Whales and market manipulation

In November 2017, the meteoric rise of Bitcoin past $8,000 was a miracle. No-one had ever seen anything like it. The market shot so high that only a year later, as we return full circle and see Bitcoin trading at around $7,500, people are scared.

They were scared it would drop below $8,000, they’re scared now that it will drop below $6,000, and they’re terrified that it will plummet into the abyss altogether. People don’t understand the mysterious forces that contribute to the market value of Bitcoin, and it’s invariably attributed to FUD/Bullish news, or market manipulation.

Economics has often been described as a “social science” because of how closely tied to human emotions it is, and it seems likely that Bitcoin is impacted by international news stories and market manipulation as well. But what does that mean? What can we do about it?

Market Manipulation 101: Spoofing

Despite the complex nature of cryptocurrencies and the financial markets, the most common and effective form of market manipulation is actually remarkably easy. Are you ready to hear how it’s done?

All you need to manipulate the price of Bitcoin and other cryptocurrencies is a LOT of money.

The method below is called “spoofing”, and people have been reporting instances of this on the crypto exchanges since the early days. The less volume a market has, the easier it is to manipulate, so even highly traded currencies like Bitcoin can be manipulated with relative ease compared to blue-chip stocks on the stock market.

Wall Street and crypto trader Ronnie Moas is one of the people who has been calling out market manipulation for a long time in the crypto space, and he explains a typical instance of price spoofing below:

“If you have $2 bln, you want a diversified portfolio, and for me diversified is a $200,000 position, but there can be a position that is $200 mln, because you want 10 percent of your money in Bitcoin. But you don’t want to pay $20,000 for a Bitcoin, so what you do — and you can call it a Whale, a cartel, a shark, a consortium, a trading group — you dump $20, $30, $40 million dollars on the market, and create selling pressure. People see those orders on the books, and they jump in front of them, because they are afraid you are going to move and shake the market down, and this feeds off itself.”

 

Of course, this isn’t the only way to manipulate the market price, but it’s the most direct. Unlike other methods, there’s no need to communicate with the community – you simply accumulate large amounts of currency, place massive sell orders that can be seen on the order book, and wait for the market to “capitulate”, as in panic and behave exactly as you want them to. People will try and sell out before the massive order drives the price down, making it them who drive the price down. Meanwhile the big player cancels the sell order, places it a few more times until the price is low enough, and then begins to accumulate far more than they bought at a higher value.

In the relatively unregulated cryptocurrency market, it’s by far the easiest method – it’s also illegal. The US government has launched an investigation into crypto market manipulation and it is spoofing that they are specifically focusing on the most.

Layering

This is a similar act to spoofing, though with slightly different intentions. Traders committing layering place many orders at key price points throughout the order book with the hopes of reserving key positions in advance. What’s wrong with that?

Just like with spoofing, the traders have no intention of actually making all those trades – just one or two. While they’re not necessarily trying to tank or inflate the price by distorting the public perception of market demand, that’s exactly what they’re doing by placing (potentially massive) orders throughout the book that will never be fulfilled. This leads people to get a warped, falsified view of market demand and causes price manipulation just as much as spoofing does, and both layering and spoofing are illegal.

Pumping and Dumping

 

This method is a little more elaborate and difficult to pull off. Because of that it’s far more effective with low-volume altcoins than high-cap coins – not that it doesn’t happen with both.

Pump and dumps are orchestrated through shilling, fake news, and false promotions. The idea is simple: the orchestrators accumulate large amounts of a currency and contract celebrities and influencers to start talking up that currency on social media. They’ll pay unscrupulous media outlets to release fake press releases, often in the form of supposedly unbiased “news” articles that are essentially covert advertising.

The media storm will drive up the price – in a small altcoin community, this can be highly, highly effective as the community shares the fake news and bullish influencer tweets amongst themselves, start buying more tokens and driving up the price which escalates as everyone “gets on the moon rocket”, etc.

 

With the pumping phase complete, the next phase is the dump. This only works if it’s done at the same time – obviously there’s bound to be price slippage either way, but the manipulators can’t sell their bags off slowly without significantly altering the market to the price reversal. The only thing to do is to sell all at once, completely tanking the price and of course screwing over everyone who bought in high in the process, leaving them holding the bag.

The opposite of this is called a Bear Raid, in which manipulators spread FUD news stories to create market fear and drive the price down. “India banning cryptocurrencies”, etc. Sound familiar? Once the price has hit the floor, the whales accumulate at a lower price. Both pump and dumps and bear raids are considered to be a form of securities fraud in the traditional finance markets.

Here’s a tweet from our friend Ronnie Moas pointing out a classic pump and dump:

Is the Bitcoin market being manipulated?

Well… what do you think? Have you ever come across fake news or press releases? Do you remember major media outlets reporting on scary upcoming events that never came to pass, or promising bullish news that turned out to be untrue? Do you ever see large orders placed on the books only to be canceled when they get close to fulfillment?

The US investigation will probably reveal some details, but you don’t need to be a detective to know that the market has been manipulated from the beginning. The question is… how much?

Let us know your experiences below!

 

Interested in other cool crypto posts….check out Mining Wars: Bitmain vs Dragonmint and The Price of Bitcoin vs Cost of Mining.

Follow us on twitter @cryptoiscomin