Because of its decentralised profile and difficult monitoring, the cryptocurrency market has proved to be a breeding ground for the illegal price manipulation practices that are well known in the traditional market. I will describe and detail three of them below: pump and dump, insider trading and identity theft.
Pump and dump
Pump and dump is the practice of artificially boosting an asset and then passing it on to other investors.
How does pump and dump work?
A group of investors buys a large position in an asset, usually with very low liquidity, and then in an organised manner, often using marketing techniques, begins to spread false, positive and exaggerated news about the asset.
Typically in investment or similar forums, under cover of anonymity, messages such as "these shares are going to explode" or "buy before they go up" arouse the curiosity of new investors for the asset, causing an initial wave of appreciation due to the low liquidity.
After all, any novice investor gets excited when they see stocks or cryptocurrencies rise sharply and quickly. At this stage, it often happens that the very group spreading the news buys a large position again, this time more loudly, returning to the forums with the famous "I told you so; I was right; I knew it", ending with "this is just the beginning", attracting a second wave of investors and appreciation.
This movement will then, halfway through, replenish the initial buyers who sell their shares at a profit and disappear from the scene. At some point, the market realises that prices are not in line with fundamentals and they collapse.
The most famous pump and dump on the Brazilian stock market
It was that of global equities in 2011 and became known as the pincer bubble. The shares appreciated by 1600% in a few months, the market value of the company rose from R$70 million to R$1.5 billion, and when it became clear that this rise had no basis, they fell by more than 85% in a week.
In the cryptoasset market, this strategy is widely used, because with the very low liquidity of new tokens emerging all the time, and people going crazy trying to find the next Bitcoin, you don't even need that much money to start a pump and dump move.
You know that new unknown crypto whose price has tripled in just a few days? Careful, it could be a pump and dump.
Insider trading
Neither chart analysis nor fundamental analysis, the best way to make money easily and without risk is insider trading. Too bad it's banned. Insider trading consists of using privileged, relevant information of which you are aware and which has not yet been made public, in order to gain some kind of financial advantage.
Cases of insider trading
In Brazil, a famous case of insider trading occurred in 2006, when the financial director of Sadia at the time, anticipating the rise, bought shares in the company listed on the US market before the news of the merger was known, making a profit on the sale after the news had been made public.
Another famous and more recent case is that of Joesley Batista of JBS in May 2017, when shortly before the contents of his plea deal involving the then President of the Republic became public, he made trades of $1 million, already anticipating that the news would shake up the market. The deal became known as 'Joesley Day'.
On the stock market, the Securities and Exchange Commission (CVM) is responsible for overseeing events of this type. As the stock market is a centralised body, it is possible to adopt warning mechanisms indicating that an illegal event may have occurred. However, as the cryptoasset market is decentralised and has a cross-border profile, this monitoring becomes much more difficult.
Identity theft
Spoofing is the practice of placing buy or sell orders without the intention of actually executing them, solely to manipulate the price. This practice has increased with the spread of high-frequency trading algorithms and robots, which can trigger thousands of orders per second.
How does identity theft work?
To illustrate, let's imagine that the XPTO04 share is trading at $10 and an investor wants to buy it for less. He places a buy order at $9.50 and then tries to manipulate the market so that the paper depreciates. And how does he do this?
He sends an express order to sell at R$9 via a high-frequency robot. The order is cancelled in a few nanoseconds, with no execution time, but enough time for the increase in the volume of sales to be recorded and noticed by the other investors, who, realising a false downward trend, end up accepting the first order, for R$9.50.
The main characteristic of spoofing is the disproportionate size of the buy or sell order. What crypto investor hasn't had an experience like this? Giant orders that disappear out of nowhere from the bid booking.
