The cryptocurrency market operates unlike any traditional financial market. It’s a developing global marketplace that never sleeps—open 24/7—but is often inefficient, loosely regulated, and prone to extreme volatility. We’ve witnessed some of the wildest price swings in modern financial history within crypto.
In 2017, Bitcoin’s price surged from around $3,000 to nearly $20,000 in just a few months. That rapid rise was marked by sharp fluctuations, with prices sometimes swinging by 30% or more within a single day. Altcoins showed even more unpredictability. Many observers suspect that “whales” or coordinated groups manipulate the market using tactics that would be illegal in traditional finance.
Given the current lack of regulatory oversight in the crypto space, these suspicions are often justified. In emerging markets, manipulation can be highly profitable—and often goes unpunished.
So how does it work? Here are four common methods of market manipulation you should know.
Spoofing
Spoofing refers to the practice of placing large fake orders to create a false impression of market demand or supply. A trader will place a large buy or sell order with no intention of actually executing it. Once the market price approaches the level of the fake order, the trader quickly cancels it.
A fake buy order is designed to push the price upward, while a fake sell order aims to drive it down. The goal is to mislead other market participants into believing there is significant buying or selling interest.
Cryptocurrency exchanges that offer margin trading—such as Bitfinex—are particularly vulnerable to spoofing. Traders can use leverage to place orders that far exceed their actual capital, creating an illusion of market momentum.
Pump and Dump
Pump and dump is perhaps the most well-known form of market manipulation. It occurs when a small group of traders artificially inflates the price of a cryptocurrency by buying it aggressively and promoting it to attract larger crowds of buyers. Once the price has been pumped up, the original group sells off their holdings at a profit, leaving later buyers with losses.
This scheme often involves coordinated messaging through private Telegram groups or WeChat channels. Organizers will accumulate a position in a low-cap altcoin, then announce a specific time and price target for the “pump.” Participants rush to buy, driving up the price, after which the organizers “dump” their coins onto the market.
Pump and dump groups were especially active a few years ago. However, regulatory bodies like the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have since taken action. In February 2018, the CFTC began offering bounties of up to $100,000 for reporting pump-and-dump schemes. While these operations are less common today, they still occur in less regulated corners of the market.
Wash Trading
Wash trading is a form of market manipulation where a trader buys and sells the same asset to create artificial trading volume. High volume often signals interest in an asset and can attract new buyers. By faking volume, manipulators mislead investors into believing an asset is more popular than it really is.
This tactic is especially common in altcoin markets. Some exchanges and trading groups have been known to artificially boost volumes to improve their rankings or attract listings. If trading fees are low, the cost of wash trading can be relatively small.
For example, in February 2018, the cryptocurrency VeChain (VEN) showed unusual volume patterns. Trading volume repeatedly dropped at 9:00 AM Pacific Time—midnight in Beijing—suggesting that some actors were artificially inflating volume during Asian trading hours and letting it fall when most Chinese traders were offline.
Long and Short Squeezes
Long and short squeezes are often byproducts of margin trading. They occur when rapid price movements force a cascade of liquidations, accelerating the price change in the same direction.
If a large number of short positions are concentrated near a certain price level, a trader can trigger a short squeeze by buying aggressively and pushing the price above that level. As short sellers are forced to buy back to cover their positions, the buying pressure drives the price even higher.
Similarly, a long squeeze occurs when falling prices force over-leveraged long traders to sell, causing a downward spiral.
The crypto market’s high leverage availability and low regulation make it especially prone to squeezes. While these events can occur naturally, they are also frequently engineered by large traders.
How to Protect Yourself
Staying safe in a manipulative market requires diligence and a healthy dose of skepticism. Here are a few tips:
- Do your own research. Don’t rely on anonymous tips or group messages.
- Be wary of coins with sudden, unexplained volume spikes.
- Avoid investing based on FOMO (fear of missing out). Many pumps are short-lived.
- Use stop-loss orders to limit losses in volatile conditions.
- Only risk what you can afford to lose.
Even experienced traders can be caught off guard by market manipulation. Staying informed is your first line of defense.
👉 Learn to identify market manipulation techniques
Frequently Asked Questions
What is spoofing in crypto trading?
Spoofing is the act of placing large fake orders to create false market sentiment. The orders are placed without the intent to execute and are canceled once they’ve influenced other traders’ behavior.
How can I avoid pump and dump schemes?
Be cautious of low-cap coins promoted in private groups or social media channels. Look for organic trading volume and avoid buying into sudden hype. Always research the project fundamentals before investing.
What are wash trades?
Wash trades are fake transactions meant to inflate trading volume. A trader simultaneously buys and sells the same asset to create the illusion of market activity.
What causes a short squeeze?
A short squeeze occurs when rising prices force short sellers to buy back the asset to limit losses. This buying can further drive up the price, causing a cascade of liquidations.
Is market manipulation illegal in cryptocurrency markets?
While many forms of market manipulation are illegal in regulated financial markets, enforcement is still evolving in crypto. However, agencies like the SEC and CFTC have begun taking action against manipulative practices.
Can manipulation be predicted?
It’s difficult to predict manipulation, but unusual volume patterns, exaggerated price moves, and social media hype can be red flags. Use tools and data analysis to spot anomalies.
Final Thoughts
The cryptocurrency market’s lack of regulation, combined with high leverage and inexperienced participants, creates an environment where manipulation can thrive. By understanding common tactics like spoofing, pump and dump, wash trading, and squeezes, you can better protect yourself from malicious actors.
Always trade responsibly, and remember: if something seems too good to be true, it probably is.