The distributed ledger technology (DLT) involved in crypto trading allows for data to be distributed and synchronised. But it does not prevent market manipulation. There are a number of respected and well-regulated exchanges in the cryptocurrency sector. But there are many small exchanges that are less well known and less regulated. There are also many who are looking to use cryptocurrency as a vehicle for wrongdoing.
Market manipulation is one way in which crypto can be used to make illegal gains. Such manipulation can be carried out in a number of ways. Some employ tactics that have been used in more traditional asset markets while others are unique to cryptocurrency.
The most popular are:
1.Pump and dump: This is the artificial inflation of the price of an asset and is a practice that has been conducted for many years on various markets. It involves a series of sales and purchases of a cryptocurrency to create the impression that the asset is increasing in value. Those behind this then sell the asset when their artificial rising of the price attracts buyers who have been duped into believing that the cryptocurrency in question is set to keep rising in value.
2.Whale wall spoofing and stop hunting: The practice of whale wall spoofing was often used when Bitcoin was in its infancy. It is now most often used on the less well-regulated exchanges. It involves an individual or organisation (“a whale”) placing a large order so that fake buy or sell walls are created in the order books, which can trick other parties into panic selling (as they fear a particular asset is losing value) or rushing to buy (as they believe huge demand for an asset is pushing its value up). For example, a whale may set large sell orders which in turn tricks investors into panic selling. In stop hunting, a whale drives the price to where set stop-loss orders – which are designed to limit an investor's loss if an asset falls in value – are triggered. The resulting market volatility enables assets to be bought at a lower price.
3.Wash trading: This is similar to whale wall spoofing and involves misleading information being introduced to the market to prompt rapid buying and selling of an asset to distort the price to an artificially high level. For small exchanges, this can increase their number of users and, in turn, the commission they earn.
4.Disseminating false information:: False information is often spread to traders or investors on forums in an attempt to provoke a change in the market that those doing the spreading wish to see.