The Web3.0 market and traditional financial markets both stem from the same financial logic, making them equally susceptible to market manipulation. Many of the manipulative techniques that plague stocks and other financial products, such as wash trading, fearmongering, and pump-and-dump schemes, are also present 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 manipulative behaviors are even more likely to succeed. Manipulators operate from behind the scenes, using various methods to manipulate prices for their own gain.
This article will discuss common manipulative techniques in the Web3.0 market and analyze how these behaviors affect the entire industry. It is hoped that investors will be able to better understand and discern market manipulation to protect their assets.
Common Manipulative Techniques in the Web3.0 Market Wash Trading
Wash trading is one of the most notorious market manipulation techniques. Manipulators create a false impression of high trading volume by repeatedly buying and selling the same asset. This exaggerates the trading activity of digital assets, misleading investors into believing that the asset has high liquidity or value.
In 2019, a report from Bitwise Asset Management indicated that approximately 95% of Bitcoin trading volume on unregulated exchanges was fabricated through wash trading. This figure suggests that a large part 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 for a specific asset (usually, these orders constitute a significant proportion of the total open orders), creating a false demand or supply, thereby manipulating market depth.
In other words, spoofing means that manipulators place large buy or sell orders on the market without the intention to execute them, creating a false impression of supply and demand. Through these false signals, manipulators can cause price fluctuations and profit from the market's response.
Bear Raiding
Bear raiding is typically used to maliciously depress asset prices. Manipulators engage in short selling or mass selling of an asset to trigger panic selling in the market, causing a chain reaction that leads to a sustained price decline.
Bear raids usually occur during periods of increased market uncertainty, with manipulators further amplifying market fear and prompting investors to sell their holdings. Therefore, in the Web3.0 market, which is highly sensitive and prone to volatility, this manipulative technique is particularly effective because any action can potentially trigger an unexpected sharp drop in prices.
FUD (Fear, Uncertainty, and Doubt)
FUD involves spreading negative or misleading information to create doubt and stir up fear among market participants. Common FUD tactics include fabricating rumors about government crackdowns on cryptocurrencies, fake news about exchange hacks, and exaggerated reports of project failures.
For example, Jamie Dimon, CEO of JPMorgan Chase, once called Bitcoin a "fraud," despite his company later becoming involved in blockchain technology. This nonetheless triggered market panic. Although such public comments are not necessarily direct market manipulation, they can lead to panic selling and price volatility.
Sell Wall Manipulation
Sell wall manipulation involves a manipulator placing a large number of sell orders at a specific price level, creating a virtual "wall" that prevents the asset's price from breaking through that level. These large orders may intimidate other traders, who believe that breaking through the price barrier is very difficult.
However, once the manipulator has purchased enough tokens at a lower price, they will withdraw the sell orders, causing the price to quickly rise. This method is typically used by market makers and high-frequency traders to accumulate assets at lower prices.
Pump and Dump
Pump and dump is one of the oldest market manipulation techniques. It involves coordinated buying to artificially inflate the price of an asset (pumping) and then selling (dumping) after the price has risen. Such behavior is usually initiated by a group of traders or social media influencers who hype up low liquidity tokens in private chat groups or on social media, enticing retail investors to buy in. Once the price goes up, the manipulators sell off their holdings, leaving latecomers to bear the losses.
In October 2024, the U.S. Federal Bureau of Investigation (FBI) conducted the "Token Mirror Operation," creating a fictitious token called NexFundAI to apprehend criminals engaging in fraud. The operation exposed a $25 million pump-and-dump scheme where traders manipulated the token's trading volume and price to attract unsuspecting investors. Once the price rose, the schemers sold off their holdings, causing the price to plummet. Ultimately, 18 manipulators were charged with 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 smooth trading. However, some market makers exploit their position to engage in manipulation, particularly wash trading and spoofing. Because they control a large amount of asset liquidity, these rogue market makers can easily manipulate prices to serve their own interests, thereby influencing price trends.
Although market makers play an important role in any trading ecosystem, the decentralized nature of the Web3.0 market, coupled with the lack of information transparency in some areas, provides them with more room to operate. For this reason, regulatory bodies such as the U.S. Securities and Exchange Commission (SEC) have begun to take action against some Web3.0 companies to curb such abuses. However, as it stands, regulatory enforcement remains challenging.
How to Prevent Market Manipulation While market manipulation is difficult to detect, the following measures can help reduce risk:
Investigate Token Background: One of the simplest ways to avoid becoming a victim of a pump-and-dump scheme is to investigate the trading history of a token. For example, Skynet can be used to check a token's historical information. Tokens with a history of only a few days or weeks are at greater risk because their liquidity is lower, making them more likely to be manipulated. Sudden surges in the price of new or low liquidity tokens should be approached with particular caution.
Choose Exchanges with High Transparency: Some exchanges actively combat market manipulation by increasing transparency and reviewing trading volumes. These exchanges monitor transactions regularly and provide transparency reports to ensure that trading volumes are not artificially inflated. Choosing to use well-known exchanges that offer market security protection measures can help reduce the risk of falling victim to market manipulation.
Stay Vigilant and Analyze Carefully: Pay attention to large orders that are suddenly withdrawn, spikes in trading volume without reliable news to support them, and rumors without credible sources. Tools like blockchain explorers can help track transactions and verify the authenticity of volume spikes. Additionally, try to avoid making impulsive investment decisions based solely on social media trends or hearsay.
Building a Safer Future As the Web3.0 market becomes increasingly mature, the situation regarding market manipulation may change significantly. The evolution of the market cannot be separated from the strengthening of regulation. For example, the European Union's latest "Regulation on Markets in Crypto-Assets" (MiCA) aims to provide a comprehensive regulatory framework for digital currencies, enhancing transparency and protecting investors. By addressing issues such as market manipulation, MiCA ensures fair operation of exchanges and sets an example for how regulation can promote 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 typically use smart contracts, which execute automatically to ensure fair trading rules. These advancements make it easier to detect manipulative behavior, thereby reducing the occurrence of market manipulation. As industry technology progresses, mechanisms to protect the market from manipulative tactics are continually being improved.
Despite the continuous improvement and advancement of regulatory frameworks and technology, participants in the Web3.0 space must remain vigilant. Due to the dynamic nature of the market, manipulative tactics can change as quickly as they do in traditional markets. Investors should always carefully identify signs of manipulation and understand regulatory measures to better protect their assets and support the market's movement towards a healthier and more transparent direction.
