How Cryptocurrency Traders Are Manipulating the Market

For an investor to outperform the market, someone else must underperform. That is a simple arithmetic fact.

In a fair and regulated environment, investors have equal access to information. Winners and losers are determined by whoever can make a better prediction.

But cryptocurrency is the wild, wild west. Market participants don’t play fair and they can profit at the expense of others.

Here are the three types of traders that are kicking your ass

Insider Traders

Under Rule 10b5–1, the SEC defines insider trading as “any securities transaction made when the person behind the trade is aware of nonpublic material information.” Insider trading is illegal in almost all traditional markets. In a research paper published in 2010, Qin Lei found empirical evidence that insiders were able to consistently beat the stock market.

Over the last year, we’ve seen many high-profile cases of insider trading in the cryptocurrency market.

Coinbase — The Bitcoin Cash Incident

On December 19, 2017, Coinbase tweeted it would add Bitcoin Cash to its exchange. But before the announcement was made public, both the trading volume and the price of Bitcoin Cash suspiciously surged.

On March 1, Coinbase was hit with a class action lawsuit. The full court document is available here.

South Korea Financial Supervisory Service (FSS)

Even regulators are being investigated for insider trading. Korean FSS officials knew ahead of time that new cryptocurrency trading restrictions would be put in place. Yet, they still made trades before the announcement.

The chief of the FSS, Choi Hyung-sik, confirmed on Jan. 18 that trading violations had occurred. Despite being caught red-handed, another FSS official responded that there was technically “no code of ethics or conduct for virtual currencies and therefore difficult to issue any punishment.”

The examples mentioned above are just a few high-profile cases. Insider trading runs rampant in the cryptocurrency space. Very often, prices and trading volumes will pump right before an exchange announces a new coin.

Whales

Not the Moby Dick kind

A whale is simply a colloquial way to describe an investor who is able to manipulate markets by mobilizing large amounts of capital.

Most crypto investors treat whales like the boogeyman. They’ve never had a personal encounter, but swear that whales are responsible for large market swings everywhere.

In some cases, there is strong evidence indicating that they are right. Recently, academic research has come out showing that large-scale price manipulation does happen. Here’s an example from 2013. Another paper that came out last week shows how large amounts of USDT was used to manipulate Bitcoin prices.

Stop-loss hunting

Whales intentionally push the price down in order to trigger stop-loss orders. Then they turn around and buy coins from these stop-loss orders for cheap and wait for the market to recover.

Short/Long Hunting

This is another form of market manipulation, but one that only exchanges can pull off.

Let’s see how this works on Bitmex for BTC.

The price just has move slightly in the wrong direction to trigger a liquidation. When liquidations happen, the investor loses their entire margin and pays a big fat fee.

Spoofing

Another common strategy whales use to manipulate the market is called spoofing. It means to bid or offer with intent to cancel before the orders are filled. The goal of spoofing is to send false signals to investors.

Wash Trading

In a wash trade, an investor takes both buy and sell positions. This may be done in order to:

Pump and Dumpers

Pump & dump (P&D) is a form of market manipulation that involves purchasing a cheap asset, artificially inflating its price, and then dumping the asset a higher price.

Examples of P&Ds:

  • Big Pump Signal (82,184 members)
  • VIP Signal Strategy (24,138 members)
  • PumpKing Community (11,124 members)
  • Crypto4Pumps (13,954 members)
  • AltTheWay (8,350 members)

How to Protect Yourself

The simple answer is to stop actively trading. The more you try to time the market, the more you open yourself up to opportunities of getting screwed over.

Speculative trading is a zero-sum game. In order for investors to outperform the market, they require others to underperform the market. This is why I genuinely believe the average investor should just index the entire market. If you’re in it for the technology and the long-term growth, why bother speculating at all? Just hold a small piece of the entire cryptocurrency market.