update 19 August 2021

The Menace Of Crypto Market Manipulations and Mitigation

In June 2018, a post by Forbes magazine focused on a crypto enthusiast tweet discussing the deep manipulation in the crypto market. The Twitter account user cited many practices of crypto exchanges that are illegal in traditional exchanges. Some of these practices include wash trades, spoofing, and front running.

Market manipulation involves a collection of different practices set to influence the market for personal gain. Therefore, it is vital for you as a crypto enthusiast to better understand market manipulation and protect yourself. Keep on reading to get insight into the risks and mitigations to crypto market manipulation.

Consequences of Market Manipulation

Usually, the persons who initiate the market manipulations are the biggest gainers at the other small traders’ expense in crypto markets. Therefore, market manipulation is a significant issue to the crypto exchanges and the persons trading the coins. These criminals come up with manipulation schemes on telegram or other social media platforms to get people who want fast returns.

New crypto traders who want to make fast returns are often the ones to lose the most in crypto manipulation schemes. They are vested in getting supernormal profits with little to no effort.

The other big losers in these scams are always the crypto exchanges. The exchanges face critiques, which often vilify them for not putting proper measures to fight manipulation. These platforms will not just lose their names, but also traders will shun from using them.

The crypto industry also loses a great deal from such manipulation schemes. Financial experts, traders, and institutions all lose trust in a sector prone to such attacks. Some media houses may choose to take advantage of these manipulations and vilify the crypto industry, which raises no regulations.

The criticization effect is a slowed adoption of the crypto industry and a ban in some countries. When banning bitcoins, for example, the Bangladesh central bank highlighted that one of its reasons is that Bitcoin poses financial loss to its citizens. There is no doubt that the publicized market manipulation schemes and hackings in the crypto world were the reasons for imposing the ban.

How to Spot and Avoid Market Manipulation

To understand the best way to protect yourself against market manipulation, you need to know the different methods criminals use in manipulating markets. Here are a few manipulation tricks and how to defend yourself quickly.

Wash Trading with Multiple Exchanges

Whale traders use this technique to create high demands or high trading volumes for assets. Wash trading involves transactions where there is no actual exchange of securities. The idea of wash trading is the creation of misleading sales in the market. When seen with investors, these false transactions will create a false impression of substantial trading activity exchanges.

The false transactions create fake liquidity and thus attract new users to the exchange. In the traditional world, trade volumes are suitable for cash, but things are different in the crypto world. Small exchanges are mostly prone to this manipulation since they are in dire need of attracting investors.

External forces think that the best solution to this menace would be to introduce some degree of regulations. We still don’t know if this is possible in the crypto world; however, you should protect yourself as a trader. The most productive way of protecting yourself is by avoiding very high trades, especially in new exchanges. Try to focus on crypto exchanges with longer price fluctuations durations; this will save you the pain of losing in fast deals.

Hidden Orders

Hidden orders are the orders that are not on the order book. In this strategy, a trader manipulates the market by placing high orders with no intention of executing them. These hidden orders always represent large flows but usually are canceled when the market hits the intended levels.

The best way of avoiding being deceived with hidden orders is by not focusing so much on the order book. Just checking the market trends of the particular exchange and their trade history is a proper mitigation technique. Liquidity providers and algorithmic traders are experts in manipulating hidden orders. It would help if you were very wary when trading cryptos in the exchanges.

Forced Liquidation

Forced liquidation is where all assets owned by an individual are sold, especially when they cannot meet some requirements. Brokerage firms and big market movers may take advantage by putting themselves in a liquidating position.

Forcing a liquidation leads to losses for small traders while the whales increase their value. It’s quite hard, near impossible to predict if brokers or market whales are using the strategy.  

Slippage is the method used for mitigation against all forms of market manipulation. It involves determining the value of an asset in different exchanges. Notice the rate of price decline in each of the assets.

Exchanges that manipulate their market have very high slippages indicating significant price declines and unstable order books. The high slippages will prove that their volumes are fake since small sell orders can manipulate the order books and coin prices.

Final Word

Crypto market manipulation has led to severe losses to small crypto traders while the whales make supernormal profits. However, it’s difficult to determine the required regulatory measures to balance the crypto world. It would be best if you were careful in all your crypto transactions and exchanges. 

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You can also use the platforms which are free from market manipulations. Some of the platforms include Binance, CoinBase, BitFinex, Liquid, and BitStamp, which have not seen manipulation problems since their inception. Although there’s a need for regulations to protect the crypto space from market manipulation, traders should be cautious to ensure they do not lose. 

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