Common Crypto Market Manipulation Tactics

Market manipulation is as old as trading itself. As new markets like cryptocurrency emerge, they do not escape the old tricks. There is more room to control and inflate prices since regulatory frameworks are still taking shape, and bad actors have devised upgrades to take advantage. These upgrades are crypto market manipulation tactics that favor only them and are detrimental to others in the industry.

Unlike other financial markets, the cryptocurrency space affords anonymity. Transaction ledgers show only addresses that are untraceable to people. Another reason why digital assets are easy targets is the speed of transactions. The job of validators is to see that transactions meet certain requirements like gas fees. This process does not account for the intentions of traders. Before anyone realizes the scam, it is already completed. These two features allow perpetrators to operate freely to cause market changes that harm investors.

This article explores common crypto market manipulation tactics used to dupe people in the cryptocurrency sector, how each method works, and popular real-life situations where the scams played out.

4 common crypto market manipulation tactics

Insider trading

While financial markets thrive on fair access to information, what happens when a person has privileged information about price? They can anticipate market movements and pull the rug from under the feet of unsuspecting investors. An individual uses market-sensitive information to gain an unfair trading advantage. It usually involves business executives, journalists, and brokers.

What forms can insider trading take?

• Daisy chains: Daisy chains allow the insider to cover their tracks as they give the information to a group of individuals for trading. This transaction is usually on an agreement that benefits the insider.
• Reverse insider trading: Reverse insider trading helps the subject cut losses. For instance, a crypto exec sells his holdings before stock-crashing news is made public.
• Scalping: In scalping, an investor promotes stocks he is holding and generates demand for them to increase price. As the price rises, he sells off. He has misled his followers.
• Front running: Front running involves a trader using knowledge from a client’s order to trade for personal benefit first, and quality service becomes secondary. It causes a conflict of interest, and the client no longer feels prioritized.

Popular scenario of insider trading in crypto

FromJune 2021 and April 2022, Ishan Wahi, a product manager in token listings at Coinbase, shared confidential information with his brother and his friend. Coinbase remains one of the world’s largest centralized crypto exchanges, and this reputation ensures a sure initial rise in tokens listed on the platform.

Nikhil Wahi and Sameer Ramani used this information to purchase these tokens on other crypto exchanges before public announcements. The duo profited over 1.5 million dollars from executing the scheme on 14 occasions.

In May 2023, the Federal Bureau of Investigation sentenced Ishan Wahi to 2 years in prison and ordered forfeiture of all assets acquired in connection to the scheme.

Wash Trading

Wash trading is an unfair practice in which an investor sells and then immediately buys the same crypto asset. This process reflects on the blockchain as a trade, but the ownership of assets remains unchanged. Wash trading gives an artificial impression of increasing trading volume.

Aims of Wash Trading

• It attracts genuine investors looking for viable assets.
• Crypto exchanges favor high volume tokens for listing. Wash trading helps imposter tokens gain visibility on more platforms, making them seem legitimate.
• Money laundering: Bad actors rapidly buy and sell to hide the actual source of assets. This method is prevalent in NFT markets. Innocent buyers purchase the NFT, and its prices fall significantly. This way, the initial purchase money becomes clean for the seller, and he does it at a profit.

Scenario of wash trading

Recently, a U.S. government investigation indicted CLS Global LLC. This company is a market maker in the cryptocurrency industry, and had an Ethereum-based token. The investigation, aimed at intercepting sham trading activity, involved the creation of a supposed cryptocurrency entity, NexFundAI.

The company approached CLS Global, which agreed to help attract potential buyers. Over video calls between July and August 2024, a CLS Global rep explained that they could help generate trade volumes with self-trades across multiple wallets. The employee went on to testify to how the company has helped many clients without suspicion. It was concluded that, CLS Global will pay $428,059 in forfeitures and fines, face three years of probation, and provide annual certifications to show compliance with the probation terms.

Spoofing

Spoofing is simplya hoax. In spoofing, a fraudster tries to imitate a legitimate entity through spam messages, convincing the other party to transfer funds or give access. To make the scam more convincing, the perpetrator must use the identity of a high-ranking official, make the message urgent, and show authenticity.

