It is no a secret that price manipulation and fraud on crypto exchanges are blooming along with the entire industry. While some might place the blame on volatility, it becomes very challenging to trust the price movements. All this due to the suspicion that selected groups of insider trades control the ups and downs of some of the cryptocurrencies. While there is not proof, it does not mean that this types of activities are out of the equation.
One case study is BitMex. Recently, the crypto exchange added the feature for short positions on bitcoin. While this feature is normal in any stock market because it enables the traders to benefit from falling prices, it can also give room for price manipulation, especially on unregulated markets.
The most common way is by using crucial information which is not available for the mainstream public. The information, combined with the order analysis, which in our days can be made with analytics apps, are giving the traders an advantage.
Simply put, they can see before everyone the moves made by other market participants.
So it often happens that the substantial price moves hit the market up and down without a real cause or catalyst. Following these triggers, most traders look at the price and ask themselves what triggered the pull effect without a real result.
Besides insider trading, the stock exchanges themselves are blamed of price manipulation. For example, the smaller or the mining fee operating exchanges are the ones under the radar. In the case of wash trading, the high-frequency buying and selling of assets create a fake high trading volume. The exchanges thereby give the impression that it has a lot of liquidity and a lot of transactions. In reality, the exchanges themselves or organized groups of traders are placing huge amounts of small orders. Thus the less instructed or the newcomers are deceived by the volume movement and invest their money in an asset while the manipulators are waiting to cash out at a bigger price.
For the moment the crypto exchange area lacks transparency. Why? On regulated or traditional stock exchanges is significant if the shareholders, insiders or board members of a listed company trade in the relevant stock, because they must make “the move” or transaction public. If they do not do it, they commit a serious crime. This rule does not exist in the crypto sector yet. Thus insider trading is not punishable, and if everybody pays their taxes, they do not face legal consequences.
While the lawmakers cannot identify all the illegal activities, a firm set of regulations can improve trading. Why? Because along with those rules the market would have more credibility and would become a secure environment for every type of investor, from day traders to “hodlers.”
And because an illiquid market dominated by large players or “whales” will always discriminate against small investors; and a regulated and fair functioning stock exchange cannot change that.
To improve the overall situation around cryptocurrencies, the sector needs both firm regulations and transparency.