Wash Trading
is a trading method where large asset holders trade among themselves, creating an illusion of activity and misleading retail investors. The mechanism is simple: alternating red and green candles. Wash trading is used for two main reasons:
Creating visibility of activity or demand for a particular currency/trading pair;
Artificially increasing trading volumes to pay exchange fees under the guise of trading operations.
A great example is NFTs. The year 2021 was marked by an NFT boom. According to ChainAnalysis, at least $44.2 billion was transferred to ERC-721 and ERC-1155 contracts, opening opportunities for wash trading and money laundering through self-funded transactions. NFT purchases were often made by sellers or their sponsors. There were several hundred such transactions:
Pump & Dump
Classic approach: disseminating information that shapes expectations of asset growth and increases demand. When the price reaches the desired level, scheme participants sell their assets, profiting from inexperienced investors.
Key methods of provoking pump and dump:
Hype: Loud statements about the "next Bitcoin" or "Ethereum killer" create optimism among investors, but in 95% of cases, it's just speculation and more of a warning sign.
Sharp price increase: If a little-known token rapidly increases in price, caution should be exercised. Parabolic growth can be a trap for retail investors.
News cycles: Positive news coincides with large purchases by major players, creating a sense of successful news trading and "whale insiders," motivating retail investors to buy.
Examples of pump events:
Crypto.com advertised during the Super Bowl.
Tesla buys BTC.
Coinbase goes public.
Elon Musk changes his Twitter icon to a Dogecoin dog.
All of these events are aimed at creating excitement and stimulating impulsive purchases by retail investors.
Bear Raid
The essence of this tactic is that large market participants open short positions and begin to spread negative information about the asset, creating FUD (fear, uncertainty, and doubt). If FUD takes effect, investors panic and close long positions, effectively becoming "fuel" for short-term traders. The typical bear raid scheme looks like this:
Launch FUD.
Open several large short positions.
Maintain panic among investors.
Take profits.
To counteract this type of manipulation, it is important to use various sources of information and differentiate between justified negativity and FUD.
Spoofing
is a manipulation method that involves placing fake orders that are canceled before execution. Since the quantity of buy and sell orders is one of the main trend indicators for traders, fake orders can prompt decisions favorable to the manipulator.
Example: On May 6, 2010, news about the Greek crisis in the EU began to be actively discussed. However, suddenly American indices fell by 10% in a matter of seconds, causing momentary panic. Within minutes, prices recovered as if nothing had happened.
The main goal of financial market participants, including cryptocurrency ones, is to make a profit. However, different players use different methods: some achieve their goals through research, trial and error, and long-term strategies, while others deliberately deceive investors to manipulate prices and make easy and quick profits.
For successful operation in the crypto market, it is important to be able to resist manipulations, rely on verified information, and conduct thorough analysis when making decisions.
