HOW TO PROTECT YOUR INVESTMENT IN A VOLATILE AND MANIPULATIVE CRYPTO MARKET

Sentiment around cryptocurrency is on the rise again due to the news of Bitcoin ETF proposals by major financial institutions like BlackRock. This has positively impacted the price of most coins and many crypto enthusiasts speculate the beginning of the new bull market which was last seen two years ago.

As we prepare for the next bull market, we should also take note of its peculiarities, one of which has to do with market manipulation. At the end of this post, readers should understand the nitty-gritty of market manipulation and how to protect their crypto investment.

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WHAT IS MARKET MANIPULATION?

Simply put, Market manipulation is the artificial creation of demand or supply to determine the price of a coin. In a free market price is determined by the aggregate demand and supply of assets. However, when an individual or group have significant influence in the market, they can control the price of a token. Centralised Exchanges and venture capitalists are some of the big market manipulators in the crypto space. Primarily anyone with an overly large stake in a blockchain can sway its price.

Market manipulation can be good or bad depending on who controls the narrative. For instance, it is legal when the government or central banks manipulate the market or currency supply–currency manipulation. This is deemed to be good and in the interest of the state. However, when such activities are carried out by individuals or institutions, it is regarded as a crime. So to understand the sentiment around market manipulation you should be aware of the narrative in your sphere. However, we are going to be looking at the negative aspect of market manipulation as it affects small investors.

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IMPLICATIONS OF MARKET MANIPULATION

One of the major drawbacks of market manipulation is that it is a zero-sum game that creates losers and winners. Often, the losers are small/retail investors who are not privy to certain information or large capital to move the market.

Also, market manipulation distorts real price discovery which makes it difficult to validate an asset class at its true value. This might lead to the collapse of Centralised Exchanges and Web 3 projects in the long run when the market can longer sustain itself. A prime example is the FTX and Sam Bankman-Fried debacle which disrupted projects funded by the Exchange and their filing for Chapter 13.

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COMMON MARKET MANIPULATION STRATEGIES.

PUMPS AND DUMPS

This is a scenario where an individual (whale) or syndicate, artificially prop up the price of a token and creates large trade volumes to entice investors. The token is then sold off to investors at the new inflated price which often leads to a crash. This cycle can be repeated continuously by the perpetrators for as long as people are willing to participate, which is typical of pyramid schemes.

To successfully pull a Pump and Dump, the individual or syndicate has to find or create a low-liquid asset at a low selling price and then artificially inflate its price and volume. This is then followed up with social engineering or hype around the token. Once successful, the perpetrator(s) sell their holdings.

Now, I must state that Pumps and Dumps are not always malicious. Oftentimes they happen accidentally like in the case of Elon Musk shilling Dogecoin. So it is important to know what you are getting into as a prospective investor. Always do your research.

WHALE WALL SPOOFING

Spoofs are similar to Pumps and Dumps. However, the individual or group involved in spoofing have no intention to buy or sell. Their goal is to sway market sentiment (positively or negatively). This is done by setting large sell/buy walls. This is common among small-cap tokens where a few individuals hold an overwhelming amount of the token supply.

For instance, a trader with surplus liquidity can set a sell order way below the market price to force other traders to sell their tokens at that price. Once the price drops, the whale cancels his sell order and buys out other traders’ tokens at an artificially discounted price thereby increasing their holding and control of the price of the said token.

WASH TRADING

This is a process where an individual or group buy and sell a particular token to large trade volumes to attract investors. This is often carried out by market makers who provide liquidity for a new token, which is an important function for a new blockchain. Nevertheless, these volumes are not real. A 2022 Study by Forbes showed that over 50% of all reported Bitcoin trading volumes were either fake or non-economical.

Also, wash trading by market makers can often be manipulated to earn the market maker more money (for risking his or her capital) as seen in the LIBOR scandal.

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TACKLING MARKET MANIPULATIONS IN CRYPTO

The crypto industry is very unregulated, thus, it is almost impossible to stop bad actors in the space. However, some Centralised Crypto Exchanges like Binance deploy advanced Algorithmic Surveillance which alerts them of instances of market manipulation. However, market manipulation occurs on decentralised exchanges, which cannot be regulated. There are also instances where CEXs engage in market manipulation using their customers' funds.

There is also increased government intervention in the crypto industry which many stakeholders do not fancy as it goes against the ethos of decentralisation. Nevertheless, they offer some form of safety for investors which engenders the confidence of institutional and retail investors.

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HOW TO PROTECT YOUR INVESTMENT FROM MARKET MANIPULATION

1. DO YOU OWN RESEARCH (DYOR)

You must be aware of the token you are investing your money into. Do not be swayed by hype. Most times, these are manipulative tactics used to deceive people into buying worthless tokens without any use case. Do not rely on the words of influencers. These people are usually paid to shill projects. So you should do your due diligence.

2. DOLLAR-COST AVERAGING

Even after doing your due diligence, it is also important to note that crypto is very volatile and still vulnerable to market manipulation–even good projects. So the best way to invest is dollar-cost averaging. This involves spending a specific amount on a token irrespective of its price. For instance, buying $50 of bitcoin monthly for 4 years. Your goal is to accumulate as much of that token regularly, irrespective of its price and take advantage of pumps when they happen.

3. DIVERSIFYING YOUR PORTFOLIO

You must spread your risk across different asset classes (NFTs, normal tokens and stable coins). This also enables you to take advantage of pumps when they happen and reduce your risk exposure to a token.

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I hope you have learnt a thing about market manipulation and how to protect yourself during this coming bull run. You might not have all the capital or information at your disposal, but you can still play safe in a very volatile crypto market.

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Check out this short thread on projects with potential airdrops.

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SOURCES:

https://www.binance.com/en/blog/fiat/what-is-market-manipulation-in-cryptocurrency-421499824684902912

https://www.binance.com/en/blog/markets/detecting-and-preventing-market-manipulation-what-it-means-for-binance-users-5805952877444160785

https://www.litefinance.org/blog/for-beginners/how-to-trade-crypto/crypto-pump-and-dump/#:~:text=The%20name%20of%20the%20puppy,of%20cryptocurrency%20pump%20and%20dumps.

https://www.investopedia.com/tech/what-cryptocurrency-spoofing/

https://www.forbes.com/sites/javierpaz/2022/08/26/more-than-half-of-all-bitcoin-trades-are-fake/?sh=58201f9d6681

https://www.investopedia.com/terms/m/marketmaker.asp

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