The Web3.0 market and the traditional financial market both originate from the same financial logic, and therefore, they are equally susceptible to market manipulation. Many manipulation tactics that have plagued stocks and other financial products, such as wash trading, creating panic sentiment, and pumping and dumping, have also appeared in the Web3.0 market. It is worth noting that due to the decentralized nature of the Web3.0 market and the lack of regulatory rules, these manipulation behaviors are more likely to succeed. The manipulators operate behind the scenes, using various means to manipulate prices for their own profit.
This article will explore the common manipulation tactics in the Web3.0 market and analyze how these behaviors affect the entire industry. It is hoped that investors can better understand and identify market manipulation behaviors to protect their assets.
Common Manipulation Tactics in the Web3.0 Market
Wash Trading
Wash trading is one of the most notorious market manipulation tactics. Manipulators create the illusion of high trading volume by repeatedly buying and selling the same asset, exaggerating the trading activity of digital assets.
In 2019, a report by Bitwise Asset Management[1] stated that about 95% of Bitcoin trading volume on unregulated exchanges was fabricated through wash trading. This figure indicates that a large portion of the trading activity in digital assets may be driven by market manipulation rather than genuine market demand.
Spoofing
Spoofing refers to traders placing one or more buy or sell orders (usually occupying a large portion of the total order book) for a specific asset, creating the illusion of demand or supply, and manipulating the market depth.
In other words, spoofing means that manipulators place large buy and sell orders in the market, but have no intention of executing them, in order to create false signals of supply and demand. Through these false signals, manipulators can cause price fluctuations and profit from the market's reaction.
Bear Raiding
Bear raiding is typically used to maliciously drive down the price of an asset. Manipulators short-sell or heavily sell a certain asset to trigger a panic sell-off in the market, causing a chain reaction that leads to a continuous price decline.
Bear raiding usually occurs during periods of increased market uncertainty, where manipulators further amplify the market's panic sentiment, causing investors to sell their holdings. Therefore, in the highly sensitive and volatile Web3.0 market, this manipulation tactic can be particularly effective, as any action can trigger unexpected significant price drops.
FUD (Fear, Uncertainty, and Doubt)
FUD involves spreading negative or misleading information to sow doubt and panic among market participants. Common FUD tactics include spreading rumors, such as the government's imminent crackdown on crypto assets, fabricating news about exchange hacks, and exaggerating reports of project failures.
For example, JPMorgan Chase CEO Jamie Dimon once called Bitcoin a "fraud"[2], which, although his company later got involved in blockchain technology, still triggered market panic. While this may not be a direct market manipulation behavior, such public statements can lead to panic sell-offs and price volatility.
Sell Wall Manipulation
Sell wall manipulation involves manipulators placing a large number of sell orders at a specific price level, forming a virtual "wall" to prevent the asset's price from breaking through that level. These large orders may make other traders feel intimidated, believing it is difficult to break through the price barrier.
However, once the manipulators have accumulated enough tokens at lower prices, they will withdraw the sell orders, causing the price to rise rapidly. This tactic is often used by market makers and high-frequency traders to accumulate asset positions at low prices.
Pump and Dump
Pump and dump is one of the oldest market manipulation tactics, where manipulators artificially inflate the price of an asset through coordinated buying (pumping up the price), and then sell their holdings (dumping) when the price has risen. This behavior is often initiated by a group of traders or social media influencers, who hype up low-liquidity tokens in private chat groups or on social media to lure retail investors to buy. Once the price has risen, the manipulators sell their holdings, leaving the latecomers to bear the losses.
In October 2024, the FBI conducted the "Token Mirror Operation"[3], creating a fake token called NexFundAI to catch criminals engaged in fraud. The operation exposed a $25 million pump and dump scheme, where traders manipulated the trading volume and price of the token to attract unsuspecting investors. Once the price had risen, the perpetrators sold their holdings, causing the price to crash. Ultimately, 18 manipulators were charged for market manipulation.
The Role of Market Makers
In the Web3.0 market, the role of market makers is to provide liquidity and market depth through continuous buy and sell orders, ensuring the smooth execution of transactions. However, some market makers abuse their position and engage in manipulation tactics, particularly wash trading and spoofing. Due to their control over a large portion of asset liquidity, these unscrupulous market makers can manipulate prices to serve their own interests, thereby affecting the price trend.
While market makers play an important role in any trading ecosystem, the decentralized nature of the Web3.0 market and the lack of transparency in some areas provide them with more room for manipulation. As a result, regulatory authorities such as the U.S. Securities and Exchange Commission (SEC) have begun to take action against some Web3.0 companies in an attempt to curb such abusive practices. However, the challenges of enforcement remain significant.
How to Prevent Market Manipulation
Although it can be difficult to identify market manipulation, the following steps can help you reduce the risk:
Investigate the token's background: To avoid becoming a victim of a pump and dump scheme, one of the simplest methods is to investigate the token's trading history, which can be done through tools like Skynet[4]. Tokens with a trading history of only a few days or weeks are at higher risk, as they have lower liquidity and are more likely to be targeted for manipulation. Be especially cautious of sudden price spikes in new or low-liquidity tokens.
Choose transparent exchanges: Some exchanges have taken proactive measures to curb market manipulation, such as increasing information transparency and auditing trading volumes. These exchanges regularly monitor transactions and provide transparency reports to ensure that trading volumes have not been artificially inflated. Using reputable exchanges that offer market safety protections can help you mitigate the risk of falling victim to market manipulation.
Stay vigilant and analyze carefully: Be wary of large orders that are suddenly withdrawn, sudden spikes in trading volume without reliable news, and unverified rumors from untrustworthy sources. Use blockchain explorers and other tools to track transactions and verify the authenticity of volume surges. Avoid making impulsive investment decisions based solely on social media hype or rumors.
Building a Safer Future
As the Web3.0 market matures, the landscape of market manipulation may undergo significant changes. The evolution of the market is inseparable from the strengthening of regulation, such as the European Union's new Regulation on Markets in Crypto-Assets (MiCA)[5], which aims to provide a comprehensive regulatory framework for digital currencies, enhance transparency, and protect investors. By addressing issues like market manipulation and ensuring the fair operation of exchanges, MiCA serves as an example of how regulation can foster trust and integrity in the Web3.0 ecosystem.
Furthermore, the rapid development of decentralized solutions is paving the way for a safer trading environment. Decentralized finance (DeFi) platforms often utilize smart contracts, which automatically execute and enforce fair trading rules. These advancements make it more difficult for manipulators to conceal their actions, thereby reducing the occurrence of market manipulation. As the industry's technology progresses, the mechanisms to protect the market from manipulation are continuously improving.
Although these regulatory frameworks and technologies are constantly improving and progressing, participants in the Web3.0 field still need to remain vigilant. Due to the dynamic nature of the market, market manipulation methods may evolve as quickly as in the traditional market. At all times, investors should carefully identify signs of manipulation, understand regulatory measures, in order to better protect their assets and help the market develop in a healthier and more transparent direction. [1] https://cointelegraph.com/news/bitwise-calls-out-to-sec-95-of-bitcoin-trade-volume-is-fake-real-market-is-or [2] https://coinbureau.com/education/what-is-fud/#an-example-of-crypto-fud [3] https://www.justice.gov/usao-ma/pr/eighteen-individuals-and-entities-charged-international-operation-targeting-widespread [4] https://skynet.certik.com/ [5] https://www.esma.europa.eu/esmas-activities/digital-finance-and-innovation/markets-crypto-assets-regulation-mica