Why are crypto investors targets for spoofing?

Spoofing targets crypto investors because of the irreversible nature of blockchain transactions. Even if authorities trace the hacker, the funds involved are inevitably lost. Through spoofing, attackers establish trust and cause investors to take actions like revealing their seed phrase or visiting a website through bad links.

Methods of Spoofing in the world of cryptocurrencies

• Fake currencies: Also known as spoof coins, fake cryptocurrencies target the entire ecosystem. These tokens imitate real tokens on a different chain, and at a first glance actually look like real tokens. Unsuspecting investors buy into these honeypots and think they have the actual thing.
  Some tricks these fraudsters use include changing a letter in the token ticker that is hardly noticeable. For instance, swapping out O for 0 in SOL. Such counterfeit tokens can easily be created and listed on decentralized exchanges (DEXs).
• Order book spoofing: Order book spoofing is how spoofing thrives in market manipulation. The scheme involves placing large sell and buy orders and canceling them before execution. It deceives the market algorithm about liquidity and impacts market price.

See how order book spoofing plays out:

• An investor places a large sell order at a price above current market levels. For example, DFX is trading at 2.5 dollars, and he puts a sell order at 3 dollars.
• The large sell order gives small investors the impression of strong selling interest at this level.
• Other traders set trades with this resistance in mind.
• Before the large order reaches execution, the manipulator cancels the trade, and the price pushes past the resistance. With this move, other trades are wiped out while the trickster has positions that benefit from this movement.

Pump and dump schemes

This practice originates from the stock market’s pump-and-dump schemes. It involves social media influencers hyping up the prices of tokens to lure unsuspecting investors and cash out gains when the token reaches peak value.

This form of manipulation relies on spreading bogus claims. Afterwards scammers sell off their stake when attention is at an all-time high, leading to a price crash.

Typical components of pump and dump scheme

When you imagine a pump and dump scheme, your mind goes to Jordan Belfort’s Stratton Oakmont in The Wolf of Wall Street. Here are features you can’t miss:

• Penny priced assets: Scammers favor low-valued assets since they can yield exponential profits with low capital investment.
• Aggressive promotion: Celebrities and social media influencers promote the assets as the next best thing. The buzz around the token tempts you to give it a chance.
• Fear of Missing Out: As the price rises, those who haven’t bought regret their decision to sit on the sidelines. They buy in and feel they will be clever enough to jeet before it crumbles. Similar action from thousands of investors keeps the price rising.
• Eventual crash: When scammers reach their target value, they sell off their holdings. The gullible crowd holds onto dust, and since the token has no real utility for a resurgence, the project is officially dead.

How to avoid crypto market manipulation tactics

Market manipulation is almost second nature to the world of investing. However, you can reduce the chances of falling into the hands of scammers by taking proactive steps. Proactive steps you can take to protect yourself include;

• Source for market data from credible sources
• Invest in various assets. Losses hurt more when you pile a chunk of your investments in one asset class.
• Do not trade with emotions. Take time to do your research instead of making trades based on fear.
• Approach low-volume stocks or tokens with caution. They are more susceptible to manipulation than large-cap tokens, boasting high trading volume.
• Research the company or project backing a token.

Conclusion

Depending on who you ask, CEXs or DEXs have loopholes that make them susceptible to market manipulation. Nearly all tactics used to swindle investors existed before digital assets became popular.

In insider trading, a person in the know makes market moves before impending news to ensure profit. Wash trading misleads innocent investors to decide due to inflated figures on liquidity dashboards. In spoofing, one token imitates another with slight changes to carefully mimic the other in name and other representations. Meanwhile, in pump-and-dump schemes, the manipulator drives up the value of a worthless token and takes profits when the price is at its peak, leaving suckers grasping onto straws.

Until more regulation and scrutiny reduce these acts in the crypto industry, always keep your eyes peeled for suspicious activity and never feel pressured to take any action. At Defiance, we are committed to exposing and reducing crypto market manipulation tactics to the barest minimum.

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