Much like traditional financial markets, crypto markets are not immune to manipulation. Many of the same practices that plague stocks and commodities — like wash trading, spreading fear, and pump and dump schemes — also exist in the crypto space. However, crypto’s decentralized and largely unregulated nature often makes it an even more fertile ground for manipulation. From professional traders to market makers to institutions, bad actors use a range of tactics with the goal of swaying prices to their advantages.

In this blog, we’ll explore some of the most common manipulation tactics in the crypto markets and discuss how these practices impact the industry as a whole.

Common Crypto Market Manipulation Tactics

Wash Trading

Wash trading is one of the most notorious forms of market manipulation, and occurs when someone buys and sells the same asset repeatedly to create the impression of high volume. By inflating the activity of a crypto asset, manipulators can trick investors into believing the asset is more liquid or valuable than it actually is.

In 2019, Bitwise Asset Management reported that approximately 95% of Bitcoin’s trading volume on unregulated exchanges was faked through wash trading. This figure illustrates that significant portions of trading activity of crypto assets can be driven by deceptive practices rather than genuine interest.

Spoofing

Spoofing involves placing large buy or sell orders without the intention of executing them, to create an illusion of demand or supply. This false signal can cause prices to shift, allowing the manipulator to benefit from the rapid reaction.

Bear Raiding

Bear raiding is typically used to push down the price of an asset. Manipulators short a large amount of an asset or sell huge quantities to trigger panic selling, creating a cascading effect that drives prices lower.

Bear raids often occur during periods of market uncertainty, amplifying fear and motivating investors to dump their holdings. This method can be especially effective in crypto’s already volatile environment, where a single action can spark a sharp, unexpected price drop.

Fear, Uncertainty, and Doubt (FUD)

FUD tactics rely on spreading negative or misleading information to create doubt in the minds of market participants. FUD could involve a rumor of government crackdowns on crypto, fabricated news of exchange hacks, or exaggerated reports about project failures. For instance, in 2017, rumors circulated about China’s ban on cryptocurrency exchanges, which drove down the price of Bitcoin by approximately 30%.

Another example of FUD is when Jamie Dimon, CEO of JPMorgan, referred to Bitcoin as a “fraud,” causing uncertainty in the market, despite his company’s later involvement in blockchain technology. Although not necessarily an act of market manipulation, public comments like these can lead to panic selling and volatility.

Sell Wall Manipulation

A sell wall occurs when a manipulator places large sell orders at a specific price level, creating a barrier that prevents the asset’s price from rising beyond that point. These massive orders can intimidate other traders, who assume that breaking through the wall will be difficult.

Once enough tokens have been bought at lower prices, the manipulator removes the wall, allowing the price to spike. This tactic is often used by market makers and high-volume traders to accumulate assets cheaply.

Pump and Dump

One of the oldest manipulation tactics, pump and dump schemes involve artificially inflating the price of an asset through coordinated buying (the pump) and then selling off once prices peak (the dump). Typically, this scheme is orchestrated by a group of traders or influencers who hype up a low-liquidity token, often in private chat groups or on social media, convincing retail investors to buy in. Once the price rises, the manipulators sell off their holdings, leaving latecomers with losses.

In October 2024, the U.S. Federal Bureau of Investigation (FBI) took unprecedented action with “Operation Token Mirrors,” creating a fake cryptocurrency NexFundAI to catch fraudsters in the act. The operation revealed a $25 million pump and dump scheme where traders manipulated the token’s trading volume and price to lure in unsuspecting investors. Once the price had risen, the orchestrators dumped their holdings, causing the price to plummet. These actions resulted in charges against 18 individuals for market manipulation and conspiracy.

The Role of Market Makers

Market makers in crypto are supposed to provide liquidity and facilitate smooth trading by consistently offering buy and sell orders. Unfortunately, some market makers use their positions to engage in manipulation — particularly wash trading and spoofing. By controlling a large part of an asset’s liquidity, they can influence price movements for their own benefit.

While market makers play a necessary role in any trading ecosystem, the decentralized and sometimes opaque nature of crypto gives them more room to engage in manipulative practices. This is why regulators like the SEC have started taking action against some crypto firms, attempting to curb these abuses. But as it stands, enforcement remains tricky.

How to Protect Yourself from Market Manipulation

Market manipulation can be difficult to spot, but here are some things to keep in mind to minimize your exposure:

• Check Token Longevity: One of the easiest ways to avoid falling victim to pump and dump schemes is to check how long a token has been trading. Tokens that have only been around for a few days or weeks are much riskier and more susceptible to these tactics. Be cautious of sudden price spikes in new or low-liquidity tokens, as they may be the target of manipulation.
• Use Exchanges with Transparency Measures: Some exchanges have taken proactive steps to curb market manipulation by improving transparency and auditing trading volume. These platforms regularly monitor trades and provide transparency reports to ensure that volumes are not artificially inflated. Choosing reputable exchanges that offer these protections can help you avoid manipulation.
• Stay Informed and Analyze Carefully: Pay attention to large buy or sell orders that disappear quickly, sudden surges in volume without news, and widespread rumors with no credible sources. Tools like blockchain explorers can help track transactions and verify whether volume spikes are genuine. Additionally, avoid making decisions based purely on social media hype or quick reactions to rumors.

A Safer Future Ahead?

As the cryptocurrency market matures, the landscape of market manipulation is likely to change significantly. Increased regulatory oversight is becoming a cornerstone of this evolution. For instance, the EU’s recent Markets in Crypto-Assets Regulation (MiCA) aims to provide a comprehensive regulatory framework for cryptocurrencies, enhancing transparency and protecting investors. By addressing issues like market manipulation and ensuring that exchanges operate fairly, MiCA sets a precedent for how regulation can foster trust and integrity in the crypto ecosystem.

Furthermore, the development of decentralized solutions is paving the way for more secure trading environments. Decentralized finance (DeFi) platforms often utilize smart contracts, which can automate and enforce fair trading practices, making it harder for manipulators to execute their schemes unnoticed. As technology advances, so too will the mechanisms to safeguard the market from manipulative tactics.

However, while these frameworks and technological advancements are promising, participants in the crypto space must remain vigilant. The dynamic nature of this market means that new forms of manipulation can emerge, just as they have in traditional markets over time. Regardless, by recognizing the signs of manipulation and understanding the regulations being implemented, investors can better protect themselves and contribute to a healthier, more transparent market.