Exploring Market Manipulation in the Crypto Industry
The crypto and defi space offers numerous opportunities for innovation, but it also comes with risks, one of which is market manipulation. Market manipulation involves intentionally distorting prices and volumes to deceive investors.
There are various forms of market manipulation, including wash trading, pump and dump schemes, flash loan attacks, and rug pulls. In this article, we will examine some notable cases of market manipulation involving cryptocurrencies like Bitcoin, FTT, Hydro, and DGTX.
Wash Trading on DEXs
A study by Solidus Labs revealed that about 67% of liquidity pools on Ethereum-based decentralized exchanges (DEXs) were manipulated through wash trading. Wash trading accounted for 16% of the total trading volume in these pools, amounting to at least $2 billion since September 2020. Examples were provided of how wash traders exploited DEXs to manipulate the prices and volumes of tokens like SHIBAFARM.
Solidus Labs has been developing solutions such as Token Sniffer and DEX-Based Insider Trading to detect and prevent market manipulation on DEXs.
The PlusToken Scheme
PlusToken was a Ponzi scheme that operated from 2018 to 2019. It attracted over 3 million victims and stole more than $2 billion worth of cryptocurrencies, mainly Bitcoin and Ethereum. Chainalysis found evidence that PlusToken scammers engaged in market manipulation by selling large amounts of their stolen crypto on exchanges, causing downward pressure on Bitcoin’s price. At least $185 million worth of Bitcoin was liquidated between September and December 2019.
PlusToken scammers used various techniques like mixing services, decentralized exchanges, and OTC brokers to cover their tracks.
The BitConnect Scam
BitConnect claimed to be a crypto trading platform using proprietary software to generate profits from market fluctuations. However, it was revealed to be a Ponzi scheme that stole over $2.4 billion worth of crypto from millions of victims. The founder, Satish Kumbhani, was charged with multiple counts of fraud, price manipulation, money laundering, and operating an unlicensed money-transmitting business.
Kumbhani manipulated the price and volume of BitConnect’s native token, BCC, to create a false impression of market demand. He is currently at large, and if convicted, could face up to 20 years in prison.
The FTX Case
FTX collapsed after engaging in fraudulent activities like using customer funds to cover losses and inflating trading volume and liquidity. The SEC filed a civil complaint against the former CEO of Alameda and the co-founder of FTX for manipulating the price and volume of FTT, FTX’s native token. False statements about FTX’s financial health, security, liquidity, and regulatory compliance were also made.
These actions caused customers and investors to lose millions of dollars and led to the collapse of FTX. The SEC charged the individuals with securities fraud, market manipulation, and aiding FTX’s violations.
Hydrogen Technology
Hydrogen Technology operated a crypto token called Hydro for its financial services. The SEC filed a lawsuit alleging that the company violated securities laws by offering and selling Hydro without registration. They also hired a market maker to artificially inflate the price and volume of Hydro on crypto exchanges.
The SEC claimed that Hydrogen Technology made more than $2 million from selling Hydro into the manipulated market and deceived investors about its nature and value. The CEO of the market maker firm was also charged. Hydrogen Technology and its founder consented to judgments that included penalties and barred Kane from serving as a director or officer of a public company.
Adam Todd’s Case
The CFTC filed a complaint against Adam Todd, the founder of Digitex, for operating an unregistered futures exchange and attempting to manipulate the price and volume of DGTX. The CFTC alleged that Todd and his companies violated the Commodity Exchange Act by facilitating unlawful futures transactions and soliciting U.S. customers without complying with registration requirements.
Todd was also accused of artificially inflating the price and volume of DGTX on third-party exchanges. If found guilty, he could face legal consequences.
Bitcoin Price Manipulation
A study by researchers at the University of Texas suggested that market manipulation involving Tether contributed to Bitcoin’s surge in 2017. Tether was used to buy Bitcoin during periods of low demand, artificially supporting its price. The study raised concerns about the backing and legitimacy of Tether, as it was often issued in large amounts exceeding claimed cash reserves.
The research concluded that Tether accounted for at least 50% of Bitcoin’s price increase in 2017 and indicated the manipulation was likely orchestrated by a single entity or group of traders. Bitfinex and Tether denied any wrongdoing and criticized the study’s methodology.
Hot Take: Market Manipulation Challenges in Crypto
Market manipulation remains a significant challenge in the crypto industry, affecting both investors and the overall market stability. Various schemes like wash trading, Ponzi schemes, and fraudulent activities have resulted in significant losses for individuals and even caused the collapse of platforms. Regulators are taking action against those involved in market manipulation, but it is essential for investors to exercise caution, conduct thorough research, and stay informed about potential risks. The crypto industry must continue to develop robust surveillance and detection systems to identify and prevent market manipulation effectively.
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