What is Market Manipulation?
Market manipulation is a litany of techniques that investors can use to affect the price of an investment product such as cryptocurrencies. These techniques are often illegal and dubious and may inflate or decrease the price of a given digital asset to fit the trading interests of perpetrators.
These techniques can impact transparency and organic price development in spot market and harm the interests of investors at large.
Signs of Market Manipulation
Sudden price spikes or falls are one of the most visible signs of market manipulation. These unwarranted price changes are not related with any important development associated with the project or economic factors.
In some cases, investors may experience an unexplained increase or decline in trading volume that shows market manipulation. There are also incidents when a price change takes place following social media mentions or other online forum postings.
At the same time, unexplained statistical changes and questionable trading methods may also point towards manipulative activity. These incidents can also harm the goodwill of a trading sector among investors.
Pump-and-dump is a commonly used tactic that involves increasing hype around a crypto project and selling-off the token in massive amounts once the price has been inflated enough.
Whale manipulation is a method that big investors can use by purchasing or selling a big amount of digital currencies to impact its overall prices. Another illegal trading technique is spoofing where investors place fake purchase and sell orders in large quantities and cancel them after creating a false sense of market demand.
Insider trading is a type of organized market manipulation that allows investors to create or dissolve positions based on secret information.
Market Manipulation in the DeFi Sector
Decentralized exchanges allow investors to have greater autonomy and added privacy. However, this sector is not free from vulnerabilities and risk of manipulation. Smart contracts can have technical blind spots such as reentry attacks that can lead to theft of locked funds.
In the same manner, criminals may also utilize lowered liquidity to impact crypto prices and generate illegal profits.
Another manipulative technique is front-running where decentralized exchanges try to complete visible orders first ahead of others in order to gain an advantage. Since blockchain transactions are visible to public therefore DeFi sector is vulnerable to this type of attack.
Fake token listing is another manipulation technique where investors end up purchasing fraudulent or malicious currencies. These projects are presented as authentic projects.
Wash trading is another method that is prevalent as a market manipulation technique. This method involves purchasing and selling digital currencies repeatedly by the same party.
This process generates an artificially inflated trading volume that gives investors an impression of false incline in demand. This can jumble price discovery process and make investors make trading decisions based on wrong information.
How to Prevent Market Manipulation in DeFi?
Hackers can locate any vulnerability in a DeFi protocol to launch an attack on the sector. Therefore, investors should invest in projects that have a robust technical infrastructure and security against these attacks.
Some of qualities that investors should look for in a DeFi project is smart contract audits, front-running prevention, token-listing standardization, liquidity-drain prevention, and regular updates. In this manner, DeFi protocols can retain decentralization and ensure best security features.
At the same time, DeFi projects should also create and host strong communities with an emphasis on educational and unbiased circulation of information. At the same time, DeFi protocols should incorporate preventive techniques to intercept market manipulation practices before they take root.
Some of these techniques involve adding preventative checks in the protocol programming to detect and obstruct any unusual activity.
Market manipulation is not limited to the cryptocurrency sector. Regulators are still working on improving legislature, technology, and trading participation in the traditional financial sector to prevent market manipulation tactics. At the same time, cryptocurrency investors can make an effort to conduct research and learn more about different trading techniques at an individual scale to avoid it.