To say that cryptocurrency markets behave differently from traditional markets is an understatement . Crypto markets are nascent, inefficient, global, 24/7, and poorly regulated - a recipe for some of the wildest price swings that markets have seen to date. In 2017, Bitcoin went from $3k to $20k in a matter of a few months. The journey was turbulent as prices dropped or surged by 30% in 24 hour windows. And patterns in altcoin deltas were even more erratic. Many suspect that these markets are rife with "market manipulation" (i.e. market activity that's illegal in traditional markets). These suspicions are likely correct due to the incentives (and lack of disincentives) in place - market manipulation is highly profitable in nascent markets and oftentimes free of consequences.
The following list includes the 4 major ways cryptocurrency markets can be manipulated.
Spoofing is the act of feigning the intent to execute a specific trade in order to affect market sentiment. A common way to do so is to set large buy or sell orders on the order book that you don't intend to fill. The moment the wall is bought or sold into, you immediately pull it. A fake buy wall is intended to push the price up and a fake sell wall is intended to push the price down. Ultimately, the goal of a fake buy or sell wall is to manufacture more demand for buying or selling than actually exists.
Markets that support margin trading, like Bitfinex, make it incredibly easy to place fake, high-volume orders; a trader can borrow on margin and create an order on the order book that's several magnitudes larger than the capital on hand.
Short and long squeezes
Short and long squeezes are byproducts of margin trading. A short or long squeeze occurs when a price is pushed upwards or downwards by a cascade of margin calls. If there's a large amount of short or long positions that will be margin called at a price range, and the price actually gets there, the margin call cascade starts and it catapults the price further up or down. Short and long squeezes manifest as large price swings in a short time period.
Short and long squeezes are common in cryptocurrency markets. Although, they can "naturally" occur, it's illegal to move a price to cause a squeeze.
Here's a contrived example of a short squeeze. Assume Bitcoin's price has been rising and is currently at $8,300. A trader notices a large amount of open short positions and decides to keep buying until $8,500. As the price increases, some of the short positions are margin called. Because exchanges need to buy back borrowed Bitcoin when forcefully closing a short position, the initial margin calls start a cascade where a closing position pushes the price up and the higher price causes more short positions to close. As a result, the price spikes to $8,800 before settling at $8,500.
In cryptocurrency markets, where margin trading is popular and regulations loose, short and long squeeze hunting is common.
Pump and dumps
Pump and dumps are perhaps the most famous (and most meme-ified) market manipulation tactic. A pump and dump occurs when a small group of traders gets a larger group of traders to buy a cryptocurrency or a stock. As many traders start buying at once, this creates a sudden price rise, and the thesis is that this sudden price rise will attract outsiders to also pile in. The insiders can then exit with a profit at the expense of the outsiders. A pump and dump manifests as a sudden rise in price that's followed by a complete retracement in a short time period.
Cryptocurrency pump and dumps are often coordinated through Telegram groups. The insiders will pick a coin and start accumulating. This is followed by a notice to the Telegram group that they will, at a certain date and time, announce a new coin to pump and a target price level to sell at. When the coin is announced, users in the Telegram group start buying in. Generally, the insiders quickly exit with a healthy profit and most participants in the pump and dump are left with a loss.
Cryptocurrency pump and dump groups were highly active a few months ago - with some groups even running elaborate referral programs. Since then, the US SEC (Securities and Exchange Commission) and the CFTC (Commodity Futures Trading Commission) have stepped up to combat P&D groups. In February of 2018, the CFTC announced a $100,000 bounty for cryptocurrency pump and dump whistleblowers. Since then, the number of active pump and dump groups has significantly decreased.
Wash trading is the act of faking trade volume in a market to signal false interest in an asset. A high trade volume indicates that many people are buying and selling - which is a generally good proxy for interest. Traders abuse this knowledge when creating a wash trade and repeatedly trade an asset amongst themselves to artificially increase that asset's trade volume. If the fees are low, this can be done at a relatively low cost.
Wash trading is especially common amongst traders and exchanges in the altcoin market. To see an example of how this has played out in the past, look no further than Vechain's trade volume throughout February. Notice that the volume repeatedly dips at exactly 9am PST everyday - which is coincidentally 12am China Time. It's likely that certain parties are trying to fake a drop in trading activity as Chinese traders go to sleep.
Cryptocurrency markets are unregulated, filled with amateur traders, and, to make matters worse, margin trading is highly accessible. All of these factors guarantee rampant market manipulation and erratic market behavior. Be mindful of the different ways the market can be manipulated, be sure to select the right table, and never risk more than you can afford to lose.