump or the dump and this tactic does hurt folks late to the pump, late to the dump, or even those who participated in it. There are multiple patterns to analyze to spot a pump and dump scheme.

First, most of the pump and dump occurs in low market cap coins out of the top 100 list, exceptions also create pump and dump in high caps although rare. Specifically, vulnerable are coins on limited exchanges, which allows greater manipulation and only one or two venues for the victim to enter and exit. Lots of price movements up and down only a handful of exchanges is an indication of being a coordinated action rather than organic market behavior.

Just remember, a dump, often also harms those who think they can profit from it.?

Second, the volume is a good indicator. The pump and dump artists have likely already accumulated a lot of coins and high volumes before price increase from nowhere is suspicious. Last, the buying price moving to a point to create FOMO for the masses. Hence, if we cannot understand why a coin is pumping, then it is best to stay away.

Whale Walls

The Whale Wall technique used to be frequently visible in prior Bitcoin cycles, somewhat less prevalent but still happens on shady exchanges. In the old economy, this technique used to be called order book spoofing. It is a tactic where a market participant will place a large set of orders with no intention of ever having executed, the intent is to create the illusion of large demand or supply in the market. Order book spoofing was used in the commodities market in the past and even reputable old economy institutions have been in trouble for executing these techniques. I have seen this in the crypto markets during the cycles of 2013 and 2017 when whales built up large buy and sell walls on the order books of exchanges, when I saw these back then I was inclined to react e.g., I saw 3000 BTC orders which triggered me to sell and it spoofed my analysis back in 2013 catching me off guard. Older, wiser, and more experienced from those days for sure!

What probably occurred was a whale accumulating BTC secretly while markets were hitting sell orders, the sell wall suddenly vanishes as the whale pulls out his order after consummating the act. This can also happen with whales building buy walls to spoof analysis in the other direction making you think there is supported to hold up selling pressures. The triggering of bullish sentiment makes people assume long positions and then liquidation grenades explode. Whale walls and spoofed order books can create exponential profits for whales, as the same people take positions on futures markets too. They profit from volatility in a derivative market by manipulating price discovery in spot markets. This has become a lot easier to catch and mitigate against nowadays given all the data, exchange features, and alerts now available.

The manipulation technique succeeded in driving Bitcoin down from approximately 32K to just under 30K. The newbies panicked and sold but, many of these bitcoins were picked up by smaller retail buyers and more accumulation on-chain continues.

On July 19th, approximately 79,000 BTC was moved by a whale or whales to Coinbase to create a sell wall and induce a downward price. Normally, this quantity of BTC is bought and sold on OTC. However, the sell wall was executed out of no choice when prices did not fall to expected levels.

Wash Trading

Wash Trading is a variant of the whale wall technique and is used to create an illusion of an active market for a specific asset. Just like other tactics, it is illegal to do this in more mature, old economy financial markets but appears to be fair on the crypto turf as of now. Wash trading typically entails buying and selling the same asset simultaneously by one individual or a coordinated set of folks projecting a false volume. Most traders look at the volume and liquidity of an asset before they jump in and quickly discover liquidity false alarms when wash trading prevails.

Propagators of wash trading can typically be traced to shady exchanges themselves, scamming crypto projects and people backing these projects. People have also leveraged technology e.g., developed bots to fake volumes and contaminate sites like Coinmarketcap, and will attract newbie investors and traders. I have made this point several times and have been very critical of Coinmarketcap about improving their accuracy, having said that the team there has been making improvements slowly but even if still not enough to take a leap of faith given they are not yet what they appear to be.

Avoiding shady exchanges is a first step in staying clear of wash trading, periodically analyze order books of your exchange to see if there is any uniformity in buy and sell order patterns. Look at attributes like timestamps, matching pairs, order sizes and see if there is any symmetry brewing. On high liquidity exchanges, large bid-ask spreads should raise alarms. Nothing compares to doing your own research, analysis, community scans to derive your own conclusions. Remember to validate every crypto influencer touting coins or exchanges.

Stop Hunting

One of the most nefarious tactics deployed by crypto whales is stop hunting i.e., hunt for all the stop loss milestones visible. This is used to force action from market participants out of their positions by driving prices low enough to trigger their stops. The motivation for whales is to pick up the asset at a lower price once multiple participant’s hand is forced out.

Most traders place their stops at key technical levels and absent other manipulation tactics, the levels usually signify key capitulation levels showing whales on what levels to target when pushing the market down. For example, if coin XYZ has stops positioned at a certain level ABC then many sell orders are executed to push the price to these stops, once it attains these key technical levels a myriad of automated sell orders are executed with whales scooping the bounty up with almost immediate market recovery with many others following the whale buys on the buy orders.

Given crypto markets run 24X7, unaware traders wake up to discover their stops were hit and the prices are back up to where they last saw it, but all their positions are lost. Given that placing stops is still essential to managing risk if the market is legitimately moving down, it becomes tricky to spot this technique to avoid being ambushed by whale attacks. One way to do this is through a stop-limit order i.e., stock orders having an execution price above the trigger price making sure these orders will be placing a few points below the stop level. It provides a modest advantage to protect yourself from larger downside risks while leaving some room to ascertain a legitimate capitulation point.

Many exchanges offer a wide variety of stop-limit orders e.g., conditional orders, cold orders, etc. and one should analyze if these work for individual needs to mitigate being stop hunted.

FUD

Fear, Uncertainty, and Doubt are one of the most effective manipulation techniques to move crypto asset prices without even buying or selling a coin. Newbie investors and day traders get shaken up with negative news and run for exit doors quickly. Traders dislike taking even small losses and hence if half-truths or fake narratives are created around a specific project or asset then you can see a large price impact i.e., sell the rumor and buy the news. False propaganda is used routinely with great effect by several hedge funds. It is very typical in many markets to push false information after obtaining a sizable position on it.

The whole crypto space is filled with a lot of garbage content from crypto newbies, influencers, second and third-tier media, etc. making fake news harder to spot for the average retail investor. In such circumstances, mainstream media prevails, and people are compelled to digest the narratives from those sources. Mitigating against this tactic comes down to the individual by analyzing news and narratives more deeply and dispassionately. Data and facts to back up these claims are key to analyze, source i.e., known biases, trolls, etc. peddling the narrative is another filter, motives of people spreading the FUD and people behind the outlet should also be scrutinized.

I am also not in the camp to dismiss everything as FUD; at times concerns, are legitimate and risk wrecking via a useless crypto project. While the multiple dozen China bans replayed by the media are clear items of FUD to totally dismiss, Tether not allowing a public audit is not to be ignored.

Concluding Thoughts

The crypto markets are relatively immature, and it shows in the ease of execution of some of these methods. This is the only asset class where one can get levels of transparency through blockchain visibility, immutability, and openness. As space has progressed over the last decade and continues to mature, the manipulation games and lawlessness of the wild west are diminishing. Most reputable crypto exchanges will not allow many of these tactics on their platforms and fill flag them. Although there is a designated crypto regulator, the CFTC and SEC do take notice occasionally and activate corrective actions. People however should know the manipulation arsenal and try to avoid them. I do hope this article added to your acumen.

References:

Coin Bureau YouTube Channel

Cryptos R Us

Glassnode