With the expansion of the cryptocurrency market, we have seen new traders entering the space and investors placing their funds in a wide range of virtual currencies, from altcoins to major cryptocurrencies. However, one of the most worrisome aspects of the space is related to the fact that the market is full of manipulation and insider trading.
In this article, we will share with you some of the aspects related to the manipulation in Bitcoin (BTC) and other digital assets, howe to avoid being affected by it and how to reduce our exposure to insider trading.
Insider trading is known as the practice of undertaking certain trading decisions based on material that has not been publicly shared. This activity could be very profitable for many traders (those that have access to this privileged information), but it can be very harmful to normal traders. Nowadays, there are several countries that consider this practice illegal.
Meanwhile, market manipulation works by interfering the normal evolution of the price of an asset. This would create an artificial and false price that could certainly affect a large number of users. Most of the countries have already prohibited this practice because it certainly affects the normal trading activities of traders, which could eventually lose money.
Both practices have affected a large number of cryptocurrencies, but specifically those with lower liquidity. In periods of time when there is large volatility in the market malicious traders take advantage of these two aforementioned practices to enlarge their profits.
Regulators around the world are trying to reduce the number of cases related to market manipulation and insider trading, but the whole space remains highly unregulated. Digital assets are completely different from traditional stocks and assets. While most of the stocks and traditional assets are traded in highly regulated environments, cryptocurrencies have their own markets all over the world, which is not possible to control as effectively as other assets.
Insider trading has been something very common in the cryptocurrency market in the last few years. For example, in 2017, a large number of Initial Coin Offerings (ICOs) were released to the market. This has affected a large number of users trading on different platforms.
The main insider trading strategy was performed by ICO members that had privileged information about partnerships with large exchanges or new projects with recognized companies. Before the information was released to the market, there was increased activity and the price of the digital currency surged massively.
For example, a short time ago, many users considered that there was an insider trading case in the RVN/BTC trading pair. As it is possible to see in the chart below, just a few minutes before the official announcement of Binance adding margin trading for RVN, the altcoin massively surged against BTC gaining over 20%. However, immediately after the announcement of Binance adding margin trading for RVN, the price of the digital currency fell.
Describe the state of the altmarket – RVN pic.twitter.com/tk6jvcHAS8
— RJ (@RJ_Killmex) December 3, 2019
A large number of individuals complained about this situation considering that many individuals knew that RVN was going to be added to margin trading on the Binance platform. However, some users shared some information showing that RVN was already added to margin trading before the announcement, which pushed prices higher.
Another case is related to several South Korean government officials that were accused of crypto insider trading. Officials from the Financial Supervisory Service (FSS), bought and sold cryptocurrencies before an important measure was going to be implemented in the market.
When these officials started handling cryptocurrencies, South Korea was planning new restrictions to the cryptocurrency market. Indeed, South Korea has already banned Initial Coin Offerings and they were planning at that time further restrictive measures.
These officials were able to trade digital assets using information that nobody else had access to and used it to obtain larger benefits that normal individuals and investors in the market didn’t have.
These two examples we have given in this article are just some of the many different insider trading cases in the cryptocurrency market. However, there are many others that have affected the market in the last few years and that harmed many users.
Another popular case of insider trading was the one that affected the ZEC/BTC trading pair and that took place in September 2017. Insiders that knew privileged information decided to purchase ZEC and wait for a price pump to sell after.
In the previous examples, we have shown you how insider trading works in the market. In this section, we will explain to you how cryptocurrency market manipulation works and how it can affect the normal price discovery of different crypto markets.
One of the most popular methods to manipulate the market is by massively buying or selling a specific digital asset. This can generally be done by joining a cryptocurrency pump & dump group in which a group of traders gives instructions about when and which crypto to buy.
Considering altcoins have lower liquidity if a large number of traders place market orders at a specific moment, the order book will almost disappear and the market will skyrocket. That would attract more users that see the price is growing, making the whole situation more extreme.
The owners of the trading group promoting the pump will be able to obtain the largest benefits considering they are the only ones that know which digital asset to purchase. They can buy it when the price is low and sell it after the pump.
Many individuals would believe that a price increase registered by a cryptocurrency is related to a genuine interest from traders. If they enter the market followed by this massive price increase the results would be certainly not desired considering large bagholders will dump their coins after promoting the pump.
For example, early in December 2019, Peter Schiff claimed that Bitcoin traders pumped the price and immediately after they dumped their coins.
It is possible to see that without any reason Bitcoin massively grew close to $550 in just a few minutes and a few hours later, the price reached the same level it had before the pump was performed.
However, many users and enthusiasts would claim that this is part of Bitcoin’s volatility and that just smaller coins are able to be affected by these manipulative techniques. Indeed, it is highly possible most of the pump and dump schemes take place among small cryptocurrencies and digital assets with low liquidity.
As mentioned before, regulators have been trying to reduce the number of pump & dump groups on Telegram and Discord which have generally attracted many novice traders.
The U.S. Commodity Futures Trading Commission (CFTC) released a document in 2018 warning customers and users about pump & dump schemes in the cryptocurrency market. This Pump and Dump Virtual Currency Protection Advisory document explained that even experienced investors can become targets of fraudsters.
On the matter, the report reads:
“Customers should know that these frauds have evolved and are prevalent online. Even experienced investors can become targets of professional fraudsters who are experts at deploying seemingly credible information in an attempt to deceive.”
While the CFTC is trying to control the market, there are other agencies around the world that are also working in order to protect investors and traders in the cryptocurrency space. South Korea and China have banned Initial Coin Offerings due to a large number of scams that appeared in the market.
In the future, other countries and jurisdictions are expected to add and establish new regulations. This would make it more difficult for these scammers to take advantage of traders and other enthusiasts in the space.
One of the different ways to trade in the market is by using trading signals groups. These groups are in general very useful because they provide information to traders about when to enter and leave the market.
There are many differences between these trading groups and pump & dump schemes. While the goal of the pump & dump groups is to manipulate the market, trading signals groups aim at making profits while trading specific trading pairs following the prices available.
In addition to it, trading signals groups have been expanding in the market as a way to become more profitable. These are regulated companies that are offering not only trading signals in different cryptocurrency exchanges but they are also providing market analysis for VIP and premium users.
One of the most popular trading signals groups is AltSignals that has been also considered a trustworthy crypto Telegram trading signals group. They are also offering very useful customer support and many other services and solutions for both experienced and novice traders in the space.
Are you a novice trader and you’d like to improve your trading skills? Are you a trading expert and you want to confirm your moves are accurate?
In this article, we shared with you how it is possible to spot manipulation and insider trading tactics in the cryptocurrency market. At the same time, we mentioned that regulators are trying to stop these activities and protect investors from these things to affect a large number of users in the space.
While there are several scams and projects that are trying to manipulate the cryptocurrency market, other companies such as AltSignals are working in order to provide crypto trading signals for a large number of platforms and exchanges in the market.