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The dark side of the cryptocurrency: how the trading volume can be used for market manipulation
The cryptocurrencies have been greeted as the future of finance, with many experts who foresee that they will revolutionize the way we think about money and trade. However, despite their potential, cryptocurrencies are not risks. One of the most significant risks is the manipulation of the market, which can have large consequences for investors and the entire financial system.
What is market manipulation?
The manipulation of the market refers to any action undertaken by individuals or entities to artificially influence the price of a security, such as a cryptocurrency, in order to obtain an unjust advantage. This can be done by various means, including the dissemination of false information, the manipulation of market data or the commitment in other forms of approved market interference.
The role of the negotiation volume
The trading volume is one of the key indicators used by traders and investors to evaluate the feeling and liquidity of the market. When the negotiation volume increases rapidly, it often indicates a strong spread of bid-Ask, in which buyers and sellers are willing to exchange at different prices. However, in the context of the cryptocurrency markets, high volumes of trading can also be used as a sign of manipulation.
How the trading volume can be used for market manipulation
There are several ways in which high commercial volume can be used for market manipulation:
- Creating a false sense of liquidity : by artificially increasing the commercial volume, it is possible to create the illusion of multiple buyers and sellers of what they exist in reality. This can increase prices and make it difficult for authentic investors to buy or sell their activities.
- The dissemination of false information : high volumes of trading can be used to disseminate false news or propaganda on a particular cryptocurrency or market trend. This can create a false narrative that guides price movements, even if there is no reason below for change.
- By manipulating the offer and demand : by artificially increasing or decreasing the commercial volume, it is possible to manipulate the offer of a particular cryptocurrency or the perceived value of an activity.
Examples of market manipulation in cryptocurrency markets
- The Bitcoin 2017 Bolla: During the 2017 cryptographic bubble, there was a significant increase in the volume of negotiation for Bitcoin, led by speculation and hype. Consequently, prices have increased rapidly, reaching unsustainable levels.
- The FTX 2020 scandal: in November 2020, it emerged that FTX, an important exchange of cryptocurrency, had used high trading volumes to manipulate its market data, creating a false narrative of strong liquidity and price stability.
- Coincheck’s hack of 2019 : in January 2019, the Japanese cryptocurrency Coinccheck was violated, with consequent theft of about 523 million Nemesa (about $ 700 million USD at current prices). According to reports, the hack was used to create a false ICO for a new cryptocurrency, which was therefore pumped by a high trading volume.
The consequences of market manipulation
The manipulation of the market can have large consequences for investors and the entire financial system. Some of the potential risks include:
- Systemic risk : If the manipulation of the market should become widespread, it could lead to a systemic break in trust in the markets as a whole.
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Conclusion
Cryptocurrency markets are still in the early stages of development and market manipulation remains a significant risk.