Market manipulation has existed for as long as there have been marketable assets, and cryptocurrencies are no different. The cryptocurrency market only has a few laws in place, making it subject to market manipulations that are difficult to perpetrate in mature markets. In this article, we'll go over some of the most frequent market manipulation strategies, how it affects crypto prices or investors' decision to buy Ethereum, as well as the patterns that surround them and how to spot abusive behavior.
Market Manipulation Techniques
The pump and dump plan is the most popular type of market manipulation you've probably heard of, especially when it comes to cryptocurrency. The concept is straightforward. Whales (large bag holders) will amass coins in a cryptocurrency with a low market cap. They will then persuade others to buy Ethereum, causing the price to skyrocket. The whales then sell their coins, causing the price to plummet.
Because small market cap currencies are easier to influence in terms of price, this method is increasingly popular. During the early years of bitcoin, pump and dump scams were widespread. These types of manipulations have gotten more difficult in recent years as the market has gained liquidity, but they are still visible.
Pump and dump schemes are operated on average every day, with a daily trading volume of $7 million. It is believed researchers have discovered a means to detect these scams before they occur, and investors buy Ethereum using artificial intelligence and machine learning.
The use of paid shills is a more subtle kind of market manipulation. In the cryptocurrency world, so-called influencers might have a big following that believes them and is eager to invest in their recommendations. By promising the world and then failing to deliver, these can trigger price spikes in specific cryptocurrencies.
How Market Manipulation Affects Cryptocurrency Prices
Market manipulation raises the cryptocurrency market's volatility, making it appear chaotic and risky to newcomers. Large increases followed by a sharp decline are all too usual, especially on smaller crypto exchanges, due to the low volume of certain coins. Whales do not always need to buy Ethereum (or other cryptocurrencies) or sell the asset. They can send a cryptic tweet that causes an asset to soar or, worse, plummet to the bottom of the market.
If you intend to buy Ethereum without falling for market manipulation, continue reading to learn key tactics you may add to your trading toolset to protect your crypto assets against market manipulation.
How To Tackle Market Manipulation
Market manipulation detection is a hard game of hide-and-seek. Always remember to conduct thorough research and due diligence before investing in any asset. We've put together a list of four basic tactics for protecting your crypto holdings from market manipulation.
- Double-check your information with various sources: Before you buy Ethereum, check its movement. To check an asset's movement, don't rely on a single source of information, such as the order book. Compare the data on your asset from several sources.
- Pay attention to price trends in the past: Wash transactions on various exchanges are occasionally used by whales to increase volume. For example, posting a major trade on a popular exchange while doing the exact opposite on a lesser one. Traders should avoid falling prey to this whale approach by making decisions based on past market trends rather than recent price swings.
- Perpetual futures vs. long-term contracts: Whales will occasionally drive prices to liquidate their short positions and profit from a long position of equivalent size. Always compare the premium on longer-term contracts to perpetual futures in an unbiased manner.
- Using the dollar-cost-average (DCA) method with recurrent purchase: If you're more of a HODLer than a trader, Using the dollar-cost-average to buy Ethereum will not only reduce your susceptibility to price swings caused by market manipulation, but it will also strengthen your cryptocurrency holdings. Short-term traders are more harmed by market manipulation since the consequences occur swiftly before the market corrects itself. If you'd like to learn more, check out our frequently asked questions about recurring purchases.
- Make your portfolio more diverse: Your crypto portfolio should include a good mix of diverse assets depending on your risk tolerance. To put it another way, don't put all your eggs in one basket. Market manipulation can only affect a tiny percentage of your assets if your portfolio is appropriately diversified.