Market manipulation in crypto

October

13

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Written by: Serhii Zhdanov, CEO of EXMO

Pump-and-dump typically happens to low-liquidity coins and tokens, which is comparable to low-liquidity stocks in traditional financial markets. Unfortunately, at the current stage of the crypto market, this is something almost impossible to fight. Therefore, investors should always be aware of this risk when making decisions: coin or token teams as well as any investors with a large amount of capital are able to manipulate prices in this way.

For larger-cap crypto like BTC, manipulation probably happens more in the derivatives market, where all trades are made with leverage. It creates a situation where the total supply of crypto, which is the underlying asset in derivatives, is not fixed. Imagine someone holds the entire supply of BTC, which is 21 million, at some crypto derivatives exchange. In this case, they can go short with a position of 42 million BTC (x2 leverage). When the position is open, it creates the selling power of 42 million BTC, which crashes its price. They can then close this short position, creating a buying power of 42 million BTC. As a result, the BTC price will skyrocket.

Results of market manipulation

Market manipulation creates unpredictable price movements and turns trading into gambling, where you just try and guess the direction. Exchanges with leveraged products can see the liquidation levels of users’ positions. With market manipulation, they can move the price toward the liquidation levels. As a result, individual investors lose money.

Other activities that should be better regulated

Offshore companies should be better regulated in the countries where they serve customers. Nowadays, while local businesses work hard to get registrations and licenses, offshore companies target the same markets without following as many rules, and the worst they usually get is a warning from regulators and some concerns from the market.

Also, ads need to be better regulated. Some countries are very strict and ban ads even for minor inaccuracies in the messages, while others are not doing anything at all.

Importance of crypto regulation

Regulations have played an essential role in fighting money laundering, the biggest concern for regulators. Thanks to regulatory developments, we’re seeing a declining share of illegal crypto transactions. For example, almost every big exchange has introduced KYC (Know Your Client) and transaction monitoring procedures.

Of course, regulations can cause inconvenience for retail investors, but it is worth all the trouble. With stronger regulations, governments feel more comfortable embracing crypto instead of banning it. Crypto anarchists and libertarians are not happy with all these new rules as they typically support anonymity. However, they only make up a small audience.

Why are some countries moving faster in regulation development while others are slow?

Different countries have different views on crypto and its nature. We’ve seen examples from completely banning crypto to making it a legal tender in a county. Generally speaking, democratic countries are more likely to embrace crypto and strive to create an environment for this industry to grow.

However, regardless of politics, nobody can actually ban the technology if it can solve real problems in today’s financial markets. In other words, if crypto is what people need, it’s not going away.

Major focus of current regulations

Based on my observation, current regulations heavily focus on AML (Anti-Money Laundering). This is the right thing to do because it helps fight the biggest risk associated with crypto without creating excessive regulations.

In terms of effectiveness and efficiency, UK’s crypto regulations have set a good example for the world. In comparison, in the US, you need to receive licenses in each state separately, which creates inconvenience. I believe the key principles for licensing should be nationally compatible, and a centralized authority should be in charge of an entire country’s crypto regulation.

How do crypto companies and projects help with regulation development

I believe crypto companies are the primary drivers for the development of regulations. For example, many industry organizations are providing feedback on proposed regulations. Think of Crypto UK, a self-regulatory trade association for the UK crypto industry.

Also, companies are helping regulators improve the transparency of the market by uncovering the typical profile of crypto investors and crypto transactions. With industry-wide efforts and collaboration, we can make a difference.

About the author, Declan Yin

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