Traditional finance also suffers from market manipulation, but due to the liquidity of this market, it is more difficult and usually harder to spot. On top of this, the traditional financial markets are much more heavily regulated than what we see in the cryptocurrency market.
While market manipulation has slowed in recent years in the cryptocurrency industry when compared to the wild early days, there is still clear evidence that it is apparent.
So what are the issues with market manipulation, and who suffers the most from it?
Evidence of market manipulation
The most common form of market manipulation you might have heard of, especially in terms of cryptocurrencies, is the pump and dump scheme. The idea is simple. Whales (big bag holders) will accumulate coins of a small market cap cryptocurrency. They will then convince others to buy the cryptocurrency and the price will rise dramatically. The whales then dump their coins, causing a big drop in price.
This scheme is more common with small market cap coins as they are easier to manipulate in terms of price. Pump and dump schemes were common during the earlier years of cryptocurrency. In more recent years, as the market has gained liquidity, these types of manipulations have become harder, but are still apparent.
Shockingly, one cryptocurrency exchange has even encouraged pump and dump schemes. YoBit ran a few pump and dumps in late 2018, pumping coins 5,000% in the space of 30 minutes. Issues such as these are why so many are calling for regulation of the cryptocurrency industry.
Pump and dump schemes are not unique to cryptocurrencies however. Infamously, Jordan Belfort ran many stock market pump and dump schemes, earning himself the moniker The Wolf of Wall Street and having a Hollywood film made dramatising his life.
Research has shown that on average there are two pump and dump schemes run each day, with a trading volume of $7 million. Using artificial intelligence and machine learning though, researchers believe they have found a way to spot these schemes before they happen.
During the bull run of 2017, many accusations were made that much of the price rise in Bitcoin was due to the printing of the stablecoin Tether inflating the market. These findings were never conclusively proven, although the accusations still exist to this day.
A more subtle form of market manipulation is through the use of paid shills. So-called influencers in the cryptocurrency space can have large audiences who trust them and who are willing to invest in their suggestions. These can cause price spikes on certain cryptocurrencies by promising the world and then subsequently not delivering.
John McAfee’s infamous ‘Coin of the Day’ during the bull run of 2017 is the clearest example of such manipulation, but there are still questions as to how much or whether he was paid to shill the projects.
Winners and losers of market manipulation
The winners of market manipulation via pump and dump schemes are those that initiate such scams. They usually start on Telegram groups and rope in newcomers to feed off.
Unfortunately, the people who lose out from such market manipulation schemes are usually those who are most desperate to make large gains with minimal effort. They become attracted to such scams as an easy and guaranteed way to make money.
The other loser from obvious market manipulation is the cryptocurrency industry itself. The lack of regulation combined with such clear and obvious manipulation lessens the trust both with traditional finance experts as well as the general public.
Media coverage, particularly from mainstream outlets, can exacerbate these issues further and make cryptocurrencies an easy target for criticism. Issues such as the lack of regulation are then brought into the equation. So far, the cryptocurrency industry has performed poorly at self-policing these issues. Instead, they are met with a shrug of the shoulders as if they are commonplace.
Market manipulation occurs in banking and stock markets, so it is little wonder that the cryptocurrency space, which is still largely unregulated, suffers as well. There are very few winners but a lot of losers from this situation. Those that line their pockets are happy, but the knock-on effects reverberate throughout the cryptocurrency industry.
Until market manipulation is reduced, along with many other troubling variables that continue to plague the industry, mainstream adoption, or even mainstream acceptance, will remain distant.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.