In a market environment with insufficient spot liquidity, market makers can only turn their attention to the perpetual contract market, which has seen a growing trading volume.
Article by: @agintender
Article source: Wu Blockchain
In a market environment with insufficient spot liquidity, market makers can only turn their attention to the perpetual contract market, which has seen a surge in trading volume. To this end, all parties rack their brains to find a way to connect the spot and contract markets, organically combining the liquidity and profit and loss determination rules of the two in a mechanism, which ultimately gave rise to new token economics models and community expectation management models, creating a dramatic spectacle of "monster coins" killing both bulls and bears.
The so-called "monster coin" is a combination of a series of specific market conditions: highly concentrated holdings (i.e., "low circulation, high control"), and simultaneously listed in both the illiquid spot market and the highly liquid, highly leveraged perpetual contract market.
This article will analyze the complete lifecycle of this manipulation process, from the initial design of the token economics that facilitated the manipulation, to guiding retail investor sentiment, and then to the precise execution of spot-driven attacks, with the ultimate goal of triggering a chain of liquidations in the derivatives market to gain profits.
Disclaimer
This article is not intended to endorse such actions or target any project or exchange, but rather to provide a technical, quantitative, and objective mechanism analysis to help sophisticated market participants identify and potentially mitigate related risks.
Part 1: Constructing the Trap: Preparations Before Manipulation
The success of the entire operation depends on a carefully designed market structure in which the manipulators have established near-absolute control over the supply of assets and the price discovery mechanism before any large-scale participation from retail investors.
1.1. Creating Scarcity: A Token Economics Model of Low Circulation and High Control
This strategy doesn't begin with the trading process, but rather at the token conception stage. Manipulators, typically the project team or their closely associated supporters, design a token economics model that ensures the vast majority of the token supply (e.g., 95%) is locked or held by insiders, with only a very small portion—the "circulating supply"—available for public trading at the initial issuance.
This "low float, high FDV" model creates artificial scarcity. Because the number of tokens in circulation is limited, even small amounts of buying pressure can lead to rapid price increases and extremely high volatility. This dynamic is deliberate because it significantly reduces the amount of capital required for manipulators to arbitrarily drive up the spot price.
This token economics model aims to create a market structurally highly vulnerable to the spot-driven liquidation strategies detailed in this report. While a normal project launch aims to build community through decentralization and equitable distribution, the low-circulation model does the opposite, concentrating power. Major holders gain near-total price control. Manipulators don't need to "hoard" later; they have control of the market from the outset. When this pre-designed asset is placed in an environment of dual spot and futures listing, its token economic structure becomes a weapon.
Low circulation ensures that spot prices can be easily manipulated, while the futures market provides a pool of leveraged participants to exploit. Therefore, token economics is a prerequisite for this strategy. Without this level of control, manipulating spot prices would be prohibitively expensive. Choosing the right token economics is the first and most crucial step in this manipulation strategy.
From a psychological perspective, despite the low circulating supply, the high FDV creates the illusion of a grand and ambitious project, while the low circulating supply generates initial hype and a "scarcity effect," attracting speculative retail investors and setting the stage for subsequent "fear of missing out" (FOMO).
1.2. Catalysts for Dual Listings: Building a Two-Pronged Battlefield
Listing simultaneously or nearly simultaneously on highly liquid spot exchanges and perpetual contract markets is a key part of the entire strategy. Platforms like Binance Alpha act as a "pre-listing token screening pool," signaling potential future main board listings and building initial hype.
The two battlefields are:
Spot Market (Control Zone): This is where manipulators exert their overwhelming supply advantage. Due to the extremely small circulating supply, they can dominate prices with relatively little capital.
The perpetual contract market (harvesting zone): This is where retail and speculative capital congregate. It offers high leverage, amplifying retail traders' positions and making them extremely vulnerable to liquidation. The manipulators' primary goal is not to profit from spot trading, but to use their control over spot prices to trigger more lucrative events in this second battleground.
