Business / Finance

The Case of a Manipulated Crypto Market

Imagine an unregulated trillion-dollar market with hard-to-understand new-age assets — a manipulator’s paradise.

Jun 21, 2022 | By Patrick Tan
Image: Unsplash

Since there have been markets, there has been manipulation. From the Mesopotamian merchant who had his thumb on the scale, to America’s first insider trade, markets will be manipulated simply because they’re there.

In 1792, less than two decades after the United State of America was born, American bonds were held to the same esteem as those of emerging markets today, fluctuating in value at the slightest bit of news about the former colonies that issued them.

As has been the case throughout history, information asymmetry has often played to a crafty (or dishonest) investor’s advantage, by allowing the clued-in to stay one step ahead of any news that would affect prices and positioning accordingly.

By the late 18th century, with the United States of America now one nation under God, then-Secretary of the Treasury, Alexander Hamilton started to restructure American finance by replacing outstanding bonds from the various colonies with a new central government bond.

Image: Unsplash

Big bond investors sought out people who had access to the US Treasury to find out which bond issues Hamilton was going to replace, because they stood to make a killing by swapping out colonial bonds for these federal ones, and no one was more eager to do so than William Duer, the Assistant Secretary of the US Treasury.

Duer was privy to all of the Treasury’s actions and would tip off his friends and trade his own portfolio before leaking select information to the public that he knew would drive up prices.

Then Duer would simply sell for an easy profit — a classic insider trade with a twist of pump and dump.

Fast forward to our current epoch and last year, two top officials from the US Federal Reserve, Eric Rosengren and Robert Kaplan, both resigned after having revealed extensive stock trading just before the central bank announced unprecedented monetary stimulus in the wake of the pandemic.

While there have been no allegations of wrongdoing levelled against either Rosengren and Kaplan, the timing of their trades, just before the Fed announced a massive monetary stimulus that sent stocks soaring, wasn’t a good look.

Is history repeating itself?

So imagine an unregulated market worth trillions of dollars, where the very exchanges that investors trade on run proprietary trading desks and teams of market makers alongside “outsiders” and have informational asymmetry that would allow them to trade ahead of their customers.

Conflict of interest much?

A Market Manipulator’s Paradise

Given the lack of oversight of cryptocurrency exchanges that matter — those with the highest trading volume — many of the behaviours that have since been outlawed by the financial markets are de rigueur in the Wild West that are the cryptocurrency markets.

From spoofing to frontrunning, insider trading to wash trading — every conceivable means by which markets can be made less fair can and often is, expressed in the cryptocurrency markets.

It’s What’s on the Inside that Matters

Take insider trading for example, which is probably the lowest hanging fruit when it comes to cryptocurrency market manipulation.

Because public blockchain data can be accessed by anyone, it’s not difficult to see insiders taking advantage to make some easy money.

Over several days last August, a cryptocurrency wallet amassed around US$360,000 worth of Gnosis tokens just days before Binance, the world’s largest cryptocurrency exchange by traded volume said that it would be listing Gnosis.

Image: Unsplash

Expectedly the price of Gnosis soared, from around US$300 to US$410 in under an hour while at the same time, the trading volume for the token shot up to over seven times its typical weekly average.

Within four minutes after the listing of Gnosis on Binance, the wallet that had held on to US$360,000 worth of the token started dumping its stake over the next four hours, netting around US$500,000 or a profit of around US$140,000.

Using blockchain analytics software, that same cryptocurrency wallet has consistently demonstrated an uncanny knack for predicting which tokens would list on major exchanges such as Binance, and knew exactly when to accumulate and sell as well.


Perhaps hubris, because whoever controlled those wallets didn’t even bother to cover their tracks knowing that there would be no consequences.

While blockchain analysis can determine that a particular cryptocurrency wallet address was prescient in knowing which tokens to hold on to and when to let them go, what can’t be determined is who actually owns it.

Although the biggest cryptocurrency exchanges all claim to have policies in place that prohibit employees from trading on privileged information, policing these measures is far more difficult.

And because blockchain transactions are anonymous, and many tokens can be traded on decentralised exchanges which require no KYC (know-your-customer) to trade on, it’s challenging to tie a trade to an individual and almost impossible when they obfuscate their cryptocurrency flows.

