1. "Pump and Dump" (Inflate and Dispose)
It is the most well-known form of manipulation and consists of three steps:
"Pump" (Inflate): A group of investors (often coordinated through social networks or private channels) quickly buys a low-cap cryptocurrency, artificially inflating its price.
Spreading: They spread false, exaggerated, or misleading information (the "hype") to attract retail investors to buy, believing that the price will rise even more.
"Dump" (Dispose): Once the price rises significantly due to purchases from retail investors, the initial group quickly sells their assets at inflated prices, making large profits. The price collapses, leaving retail investors with significant losses.
2. "Wash Trading"
This practice consists of one or more parties repeatedly buying and selling the same asset to each other.
Objective: To create the false impression that an asset has a large trading volume and high demand on an exchange. This attracts legitimate traders seeking liquidity and market action.
Context: It is common in exchanges with little regulation and in new token or NFT markets. Although transactions are recorded, the final control of the assets never changes, distorting the statistics.
3. "Spoofing"
It consists of placing large buy or sell orders in the order book with the intention of canceling them before they are executed.
Mechanics: A trader places a large buy order to make the market believe that there is huge demand and that the price should go up. When other traders react by buying, the manipulator cancels the original order and benefits from the small price increase or uses the created liquidity to execute another strategy.
4. Use of Whales (Massive Liquidity)
Whales (individuals or institutions with large amounts of crypto assets) can manipulate the market simply by the size of their transactions:
Whale Sales to Exchanges: The movement of thousands of Bitcoins or Ethereum from a personal wallet to an exchange is interpreted as an imminent intention to sell. This injects fear into the market and can cause other traders to sell, lowering the price.
Whale Liquidation: If a whale executes a very large sell order suddenly, it can cause the price to drop sharply, triggering the automatic liquidation of leveraged positions of other traders (the phenomenon of stop hunting), accelerating the decline.
Regulation and Fight Against Manipulation
Because cryptocurrencies operate across borders and their regulation is still nascent, manipulation is more prevalent than in traditional markets like stocks.
However, regulators worldwide are taking action:
USA (SEC and CFTC): They have filed lawsuits against individuals and platforms for wash trading and for using insider information (insider trading), treating them as securities fraud.
Europe (MiCA): The new MiCA regulation (Markets in Crypto-Assets) seeks to establish a legal framework that requires crypto service providers to prevent market manipulation and to ensure integrity and transparency.
On-Chain Analysis: Blockchain analysis companies are becoming increasingly sophisticated, allowing for the tracking and linking of addresses to detect patterns of wash trading and pump and dump, helping authorities build cases.