Introducing derivatives alongside spot assets creates a powerful linkage effect. It increases overall market liquidity, price synchronization, and efficiency, but in this controlled environment, it also creates a direct vector for manipulation.
Part Two: Market Warm-up: Generating Sentiment and Assessing Risk Exposure
Once the market structure is in place, the next stage for manipulators is to lure targets into the harvest zone (the contract market) and precisely measure their risk exposure. This involves creating false activity and demand narratives while using derivatives data as a "fuel table."
2.1. The Illusion of Activity: Wash Trading and Fake Trading Volume
A new token with low trading volume lacks appeal. Manipulators must create the illusion of an active, liquid market to attract retail traders and automated trading bots that use trading volume as a key metric.
To achieve this, the manipulator uses multiple controlled wallets to trade with themselves in the spot market. On-chain, this manifests as a circular flow of funds or assets between related parties. This behavior artificially inflates trading volume metrics on exchanges and data aggregators, creating a misleading impression of high demand and high liquidity.
Despite the complexity of the methods, such behavior can still be identified by analyzing specific patterns in on-chain data:
High-frequency trading exists among a small group of unknown exchanges or market maker wallets.
The buy and sell orders for the transaction occurred almost simultaneously, and there was no meaningful change in the actual beneficial ownership.
The report shows a mismatch between high trading volume and shallow order book depth or low on-chain holder growth.
2.2. Understanding the Derivatives Battlefield: Analysis of Open Interest and Funding Rates
Manipulators don't trade blindly. They meticulously monitor the derivatives market to assess the effectiveness of their pre-market activities. Two key metrics are open interest (OI) and funding rates.
Manipulators don't use position sizes and funding rates as predictive indicators like ordinary traders do; instead, they use them as a real-time feedback and targeting system. These indicators act like a "fuel gauge," precisely telling them when the market has been fully penetrated by one-sided leverage, thus maximizing profits from a liquidation storm and making it self-sustaining.
An average trader, seeing high open interest and a positive funding rate, might think, "The trend is strong, maybe I should long," or "The market is overextended, it might reverse." Their perspective is probabilistic. Manipulators controlling the spot price, however, possess a deterministic perspective. They know they can forcefully push prices down. Their question isn't whether a reversal will occur, but when to trigger its most profitable range—in layman's terms, when to "cut their losses." Increasing open interest tells them the number of leveraged positions is rising. High funding rates tell them these positions are overwhelmingly directional. The combination of these two indicators allows manipulators to quantify the size of the "liquidation pool." They can estimate the dollar value of positions to be liquidated at different price levels below the market. Therefore, they are not predicting market tops, but waiting for the perfect moment to create them. Open interest and funding rates are their signals, indicating that the system has enough "fuel" to launch a successful attack. (Reference: https://x.com/agintender/status/1957393030325178770)
Open Interest (OI) as a metric for "fuel": OI represents the total number of open futures contracts. A rising OI, especially during an uptrend, indicates that new money and new leveraged positions are entering the market. This is not merely existing traders exchanging positions, but an expansion of the total stake. For manipulators, a rising OI confirms that the pool of potential liquidation targets is expanding.
Funding rates as a measure of sentiment: Funding rates are the payments exchanged between long and short position holders to anchor the price of perpetual contracts to the spot price.
High positive funding rates: Contract prices are higher than spot prices. Long positions are paying fees to short positions. This indicates extremely bullish market sentiment and a high concentration of leveraged long positions.
High negative funding rates: Contract prices are lower than spot prices. Short sellers are paying fees to long positions. This indicates extremely bearish market sentiment and a high concentration of leveraged short positions.
Combination Signals: Manipulators await a specific combination of signals: a sharp increase in open interest accompanied by consistently high funding rates (whether positive or negative). This combination indicates that a large number of retail traders have established leveraged positions in the same direction, forming a dense cluster of liquidation levels below (for longs) or above (for shorts) the current price. This is the "fuel" for a chain of liquidations.
2.3. Narrative Warfare and the Creation of FOMO
While generating buzz through quantitative manipulation, manipulators typically launch a "soft power" offensive. This includes using social media, paid KOLs, and press releases to build a compelling narrative around the token.
