Market manipulation in an unregulated cryptocurrency environment

Freak news VS Fake news

Pump & Dump Schemes (P&D)

There’s a delicate balance for regulators to put into place measures that don’t stifle innovation while at the same time ensuring consumer protection, and with cryptocurrency, that crosses multiple jurisdictions. I welcome regulators not rushing into the marketplace but taking a more considered approach, but it does mean investors need to be even more alert to potentially fraudulent activity.

With the phenomenal rise of Initial Coin Offerings and Token Sales there are now 1465 different cryptocurrencies listed in CoinMarketCap. These alternative coins (altcoins) have garnered a lot of interest from people as investment vehicles, and even today in a sea of red as the market has dropped, there are still a number of altcoins that have produced 100+% in just 7 days.

I see Facebook groups popping up everywhere sharing information about investment strategies, altcoin recommendations, whether to day trade, to HODL (in case you didn’t know cryptocurrency slang for “hold” – which took hodl in tribute to a long ago drunken typo), celebrate when the markets go down because that’s like having a SALE on your altcoins and more. A lot of it is being taken as advice by some, which will inevitably lead to some regrettable investment outcomes.

The volatility of some of these altcoins means you can double your portfolio value over night, or equally lose half of it in a morning. Until quite recently it’s seemed almost impossible not to pick a handful of cryptocurrencies and turn a handsome profit in just a few weeks. Now most portfolios are showing losses over the last week or so. It’s quite the roller coaster, from the giddy highs of seeing your portfolio reach 100%, 200% even 2000% increases, to lows for the lucky of seeing unrealised profit disappearing, or for the unlucky just losses.

With the potential for such rewards, it’s little wonder people who have never invested before are rushing to this market. But in such an unregulated environment, how much are the markets being manipulated, and what should would be investors be wary of?

We’ve already covered Ponzi schemes in our previous post, so let’s focus now on the Pump & Dump schemes, or cornering the market.

Pump & Dump

Like Ponzi schemes, Pump & Dump scams have a long history in other markets. The good news for cryptocurrency investors is that the techniques used by the scammers to lure in their victims don’t change. Forewarned investors who are aware of these tricks are forearmed.

The simple premise is that an individual, or group of individuals work together to create a hype and interest in an asset, in this case an altcoin. This activity drives the price of the altcoin up. Less sophisticated investors pick up on this market interest believing it to be based on solid intelligence, not manipulated market speculation, and start buying.

When frenzied speculation has driven the market price to levels unjustified by the fundamentals, the scammers behind the price manipulation sell up and take their often substantial profits. Very quickly the price drops back to pre pumped levels and victims who bought high and are now left nursing big losses.

In EU regulated markets it’s considered market abuse and in the US it’s fraud.

Unfortunately, cryptocurrencies are often ideal market conditions for Pump & Dump schemes. Many altcoins have a small marketcap (market cap = price of cryptocurrency x outstanding units of cryptocurrency). The price changes easily from hype across social media, where a tweet or two from an influencer can be enough to prompt huge fluctuations in the market price. Indeed, this was the reason given by Charlie Lee for selling/donating his entire holding of Litecoin (LTC) – so that he couldn’t be accused of market manipulation.

Investors also need to be aware of the volume being traded in the market. CoinMarketCap which shows the list of cryptocurrencies, their Market Cap, current price, the number of coins/tokens in circulating supply and the volume traded over the previous 24 hours.

List of cryptocurrencies from CoinMarketCap

You can track this activity to see if the trading volume has changed. Is the recent swing usual for this cryptocurrency, or does it indicate something different? It could be highlighting a Pump & Dump scheme.

As always, please be careful and do plenty of research, and remember in regulated markets these types of market manipulation tactics are an offence. How long will it be before authorities start to pay attention to these schemes in the cryptocurrency world? They’re already getting involved with alleged Ponzi schemes.

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