But, due to the possibility of generating high returns, the market has also become a place where fraudsters engage in market manipulation of various types. Of these pump and dump schemes are the most notorious but other strategies are also used. For example, the performance of the “bitcoin price usd” indicates generally sudden and unpredictable changes that are usually associated with fraudulent activities. This article looks at the working of pump and dump schemes, other prevalent manipulative strategies and their effects on investors and the market.

Pump and Dump Schemes
 

It is a fraudulent activity that has been successfully migrated to the crypto sphere and is named the pump-and-dump scheme. It works in such a way that several people or an organization manipulate the price of a certain cryptocurrency and provide fake information that makes more people invest in it then dump their cryptocurrencies and leave other investors with losses.

The mechanics of the pump and dump scheme

 

Coordination: A pump and dump scheme’s manipulators engage in private ways like encrypted messengers, social networks, groups or boards.

Pump Phase: In this phase, the organizers will purchase a large number of the particular cryptocurrencies they want to promote and ensure that they spread positive information about the said cryptocurrency to the public. These are things like fake news on partnerships, technological innovations, or the endorsement by key personalities.

Attracting Investors: The first spike of the price pulls in innocent investors who have been prompted by the fear of missing out (FOMO). The new investors are attracted to the bitcoin and other cryptocurrencies and purchase them hence increasing the value.

Dump Phase: When the price gets to a certain level, the orchestrators dispose of the entire holding at a very good profit. Such a large number of sell orders is placed that the price drops and the last investors are left with worthless investments.

Real-World Examples
 

Pump and dump schemes are typical in cryptocurrencies with low market capitalization and less awareness as it is relatively easier to manipulate them. For instance, in the 2017 crypto boom, several altcoins saw very high fluctuations due to such scams. Sometimes, organized communities on messengers such as Telegram would pump certain coins and increase their prices by more than 100 percent within several hours and then dump them.

Other Manipulative Tactics
 

While pump-and-dump schemes are among the most widely recognized examples of market manipulation, other techniques are also highly dangerous for cryptocurrency traders.

Spoofing and Layering
 

Spoofing is putting in a very big bid or offer with the intent of never taking the other side of the trade. These fake orders also give a wrong impression of an existing demand or supply in the market which in the real sense is not there and this affects the price of the cryptocurrency. When the price goes in a favorable direction, the manipulator cancels the orders. Market-making is another technique where some orders are made at various levels to give the impression of liquidity.

Insider Trading
 

Insider trading is a process in which specific people who possess information about certain cryptocurrency’s future events or news engage in trading it before such information is made available to the public. It can result in large price swings and the general public who do not have access to the information gets affected. Insider trading is a challenge, particularly in the unregulated market of cryptocurrencies.

Whale Manipulation
 

Whales or the key investor/ investee that is a person or entity with a large position in the cryptocurrency can easily manipulate the market through buying or selling in large quantities. For instance, a whale may put a big sell order on the table to push down the price and this will make the other investors follow suit and dispose of their stocks and the whale then buys at the new lower price.

Protective Measures
 

Investors can take several steps to protect themselves from market manipulation. There really are many measures that investors can take to shield themselves from market manipulation:

Research: Ensure that you truly research the cryptocurrencies that are to be invested in. Essentials are easy to comprehend and it is recommended not to buy coins that are experiencing unknown and sharp increases in rate.

Diversification: It is recommended to spread the investment across different cryptocurrencies to avoid high-risk exposure.

Use Reputable Exchanges: Only trade on exchanges that have a good reputation and exchanges that have all the right mechanisms to prevent cheating such as price manipulation.

Stay Informed: Get to read through credible dailies and get to understand the existing or the new policies and trends in the market.

Market manipulation and other forms of Ponzi schemes and manipulation incidences like pump and dump schemes are truly unhealthy for investors and the market. It can be assumed that as the market develops and as rules against manipulative strategies are enforced, the detection of these strategies will be more efficient, and thus the occurrence of such manipulative behavior will decline in the market.