But insider trading, as unfair as they make cryptocurrency markets, are hardly the most reprehensible behaviour in the industry.

Awash with Trades

In the early days of the cryptocurrency industry, when there was at one point more exchanges than there were tokens to list, many exchanges took to using so-called “market making” bots to create the illusion of active traded volume.

“Market making” in that sense was really just wash trading, where various accounts on an exchange traded with each other, representing a far more liquid and active market than otherwise existed in order to lure real human traders in.

Image: Unsplash

These wash trading bots could even manipulate price charts, order books and create a parallel universe that an active market existed for a token, which was simply a work of fiction.

Such actions would be challenging to execute in the financial markets, but not impossible.

In October 2013, over US$6.2 billion in market cap was wiped out on the Singapore stock exchange as a Malaysian financier and his girlfriend manipulated the share prices of Blumont Group, Asiasons Capital and LionGold using a complex string of wash trades between trading accounts that they ultimately controlled.

Running out Front

Because an exchange can see a trader’s order, they can provide this information to their market maker (typically owned by the exchange as well) and put themselves ahead of that order so that a trader will always pay slightly more to buy a token and sell for slightly less before the price goes back to normal, whenever a market order is made.

The amounts made on frontrunning are typically tiny, may be a couple of basis points per trade, but over time and given the volumes, they can rapidly add up.

Cryptocurrency markets are hardly alone when it comes to front running.

In 2016, global banking giant HSCB made headlines when some of its staff front run a currency transaction for the bank to profit.

HSBC had been hired to convert dollars into British pounds for a company as it was preparing to complete the sale of a subsidiary.

Armed with the knowledge that a substantial amount of pounds would be in demand, two HSBC executives dealt head of the US$3.5 billion currency transaction, “ramping” up the price of one currency to benefit the bank at the expense of the client.

Spoof and It’s Gone

Spoofing is where a whole bunch of orders are placed to create the false impression of buy or sell pressure, only for them to be cancelled at the last minute, luring in traders and leaving them holding the bag.

Also known as “layering” the order book, spoofing involves placing multiple, non-genuine orders on one side of the order book to manipulate perceptions of the trading environment.

For instance, by stacking up the ask, it looks like there are a lot more sellers than there actually are, and that may cause some traders to give up and sell out, whereupon the market manipulators then remove all of the sell orders and pump up the price of the token.

Between January 2008 and May 2014, NatWest, a London-based global banking and financial services firm spoofed US Treasury futures and spot markets.

Image: Daily Record

According to prosecutors, NatWest injected materially false and misleading information about the genuine supply and demand for Treasuries into the markets, tricking other market participants into reacting to apparent changes in supply and demand.

Derivative This

Then there’s the issue of derivatives.

These days, many cryptocurrency exchanges offer a wide range of derivatives, some of which have no equivalent in the financial markets, such as perpetual futures that have no expiry.

But more importantly, exchanges also offer ridiculous amounts of leverage that would otherwise not be available in the financial markets.

You could get rich using 10x leverage, but you could get a yacht with 100x!

And that’s precisely what a lot of traders did and continue to do.

During periods of high volatility in the cryptocurrency markets (practically all the time), traders (gamblers) who fear missing out (buy) or are trying to get out (sell) place what’s known as “market orders “— whatever price the market will give.

blockchain in crypto
Image: Jeremy Bezanger

As traders pile on positions heavily on one side, cryptocurrency exchanges through their market makers can take the opposite side of the trade and walk the price of the underlying token to wherever they need it to go (wash trading), liquidating these open futures contracts which post the bare minimum to keep those positions open — free money.

If futures are piled too heavily on the long side, exchanges can simply get their market makers to walk the price down and liquidate these open positions.

And if traders are almost uniformly bearish and taking leverage to goose short futures bets, the exchanges will simply walk up the price enough to liquidate all of the positions and cash out.

While the amount of short futures and long futures is known, what’s not known by traders generally is the liquidation margins that everyone is maintaining — only the exchange knows that.

So the exchange also knows how much of a price move is needed to ripple through a whole stack of liquidations and typically, it’s not a lot, because most traders post a minimum margin to hold the position open.

