How exactly does crypto market manipulation work?

One of the biggest perception that holds crypto back from being traded and invested in is the threat of market manipulation. The SEC has cited market manipulation as a reason to not allow regulated ETFs, Tether and Bitfinex are facing a trillion dollar lawsuit for alleged manipulation and in general, traders of Bitcoin often refer to it as a “scam.”

Crypto market manipulation can be narrowed down to a few talking points. Problems being acknowledged and worked on could further the case for adoption. Here are the most prominent issues in the crypto market.

Pump and dump market manipulation

Traditionally, a “pump and dump” scenario is caused by a company misleading investors into buying. After price has risen because of suckered investors, the company sells. In crypto, companies don’t have control over coins in the traditional sense.

Bitcoin has no official dev team and the creator is nowhere to be found. Ethereum on the other hand does have an official team, but they still can’t change things by themselves. In decentralized blockchain networks, the user base chooses which version of a project’s open source code to adopt, so it’s harder for one organization to mislead them.

Still, “pump and dump” scenarios happen within Bitcoin on a regular basis. Instead of being caused by a company, they are caused by what crypto traders call “whales.” A whale is someone who owns enough Bitcoin to single handedly impact the market.

Instead of completely falsifying then destroying a stock, a whale can take advantage of Bitcoin at a low volume time to spike the price up. Whales look for low volume intersecting with an area they know traders have automatic orders placed at. This is usually by areas of big support or resistance. When support or resistance is broken, traders expect big movement to follow because the price is “breaking out.”

So whales put multi-million dollar orders up where price is thought to be breaking out, triggering traders orders and sending the price up even further. Since the move isn’t organic, the price will flatten out and then drop back to where it started. The whales who created this movement sell at the top, and people consider them to be “smart money.”

This process ends up leaving a pattern that can closely be filled in by Bart Simpson’s head, so traders refer to it as a “bart.” It is unique to the crypto market because of its illiquidity, high leverage and lack of regulation.

Market manipulation

Tether pumping the crypto markets

Tether is a “stablecoin” created by the Bitfinex exchanges’ parent company, iFinex. As a centralized stablecoin, it is supposed to be backed entirely by U.S. dollars, held by the Tether Limited company. Controversy has surrounded them ever since Crypto Capitol, who managed funds for Tether shut down. Tether lost $850 million that was tied up in Crypto Capitol

In order to compensate for the lost money, Tether borrowed the $850 million from their sister company, Bitfinex. USDT, Tether’s stablecoin, kept printing after these events. Some people have correlated Tether printings with Bitcoin price increases and became under the impression that they were printing money from nothing. Eventually, they were ordered to send financial documents to the New York Supreme Court.

Bitfinex and Tether turned in documentation from April 2019 until October 2019. When they were no longer forced to turn in documents, the New York State Attorney General wasn’t happy and alleged they were stalling. Bitfinex won an appeal to not have to turn in documents any longer, but that was followed with a trillion dollar lawsuit.

The same legal team who took down Craig Write for impersonating Satoshi Nakamoto is suing Bitfinex and friends for $1.4 trillion. They believe that Tether illegally printed their USDT currency to pump the market, costing $1 trillion in damages. The damages come from people who lost money during the collapse, which the legal team credit to Tether pumps. Ironically, this is more like a grand scale classical pump and dump scheme from the picture above.

If this turns out to be true, it would mean that a company used fake money to bring Bitcoin’s price to $20,000. Since that price point was crypto’s greatest accomplishment, it could have negative consequences on morale if it was a hoax the whole time.

Tether can be found on exchanges like Bitfinex, Binance and oKEX.

Crypto wash trading

There are tons of crypto exchanges that abide by no regulations whatsoever and are not registered. This makes it easy for an exchange to fake trading volume by buying and selling with their own funds.

CoinMarketCap is the first site someone might find by searching “popular crypto exchanges” because it ranks all exchanges by volume. Unfortunately, it is very easy to fake volume and get listed on this site. One report said that nearly 70% of volume reported on CoinMarketCap is fake.

The harm comes from users deciding to spend their money on an exchange with fake liquidity. The lower the volume, the higher the slippage. Slippage translates to the amount of crypto available at the price that you want to buy it for. For instance, an exchange might say that you can buy Bitcoin for $9120 but not clarify the supply available at that price. A trader might get the first $1000 worth of Bitcoin at $9120 per Bitcoin, but if they were buying $10,000, the average price might move to $9300 on an illiquid exchange.

Price increasing because of their order gives the fraudulent exchange an incentive to sell their holdings. People trading on  these types of exchanges aren’t long term customers because the exchange simply isn’t competitive with others. A trader might be tricked in to exchange on their platform, lose some money, and then leave.

Regulators don’t like that this practice because it means their citizens are being scammed out of money, and it’s hard to get an accurate read on volume. 70% of volume recorded being fake is a large number and it’s easy to see how allowing a Bitcoin ETF on a major stock exchange based off of that data could be problematic.

We’re still in the Wild West 

Crypto markets are still in many ways the Wild West. The stock market is made up of mostly made up of data from regulated, documented business. Crypto exchanging began as a global, unregulated market and the biggest centralized exchanges operate outside of the U.S. where there are more lenient trading policies.

In order to bring standards up to what mainstream, institutionalized investors are used to, there needs to be a more global consensus on regulation. It often seems like U.S. regulators are the only ones trying to crack down on wash trading, printing fake money and allowing access to unnecessary leverage. As long as the U.S. is the only threat to scams, they will have somewhere to run and hide.