Dealing With Price Manipulations in the Crypto Markets
When Vitalik Buterin made the decision to burn $6B worth of Shiba tokens, it was because he didn’t want to be a “locus of power”.
The kind of power that made it easy to manipulate the price of Shiba token, or even the crypto markets. Every action on his SHIB wallet could be misinterpreted by crypto traders as a buy or sell signal.
The same cannot be said of the Tesla boss, Elon Musk, who in recent times has directly impacted the price of Dogecoin through his crypto tweets. URL — https://www.google.com/amp/s/www.cnbc.com/amp/2021/05/20/dogecoin-jumps-on-elon-musk-tweet-as-wild-cryptocurrency-trading-continues.html
Crypto market manipulations portend dire consequences to both traders and investors, which results in loss of funds and or investment capital.
This article highlights the dangers, causes and steps to take in curbing the effects of crypto market manipulations on your portfolio.
Dangers of Crypto Market Manipulations
1 — Loss of Funds: According to the crypto index site Coinmarketap, the price of Bitcoin peaked at $64,863.10 on the 14th of April 2021.
Shortly afterwards, we witness a steady decline in Bitcoin price to the current price of $33,930.55. Nearly 48% drop in the price of Bitcoin including other coins and tokens within a 2-month period.
Incidentally, the rapid decline within the month of May coincides with Elon Musk hinting that Tesla would stop receiving bitcoin as payment.
2 — Loss of Investors’ Confidence: It’s a no brainer that falling prices of any asset lead to investors scurrying for safety. However, when the bearish market is caused by price Manipulations by external factors, it leads to investor apathy and loss of confidence in that particular market.
3 — Unhealthy Price Movements and Market Volatility: Bitcoin experienced a very volatile month of May with price falling as low as $30,000 before climbing to $42,000.
Every attempt by an external force to manipulate crypto prices will lead to high market volatility and losses, especially for traders that have leveraged positions.
4 — Clampdown by Regulators: Financial regulators get caught up in the price manipulation web without intending to. A typical case is that of Chinese regulator’s ban of financial institutions from offering crypto related services to clients.
A move which resulted in frenzied sell-off of crypto assets and further decline of crypto prices in the month of May.
Crypto market manipulations can be caused by a number of factors; however, they mostly fall under the following categories:
1 — Crypto Whales — Whales are entities (individuals or organizations) that possess enough crypto assets to manipulate that crypto price with just one trade. Depending on the assets owned, whales can be referred to as bitcoin whales or Ethereum whales.
2 — Exchanges — According to a 2019 published report by Bitwise Asset Management, about 95% of trading volume (bitcoin) were falsified in order to attract new traders to their platforms. URL — https://www.sec.gov/comments/sr-nysearca-2019-01/srnysearca201901-5164833-183434.pdf ).
These fake trading volumes have a way of pushing crypto prices either upward or downward.
3 — Crypto Influencers: These are entities that wield a considerable level of influence in the crypto space, with the ability to drive social sentiments of followers. Notable crypto Influencers on Twitter include Justin Sun (founder of TRON) with 2.5+ million followers, Vitalik Buterin (co-founder Ethereum) with 1.3+ million followers and John McAfee (computer programmer) with over 1 million followers.
A single tweet from any of these individuals or any other crypto Influencer can result in major price movements in the crypto market.
Steps to Reduce Impact of Crypto Market Manipulations
Follow these simple steps to protect yourself from crypto market manipulations:
Step 1: Conduct your own market research before making any buying or selling decisions.
Step 2: Crypto trading is a risky venture so it’s important that you trade or invest with only funds that you can afford to lose.
Step 3: Spread your risks using strategic asset allocation formula. As much as possible avoid the use of high leverages as they amplify both profits and losses.
Step 4: Have a longer-term perspective when buying a crypto asset.
Crypto market manipulations may lead to loss of capital and/or investor confidence, however there are proactive steps to protect yourself.
The steps outlined in this article are easy to follow as you can start implementing them right away.