“Leverage in the crypto markets — particularly on the retail side — has been a big theme that accentuates the volatility.” – Devin Ryan, JMP Securities
Bitcoin is a notoriously volatile market. The lack of oversight found across cryptocurrency exchanges makes the market ripe for abuse. And, since massive price swings occur at least biweekly, fears of manipulation are founded.
The assertion that Bitcoin is subject to price manipulation is bolstered by the fact that such practice is rampant among “altcoins.” Wash trading, pump and dump schemes, and spoofing have become almost common practice.
- The average cryptocurrency pump-and-dump manipulation is associated with a price rise of 65% in the space of minutes.
- On average, wash trades account for over 70% of total trading volume on each unregulated exchange.
Here are some of the other conversations happening around price manipulation in the Bitcoin ecosystem:
According to Bitwise Asset Management (2019), “95% of Bitcoin trading volume is fake and/or non-economic in nature.” In a presentation to the SEC, Bitwise alleged that crypto exchanges were purposely manipulating data in order to attract traders to their platforms and boost their own ranking.
There is also some speculation that manipulator’s “exploit the fact that the order book for crypto is thin.” Traders sell massive amounts [of a crypto asset] in the spot market, which has a huge impact on the underlying asset. The asset then fluctuates to the upside (if the manipulator buys large amounts) or to the downside (if the manipulator sells large amounts). There are several analyses which support this thesis.
Traditional financial markets have been using automated systems to trade assets for decades now, and it is currently estimated that 80% of the stock market is controlled by machines (2018). Essentially, a trader can create programs based around a trading strategy, which then watch the market 24/7 and place trades following the defined algorithm. “High frequency trading” has become common among high-end traders who use trend-following bots, arbitrage bots and scalping bots for short-term trades. There are many elements of trading in cryptocurrency that make it a hot-bed for bot trading.
A targeted DDoS attack is one common obfuscation tactic that savvy traders use to sway crypto prices. Timed DDoS attacks can be launched on trading exchange servers in combination with specific trading activity to create a lucrative manipulation strategy. Although the volume of DDoS attacks has fallen in recent past months, the high number of successful DDoS attacks on crypto exchanges and other crypto sites is indicative of a more significant problem—maintaining trust in the market.
According to ByBit.com and other analysts, liquidations and leverage appear to have turbocharged 2021’s cryptocurrency meltdowns. Liquidations happen when trades cannot fulfill margin requirements for holding long/short positions and often exacerbate bullish/bearish moves. On exchanges where traders are overleveraged up to 50-100X, excess greed leads to major retracements in price.
Ultimately, all cryptocurrencies still have a very low market cap. Large holders of Bitcoin, often referred to as “whales,” can effectively influence this small market with just a few clicks of a button.
As a rule of thumb, retail traders should learn to take a longer-term view on crypto price action instead of watching charts measured in minutes.