The Rising Risks of Crypto Market Manipulation and How to Protect Your Investments

As crypto investments continue to show heightened interest in the wake of the Covid-19 and Coronavirus pandemic, in this post, we look at the dark side of such investments.

For a long time, it has been well known that crypto assets, especially within exchanges, where the majority of trades happen, manipulation has been shown to take place.

SEE ALSO: Luno is Still the Only African Exchange Among Top 20 Globally, Latest Crypto Exchange Rankings Reveal

A recent report by BlockchainTransparency indicates that 88% of the Top 25 cryptocurrency exchanges are manipulating their trading volume to boost their rankings in CoinMarketCap.

This risk however is a third-party problem, and its not inherent in crypto assets, and investors therefore need to be wary which exchanges they need to be trading on.

Why Do Crypto Exchanges Manipulate their Trading Volumes?

There are several reasons as to why exchanges manipulate their trading volume.

Here are the 2 main reasons why this might happen:

  • Referral traffic from CoinMarketCap (CMC) – Being the most popular crypto website globally, CMC offers key displays and key financial metrics and graphs for all coins and tokens in the cryptocurrency world. CMC also offers plenty of related data on the trading volume of all cryptocurrency exchanges. With over 3 million daily users and with Alexa rank of 438, being ranked highly on CMC and the resulting referral traffic from CMC would be a huge boost to the exchange and its business. Since the main factor that most cryptocurrency investors and traders look for when trading on an exchange is liquidity, cryptocurrency exchanges would have an incentive to artificially inflate their numbers to attract users to their exchange.
  • Listing Fees – With listing fees being a huge driver to the business model of exchanges, tokens that want to get listed on highly-ranked crypto exchanges get asked to pay staggering amounts of money, ranging from USD $50,000 to $1 million. Given the sheer amount of coins and tokens being created by projects in the crypto market, exchanges with greater liquidity would possess a higher listing fee since token liquidity is the main factor that traders look for. This provides the perfect incentive for cryptocurrency exchanges to inflate their volumes by a long shot to increase their rankings and charge a sizeable fee for the rights to be listed on the exchange.

What are Some of the Ways that Malicious Exchanges Manipulate Crypto Assets Prices?

We discuss these 4 ways how that can happen:

  • Shutting Down Systems – The fact that the crypto price surges almost always happen during a shutdown of one of the most prominent BTC trading platforms, notably BitMex, continues to raise questions over price manipulation. Numerous reports indicate that BitMex shutdowns, including the latest in March 2020, created arbitrage opportunities in the market which directly led to the sharp price spike. The derivatives platform offers high leverage (100x) that exposes users to high risks and it is thought that Bitmex trades against their users. BitMEX crypto derivatives exchange is mostly an instrument to short Bitcoin or Ethereum.
  • Freezing Assets on the Platform – Some exchanges, and hackers included, are known to intentionally claim a hacking attempt and freeze crypto assets trading in order to manipulate crypto prices. This strategy is similar to the one above where a crypto exchange will instead freeze trading until a preferred time thereby restricting withdrawals from the exchange for traders.
  • Staging a System Breakdown – This is the most common form of freezing trading on a platform where an exchange will claim a hack, a 51% attack, or simply a system overload, thereby resulting in a shutdown or a crypto trading freeze all designed to take the money from retail users and enrich the platform and the good traders. BitMex, which has profited plenty from these downtime periods, has commonly been accused of doing this resulting in users not being able to:

– fix positions that may have been near liquidation (longs)
– take profits on positions that were significantly gaining (shorts)
– manage positions, add/subtract, trade, etc fix positions for long liquidations

  • Wash Trading – A process of market manipulation where an entity simultaneously buys and sells securities with the sole purpose of creating misleading and artificial activity in the marketplace. The general idea of wash trading is to create a false impression that there is a good level of trading activity actually going on. This is achieved by an entity – in this case, a cryptocurrency exchange – placing orders in the exchange and executing these orders themselves, with no actual value exchanged with real users.
  • Whale Manipulation – This is where holders of large crypto assets associated with exchanges lure less experienced traders into short positions only to start buying, forcing the traders to close their positions at a loss. This can also happen in margin trading where a whale sells off in order to liquidate any longs due for liquidation at a certain price wrecking a ton of positions on the exchange.
A sudden drop in the price of Bitcoin across all exchanges before resuming back to normal is an example of market manipulation through a classic bear trap

How can You Measure or Identify Crypto Manipulation?

A common method to measure manipulation is called ‘Slippage’, which assesses the liquidity of digital assets by selling a certain value worth of each asset across a variety of different exchanges and measuring the rate of price decline of the coins.

Exchanges that were manipulating their data had massive slippages, indicated by a greater degree of price decline and an unstable order book. This implies that their trading volume is fabricated and inflated since a small amount of sell orders is sufficient to destabilize the order book and ultimately the prices of the coins.

What are Some Trusted Exchanges With No Manipulation History?

According to Blockchain Transparency, the trusted resource for crypto data and metrics, below are some of the trusted exchanges that you can consider operating an account with:

  • Binance
  • CoinBase
  • BitFinex
  • Liquid
  • BitStamp

It can be difficult to gauge just how much regulation should be instilled into cryptocurrency trading, because the lack thereof is exactly why a lot of people have entered into the asset class. The crypto space needs to maintain its de-regulatory nature while still minimizing the vulnerabilities of the investors.

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