Shoking reveal! How crypto market prices and volumes are manipulated

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  • Insider trading in cryptocurrency is where individuals use private information to buy coins before exchange listing announcements
  • SOLIDUS has identified 51 interconnected wallets that seem to be responsible for most of the insider trading
  • The platform found that a whopping 56 percent of all ERC-20 tokens listed on crypto exchanges in 2021 had evidence of insider trading.

The crypto market is quite volatile and prices fluctuate quite often. But what if the market is manipulated, and if so, by how much? The issue is of great concern because crypto will only witness growing adoption if there is evidence that price dictation is independent of individuals. Market manipulation has become a major concern, topping among the biggest unresolved investor protection problems.

According to a report by SOLIDUS LABS, the crypto market is manipulated in two avenues, insider trading and wash trading.

Insider trading

Insider trading in cryptocurrency is where individuals use private information to buy coins before exchange listing announcements. HALO, a market integrity platform, has revealed that there has been evidence of insider trading through Decentralized Exchanges. The platform found that a whopping 56 percent of all ERC-20 tokens listed on crypto exchanges in 2021 had evidence of insider trading. This means that insider trading for other tokens in other blockchains could make the figure higher.

SOLIDUS has identified 51 interconnected wallets that seem to be responsible for most of the insider trading. Their criteria for arriving at this number was looking at wallets that bought specific tokens in question a few hours before they were listed. However, the authors of the report fail to mention the specific wallets they analyzed.

Additionally, the report speculates that crypto exchanges that list new tokens could also be involved in insider trading. However, there is no dispute that people could be lucky to buy a token hours before its launch without any insider information.

Read: AI tools heighten safety and transparency in the NFT market

Past insider trading lawsuits

Several attempts have been made to try and halt the indomitable menace. In May, Coinbase’s ex-manager was sentenced to two years in prison for trading confidential information on when Coinbase would list new tokens.

Sam Bankman-Fried is still battling court cases as he is also a culprit in engaging in this crypto-related malpractice that saw investors losing huge amounts of money.

Decentralized Exchanges, game changers for insider trading

The presence of DEXes seems to increase the frequency that insider trading occurs due to the pseudonymous nature of DeFi. The presence of DeFi whales on some blockchains makes this possible. However, the report gives a warning to insider traders, stating that blockchains may be pseudonymous, but they are publicly viewable and all transactions are traceable. They go ahead to state that they will hunt the Inside traders using their advanced blockchain analytics platform.

Wash trading

Wash trading is a form of market manipulation in which one entity simultaneously buys and sells the same asset, creating a false impression of market activity. The trade reflects no change in beneficial ownership.

To understand the weight of the crypto malpractice, here are some “picture” statistics. Since 2020, liquidity providers on Ethereum wash traded over two billion dollars worth of crypto. Additionally, over 20 thousand token prices and volumes have been manipulated.

Despite wash trading on DEXes being extremely expensive due to on-chain fees, investors can still make a killing out of it. How? Wash trading on a DEX increases the chances of a centralized exchange listing, making it possible to practice insider trading.

However, wash trading in DeFi is both detectable and preventable. SOLIDUS LABS stated that DeFi protocols can implement similar technologies to those used on Centralized Exchanges to stop wash trading.

How the report findings affect the crypto market

The report spells doom to DEXes, as it implies that they facilitate these two forms of crypto injustices. Additionally, the report discourages new traders who haven’t actively engaged in crypto trading. Previously, Forbes had published a report that 50 percent of all BTC trades are either fake or non-economical.

Whether the Forbes report is anything to go by or not, there is a clear discomfort among a majority of investors in the crypto space who strongly believe that the crypto market is being manipulated.

Read: Crypto wash trading and the need for comprehensive regulation

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JOSEPH KANGETHE
JOSEPH KANGETHE
I am a tech, business, and investment news reporter covering Africa. Most of what is good in Africa is obscured by preconceptions, yet there is still a lot of good going on. Technology is what is driving the continent and this is my passion. For Africa, I share the stories that are important to Africans.
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