Spoofing

Another common strategy whales use to manipulate the market is called spoofing. It means to bid or offer with intent to cancel before the orders are filled. The goal of spoofing is to send false signals to investors.

Here’s an example of using this strategy to profit:

A spoofer places a large buy order right underneath a smaller buy order with the intention of sending a bullish signal to the market.

After filling a few trades, *poof*, the spoofer cancels the entire buy order.

When the price starts to rise, the spoofer starts to sell his coins.

This also works in the opposite direction. By placing large sell orders, spoofers can send bearish signals and lure investors into selling their cryptocurrencies at a discount.

Bitfinex’d investigates an entity known as “Spoofy” operating on the Bitfinex exchange.

Wash Trading

The last strategy we’ll cover is wash trading. In a wash trade, an investor takes both buy and sell positions. This may be done in order to:

Artificially inflate trading volume in order to send a bullish signal

Manipulate prices on markets with small order books

Usually wash trading is extremely hard to prove, as washed trades look very similar to real trades.

On July 27, however, Bitfinex unknowingly baited wash traders during the Bitcoin (BTC) fork to Bitcoin Cash (BCH). At the time of the fork, all BTC holders were to receive BCH commensurate with the amount of BTC they held.

To accommodate for BTC held in margin positions at the time, Bitfinex had to finesse the numbers. To quote the announcement:

BCH will be distributed to settled bitcoin wallet balances as of the UTC timestamp of the first forking block, which is expected to occur on August 1st, 2017. The token distribution methodology will be: - All BTC wallet balances will receive BCH - Margin longs in BTC/USD and margin shorts in XXX/BTC will not receive BCH - Margin shorts in BTC/USD and margin longs in XXX/BTC will not pay BCH - BTC Lenders will receive BCH Due to the net amount of BTC committed in margin positions at the time of the fork, the above methodology may result in Bitfinex seeing a surplus or deficit of BCH. As such, we will be resolving this discrepancy in the form of a socialized distribution coefficient. For example, currently, there are more longs than shorts on the platform, causing a distribution coefficient of ~1.091 (Meaning that for each qualifying BTC a user will receive 1.091 BCH). The actual coefficient will be calculated at the moment of the distribution.

These rules turned out to be game-able. Because Bitfinex did not charge BCH to open short positions leading up to the split, one could simply purchase 10 BTC and short 10 BTC. This way, you could collect free BCH without any exposure to BTC price volatility. If BTC drops, the shorts cancel out any loss. If BTC soars, the profits cancel out the short positions.

On July 27, there were more longs than shorts on the platform and the distribution coefficient was 1.091.

Credit to Bitfinex’d for this image

However, on August 1, the distribution coefficient moved to 0.7757.

Leading up to the fork, an enormous amount of short positions were created. And instead of prices going down, which is what usually happens when shorts increase so dramatically, prices actually went up.

To make matters even more dubious, shorts dropped by 24,000 on a single tick right after the fork.

The manipulation here was so obvious that even Bitfinex had to acknowledge it. They issued an official statement about the wash trading here.

Pump & Dump Group Executives

So we’ve talked about insider traders and whales.

The final type of traders we’re going to talk about are the pump & dump group executives.

Pump & dump (P&D) is a form of market manipulation that involves purchasing a cheap asset, artificially inflating its price, and then dumping the asset a higher price.