As a result, forced liquidations keep occurring, and traders keep losing their money — because exchanges have desks that actively trade against their own customers and are able to front run, spoof and walk the price to whatever is necessary to take money from traders.

Finally, no discussion of market manipulation would be quite complete without the evergreen pump and dump.

The Classic P&D with a Side of Fries

Pumps and dumps primarily take two forms — insider-led or community-led.

There is no shortage of pump and dump Telegram groups, where anonymous individuals collaborate to bid up the price of a token to lure in other unsuspecting traders, similar to what happened with GameStop.

The other sort is where insiders corner the market for a particular token, wash trade to lure in other traders to come in while bidding up the price, and then dump all of the tokens acquired earlier on the unsuspecting bag holders as they come in.

Another way of course is for crypto celebrities to talk up a token which insiders have collected and dump it on unsuspecting investors who come in later.

And why is all of this possible?

Because cryptocurrency exchanges continue to be unregulated and even where they are regulated, this sort of behaviour is exceedingly difficult to detect and even harder to prove.

To make matters worse, it’s not as though regulation can necessarily help matters anyway.

Even the highly regulated financial markets are not immune to manipulation and traders are regularly brought up on charges ranging from insider trading to rigging bids and offers.

As long as there’s a market, there’ll be someone out there who’ll attempt to manipulate it.

Nevertheless, it’s incumbent on investors, especially retail, to know what they’re getting into.

Take casinos for instance, it’s no big secret that the house has a mathematical advantage, but that edge is transparent and monitored by gaming authorities.

Image: Unsplash

Gamblers who walk into a casino are aware that mathematically, the house will always have a leg up, but even though the odds are stacked against them, there are still opportunities for them to win as well.

To that end, cryptocurrency markets are no different.

So long as traders head to the centralised exchanges, they’re walking into a casino and the house controls every aspect of the experience.

From the order books to the trading volume, everything is engineered so that traders will take more leverage, trade more and over time, the house will always win, especially since the exchange charges a fee on every transaction.

What perhaps makes cryptocurrency markets that much more degenerate than casinos is because they’re not regulated, there’s no watchdog that is there to stop the most egregious forms of market manipulation being perpetrated on investors, especially retail.

And there’s no one who will speak on behalf of retail traders who are often the ones getting “rekt” by the exchanges or “whales” that ply the dark waters of the cryptocurrency markets.

Yet How Is That Any Different From Wall Street?

In the run-up to the 2008 Financial Crisis, Wall Street stiffed Main Street by putting people in mortgages that were so complex even they didn’t understand them and which ultimately people couldn’t afford.

Image: Fortune

People got kicked out of their homes and had their properties liquidated by the banks, many committed suicide and others saw their entire wealth evaporate.

To add insult to injury, the American taxpayer had to fund a massive bailout of the very banks who were helping to perpetrate and if nothing else, encourage the very sort of activity that caused the financial meltdown to begin with.

At least in the cryptocurrency sector, if too many traders lose too much money too often, the exchange (casino) will eventually develop a bad reputation and players will take their chips elsewhere.

In reality though, as consolidation occurs in the cryptocurrency sector, this will become harder to do as a handful of major centralised exchanges soak up all of the global liquidity.

Which is where regulators must come in.

Unfortunately, given the decentralised nature of cryptocurrencies, it will be near on impossible to stop exchanges setting up in light-touch jurisdictions, always staying one step ahead of regulators in the US and Europe.

And traders will continue to be drawn to these offshore exchanges which provide them with the best trading experience, regardless of if they’re being traded against or not and even if the markets are manipulated.

There isn’t a strong incentive for the exchanges to play fair, and going out to decentralised exchanges doesn’t necessarily help either (sandwich bots and frontrunning are painfully common).

So what can traders do?

In all honesty, nothing.

As long as there’s a market, someone will try to manipulate it.

Investors going into the cryptocurrency markets should know that they’re playing at a casino where the odds are heavily stacked against them, but who knows, they may just get lucky.

By Patrick Tan, CEO & General Counsel of Novum Alpha

Novum Alpha is the quantitative digital asset trading arm of the Novum Group, a vertically integrated group of blockchain development and digital asset companies. For more information about Novum Alpha and its products, please go to or email:

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