The Dark Side of the Financial Market! Unveiling the Manipulation Methods in the Web3 Market and How Investors Can Protect Themselves?

Both the Web3.0 market and TradFi market stem from the same financial logic and are therefore equally vulnerable to market manipulation. Many manipulation methods that plague stocks and other financial products, such as wash trading, creating panic, and Pump and Dump, also occur in the Web3.0 market. It is worth noting that due to the Decentralization feature of the Web3.0 market and the lack of regulatory rules, these manipulative behaviors are more likely to succeed. Manipulators operate behind the scenes and use various means to manipulate prices for their own profit. 01928374656574839201

This article will explore the common manipulative methods in the Web3.0 market and analyze how these behaviors affect the entire industry. It is hoped that investors can better understand and distinguish market manipulation behaviors to protect their assets.

Common Manipulation Techniques in the Web3.0 market

wash trading（Wash Trading）

Wash trading is one of the most notorious market manipulation techniques. Manipulators create the illusion of high volume by repeatedly buying and selling the same asset, exaggerating the trading activity of digital assets. This misleads investors into believing that the asset has high liquidity or value.

In 2019, Bitwise Asset Management's report[1]It is estimated that about 95% of Bitcoin trading volume in unregulated exchanges is generated through wash trading. This figure indicates that a significant portion of trading activity in digital assets may be driven by market manipulation rather than genuine market demand.

Spoofing

Pump and dump refers to a trader placing one or more buy or sell orders for a specific asset (usually with a large scale in the total order volume), creating the illusion of demand or supply, and thus manipulating the market Depth.

In other words, spoofing means that the manipulator places large buy or sell orders in the market, but has no intention of executing them, in order to create a false impression of supply and demand. Through these false signals, the manipulator can cause the price to fluctuate, thereby profiting from market reactions.

Bear Raiding

Short attacks are usually used to maliciously lower asset prices. Manipulators trigger panic dumping in the market by shorting or dumping large amounts of a certain asset, causing a chain reaction and resulting in a continuous price decline.

Short attacks usually occur when market uncertainty intensifies, manipulators further amplify market panic, prompting investors to dump their holdings. Therefore, in the Web3.0 market, such manipulation is particularly effective in this highly sensitive and easily fluctuating market environment, as any action can trigger unexpected significant price drops.

Create panic (fear, uncertainty and doubt)

Fear, uncertainty and doubt (FUD) is the creation of doubt and the incitement of panic among market participants by spreading negative or misleading information. Common examples of FUD include spreading rumors, such as government crackdowns on encryption assets, fabricated exchange hacking news, exaggerated reports of project failures, and more.

For example, JPMorgan CEO Jamie Dimon once referred to BTC as 'eyewash'.[2]Although the company later also ventured into blockchain technology, this still triggered market panic. While this may not be direct market manipulation, such public comments could lead to panic selling and price fluctuations.

Sell Wall Manipulation

A sell wall manipulation refers to the manipulator placing a large number of sell orders at a specific price level, forming a virtual 'wall' to prevent the asset price from breaking through that level. These large orders may make other traders fearful, thinking that breaking the price limit is very difficult.

However, once the manipulator has bought enough Tokens at a lower price, they will withdraw sell orders, causing the price to rise rapidly. This tactic is often used by market makers and high-frequency traders to accumulate assets at a low price.

Pump and Dump (Pump and Dump)

Pump and Dump is one of the oldest market manipulation techniques, which artificially raises the price of assets (pumping) through coordinated buying, and then dumps (dumping) them when the price is high. Such behavior is usually initiated by a group of traders or KOLs on social media, who hype low liquidity tokens in private chat groups or on social media to entice retail investors to buy. Once the price rises, the manipulators dump their holdings, leaving latecomers to bear the losses.

In October 2024, the Federal Bureau of Investigation (FBI) launched Operation Token Mirror.[3]Created a fake token NexFundAI to catch criminals engaged 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 orchestrators sold their assets, causing the price to plummet. In the end, 18 manipulators were charged with market manipulation.

Market Maker's Role

In the Web3.0 market, the function of market makers is to provide liquidity and market depth through continuous buy and sell orders, ensuring smooth trading. However, some market makers abuse their positions and engage in manipulative behavior, especially wash trading and deceptive practices. These unscrupulous market makers, who have a large amount of asset liquidity, can manipulate prices for their own benefit, thereby affecting price trends.

Although market makers play an important role in any trading ecosystem, the decentralization nature of the Web3.0 market and the lack of information transparency in some industries provide them with more room for operation. As a result, regulatory bodies such as the Securities and Exchange Commission (SEC) in the United States have begun to take action against some Web3.0 companies in an attempt to curb such abusive behavior. However, at present, regulatory enforcement remains challenging.

How to prevent market manipulation

Although market manipulation is difficult to discern, achieving the following points can help you reduce the risk:

Investigation of Token background: One of the simplest ways to avoid becoming a victim of Pump and Dump manipulation is to investigate the trading history of the Token. For example, through Skynet.[4]You can check the historical information of the Token. Tokens with only a few days or weeks of trading history have higher risks because of their lower liquidity and are more likely to be chosen as targets for manipulation. Be particularly cautious of sudden price surges in new or low-liquidity tokens.

Choose exchanges with high transparency: Some exchanges take proactive measures to curb market manipulation by increasing information transparency and reviewing trading volume. These exchanges regularly monitor trades and provide transparency reports to ensure that the volume is not artificially inflated. Choosing to use well-known exchanges that provide market security measures can help you reduce the risk of suffering losses from market manipulation.

Stay vigilant and analyze carefully: pay attention to large orders that are suddenly withdrawn, volume surges without reliable news support, and rumors from unreliable sources. Use tools such as Block browser to track transactions and verify the authenticity of the volume surge. In addition, try to avoid making impulsive investment decisions based solely on social media hotspots or rumors.

Building a safer future

As the Web3.0 market matures, the situation of market manipulation may change significantly. The evolution of the market is inseparable from the strengthening of regulation, such as the latest EU MiCA (Markets in Crypto-assets) regulation on encryption assets.[5]Aiming to provide a comprehensive regulatory framework for digital currencies, enhance transparency, and protect investors. By addressing issues such as market manipulation, ensuring fair operation of exchanges, MiCA provides an example of how regulation can promote trust and integrity in the Web3.0 ecosystem.

In addition, the rapid development of Decentralization solutions also paves the way for creating a more secure trading environment. Decentralized Finance (DeFi) platforms typically use Smart Contracts to automatically execute contracts and ensure fair trading rules. These advancements make it easier to detect manipulative behavior, thereby reducing market manipulation. As industry technology advances, mechanisms to protect the market from manipulation are also continuously improving.

Despite the continuous improvement and progress of these regulatory frameworks and technologies, participants in the Web3.0 industry still need to remain vigilant. Due to the dynamic nature of the market, market manipulation tactics can evolve rapidly, just like in traditional markets. Investors should always carefully identify signs of manipulation and understand regulatory measures in order to better protect their assets and contribute to the development of a healthier and more transparent market.

[Disclaimer] The market is risky and investment needs to be cautious. This article does not constitute investment advice. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their specific circumstances. Invest at your own risk.

This article is authorized for reprint from: "Shenzhen TechFlow"

Original author: CertiK