Announcing false partnerships, touting "major developments," or simply promoting a "get rich quick" narrative can all trigger strong FOMO (Fear of Missing Out) sentiment. This psychological manipulation pushes retail traders into the futures market, encouraging them to bet leveraged, directly providing data for the OI (Online Indicator) and funding rate indicators that the manipulators are monitoring.
Part Three: Execution: Weaponizing Tag Prices
This is the kinetic phase of the operation. Manipulators use their control over the spot market to launch direct and precise attacks on the derivatives market, and use the exchange's own mechanisms as weapons.
3.1. Mechanical Connection: In-depth Analysis of Mark Price Calculation
The key to this strategy is that liquidation of perpetual contracts is triggered by the mark price, not the last traded price. This is a crucial distinction. The last traded price can be highly volatile and easily manipulated within a single exchange, so exchanges use the more robust mark price to prevent unfair liquidation.
While the formula for the markup price varies slightly between exchanges, it is fundamentally based on an index price plus a decaying funding rate. The index price is a volume-weighted average of the asset's spot prices across multiple major exchanges. (Reference: https://x.com/agintender/status/1950876402343108921)
This design creates a direct and unavoidable causal chain:
Manipulator's spot market behavior → Spot price changes → Index price changes → Mark price changes → Triggering liquidation.
By dominating the spot market of a new, illiquid token, manipulators effectively control the key input variables in the calculation of the mark price. They are not influencing the liquidation mechanism; they are dominating it.
Manipulators are exploiting exchanges' own risk management systems—namely, mark-price and automated liquidation engines—as tools for profit amplification. This system, designed to protect exchanges and traders from excessive risk, becomes a mechanism for "harvesting" when an entity controls the underlying spot price. Exchanges introduced mark-price mechanisms to prevent manipulation based on the latest transaction price of a single exchange, assuming that the aggregated index price is difficult for any single actor to manipulate. This assumption holds true for highly liquid, decentralized assets like BTC or ETH. However, for a new, low-liquidity token, the "exchanges" constituting the index price may only be one or two (some are simply liquidity pools on DEXs). By controlling the vast majority (e.g., 98%) of the circulating supply, manipulators can easily control the price of the most crucial input variable in the index price calculation. Therefore, manipulators have turned the exchange's protective measures into weapons.
Chain liquidation was not a secondary objective of their operation, but rather the primary one. The forced market orders generated by the liquidation provided manipulators with massive liquidity to close their huge futures positions at extremely favorable prices.
3.2. Short Squeeze Scenario (Harvesting Short Sellers)
Prerequisites: Manipulators observe falling prices, rising open interest, and negative funding rates (funding rates can also be used to induce buying or selling), indicating a large accumulation of leveraged short positions. Retail investor sentiment is bearish.
Phase 1: Position Building: Manipulators quietly establish a large long position in the perpetual contract market, typically absorbing selling pressure from retail short sellers. They are happy to temporarily pay funding fees, viewing them as the cost of setting a trap.
Phase Two: Spot Market Attack: The manipulator uses a small fraction of their vast token holdings to execute a series of large buy orders in the spot market. Due to the extremely small public float, this action requires relatively little capital to trigger a massive, almost instantaneous price surge.
Phase Three: Chain Liquidation
The surge in spot prices immediately pushed up index prices.
The index price subsequently drove up the mark price.
The rising mark price triggered the liquidation level for the most leveraged short positions.
These liquidations were forced to be executed as market buy orders, further increasing upward pressure on prices.
This creates a feedback loop or "short squeeze": forced buying drives up prices, liquidates the next tier of short positions, and generates more forced buying, thus creating a cycle. This chain reaction will continue until most of the short positions are cleared.
3.3. Multiple Kills, Multiple Scenario (Harvesting Multiple Opponents)
Prerequisites: Manipulators observe price increases (usually driven by their own wash trading and hype), soaring open interest, and high positive funding rates (funding rates can also be used to lure in buyers and sellers). Retail investor sentiment is euphoric, with heavy leverage used for long positions.
Phase 1: Position Building: The manipulator establishes a large short position in the perpetual contract market. They collect funding fees (or temporarily pay a certain amount of funding fees) from numerous long positions and profit while waiting.
Phase Two: Spot Market Attack: The manipulator dumps a small portion of their token holdings into the spot market. This sudden, massive selling pressure immediately causes a sharp drop in spot prices.
Phase Three: Chain Liquidation
The plunge in spot prices dragged down index prices, which in turn dragged down mark prices.
The falling price triggered the liquidation of leveraged long positions.
These liquidations were forced into market sell orders, further increasing downward pressure on prices.
This creates a "long squeeze" or chain reaction of liquidation, where forced selling triggers more forced selling, clearing out long positions like dominoes until excessive leverage in the market is eliminated.
Part Four: Aftermath: Profits, Risks, and Identification
4.1. Profit Realization
Profit from closing positions: The main profits come from the large number of futures positions established in the first step of the execution phase. During the chain liquidation, a large number of forced market orders (buy orders during a short squeeze and sell orders during a long squeeze) flood the market. This provides the manipulator with perfect, high-volume exit liquidity, enabling him to close out his multi-million dollar positions with extremely high profits.
Secondary Profits: Manipulators can also profit from the actions themselves in the spot market. After dumping and liquidating long positions, they can buy back their tokens (or even more) at extremely low prices. After pumping and liquidating short positions, they can sell their tokens to capitalize on FOMO-driven rallies.
4.2. Risk Analysis of the Manipulator
Cost of capital: While manipulation in the spot market is effective, it is not without cost. Executing price pumps or dumps requires substantial capital.
Exchange intervention: Exchanges like Binance, OKX, and Bitget have internal market surveillance teams. For egregious manipulation, especially if detected, this can lead to account freezes, asset delisting, or investigations. There are cases where Binance and Bitget have fired investigators who uncovered manipulation by major clients, demonstrating the complex environment and sometimes conflicts of interest.
Counterparty risk: This strategy assumes the manipulator is the only "whale" in the pond. While unlikely to be the case with 97% control, there is still the possibility of another large entity attempting to manipulate the market in the opposite direction, which could lead to a costly price control war.
4.3. Warning Signals and Defensive Measures for Retail Traders
Red flags in token economics (from Part 1): Verify on-chain holder concentration. If the top 10 holders control more than 90% of the supply, the asset is structurally compromised and poses a very high risk of manipulation. Avoid tokens with extremely low initial circulating supply.
Market activity warning signs (from Part 2): Be wary of tokens whose prices are skyrocketing but accompanied by suspiciously high trading volumes, without any real community growth or utility. Cross-reference trading volume with on-chain transaction counts and holder growth to identify potential wash trading.
Derivatives Warning Signs (from Parts 2 and 3): The strongest warning sign is a sustained and rapid increase in open interest, accompanied by extreme funding rates. This indicates excessive market leverage, setting the stage for a dramatic "purge" orchestrated by entities controlling spot prices. Analyzing the rate of change in open interest may be more telling than its absolute value. (Reference: https://x.com/agintender/status/1959919999205666933)
By understanding the structure of this strategy—from its structural basis in token economics to how it is executed through price marking—sophisticated market participants can better identify these elaborate traps and avoid becoming "liquidity" prey for manipulators.
Know not only what it is, but also why it is so.
May we always maintain a sense of awe and respect for the market.
postscript
The man on the cover is Richard Wyckoff, a legendary stock market expert (and also a durian lover!) – just kidding! – a master of "market manipulator" trading techniques. I highly recommend everyone read his "Three Theories." His Wyckoff Trading Rules not only focus on price itself but also emphasize the analysis of trading volume and market structure, making them extremely useful for beginners to understand and predict the behavior of major players. By identifying different market phases and the operational methods of major players, traders can better grasp market trends.
Although more than a hundred years have passed, his understanding and insights into the market are still applicable in today's crypto environment, just as they were then.
