Due to its young age and exponential profit potential, the cryptocurrency market is subject to manipulation by traders, investors, and even financial institutions. Inexperienced market participants often lose their funds, becoming hostage to manipulation and unexpected market behavior, which is not only caused by their own mistakes but also due to the influence of mass media, social networks, or fake news.
In today’s article, we will talk about these market manipulation tactics as a means of spreading FUD (fear, uncertainty, and doubt), which is often used to manipulate market prices. We will look at recent examples of such manipulation and how not to fall prey to externally induced illusions.
Fear, uncertainty, and doubt
FUD is used as a means to manipulate crypto markets into a desired outcome in regards to a particular event. As a result, those generating FUD can profit from the reaction of the market to which this technique was applied.
The strategy of shaping public opinion by generating and intensively spreading negative information is widely used outside of the cryptocurrency or traditional markets. In fact, this is often commonplace in areas such as politics, business, marketing, or advertising.
In the case of cryptocurrencies, FUD is one of the most popular strategies used by big players to manipulate the market. For example, many “experts,” celebrities, and media personalities have buried bitcoin over 400 times, declaring the cryptocurrency dead and no longer relevant. However, most of these statements were nothing more than a means of market manipulation.
Examples of market manipulation
Market manipulation is an attempt to generate a negative or a positive scenario within a market to shape the reaction by its participants. A rise in price occurs as positive news appears and participants’ expectations rise, while a fall is often caused by market uncertainty, doubts, and fear.
Below we will list some examples of planned and ongoing FUD, which was previously spread by the media and resulted in sharp price fluctuations. These examples have also been aimed at redistributing funds from weak hands or selling the assets to new buyers.
One of the oldest cryptocurrency exchanges Mt.Gox, is still very well remembered by the entire cryptocurrency community. The exchange stopped functioning in February 2014 after announcing the theft of over 700,000 BTC belonging to its users, causing the exchange to later file for bankruptcy.
As it turns out, about 200,000 BTC were stored in an “old-format” wallet, and the company still has access to the funds. As a result, a plan was initiated to return the funds to those affected by the exchange hack. Launched back in 2016, the refund process is still ongoing. However, FUD has taken over and news about the next rescheduling or revision of the refund plan is published at moments of large-scale negative sentiment around cryptocurrencies. FUD arises as market participants expect the hack victims who receive their BTC will likely sell them to cover legal expenses, thus causing the price to fall.
It is worth considering that the precedent with Mt. Gox is unique because cryptocurrencies are not controlled by any jurisdiction. The price of bitcoin has continued to rise since the exchange was shut down, and, on top of that, many users of the exchange were associated with illegal activities, which led to problems with the recovery of funds and gave market manipulators a great tool to move the price in their preferred direction.
A prevalent way to manipulate public expectations is promoting news about the ban of bitcoin.
In the fall of 2017, bitcoin’s price plummeted as a result of China’s ban on cryptocurrency exchanges. The price of bitcoin fell by more than 30%, but by December, three months later, it reached its all-time-high of $20,000 after it was clear that China’s ban was not as advertised.
A similar example is news from Iran, which imposed a temporary ban on cryptocurrency mining. Iran accounts for about 5% of the bitcoin’s hashrate, and demand for cryptocurrencies in the country is growing due the country’s macroeconomic problems coupled with U.S. sanctions. Periodic regulatory tightening forms FUD in the market, which negatively affects the price of cryptocurrencies, causing further panic selling while reducing the exposure of inexperienced investors.
FUD is also formed to put short-term pressure on an asset’s price. For example, the media may publish high-profile headlines about the cryptocurrency ban, although the news is either entirely false or overblown. In order to avoid falling prey to FUD and make the right decisions, it is necessary to research the source of news information and verify it with multiple sources.
Chinese Twitter FUD
One of the most popular tools of cryptocurrency market manipulation is influential Twitter accounts. Twitter accounts such as @WuBlockchain, which belongs to a journalist who publishes China-related news, generates significant amounts of FUD China is one of the biggest players in the crypto industry, so the measures that are taken inside the country regarding cryptocurrencies directly affect the industry as a whole.
Another example of FUD is news regarding the ban on cryptocurrency mining in China, published on Wu’s Twitter account. As it later emerged, the document released contained a list of orders on financial risks and markets, suggesting that actions should be taken toward a ban on mining, not that these actions were already being implemented. Due to frequent (either unintentional or purposeful) misrepresentation of information, investors should independently verify primary sources to avoid becoming a victim of false narratives.
Binance is one of the world’s largest cryptocurrency exchanges in terms of trading volume and services offered. Yet, the FUD around Binance has not subsided, and regulators periodically ask questions about the company’s operations. Such news negatively affects both the exchange itself and cryptocurrencies in general, given that centralized exchanges such as Mt. Gox have made it clear that the possibility of exchange theft or fraud is a very real threat.
Binance is growing rapidly, becoming a serious player in the financial markets. The interest from regulators may be due to concerns about the company’s expansion and possible violations by the exchange. Recently, regulators in three jurisdictions — the Cayman Islands, Singapore, and Taiwan, reported violations by Binance.
And although some of the FUD around Binance is justified,, negative news related to the activities of Binance tend to appear during bear markets, multiplying the negative market sentiment. This can be seen as a means of using Binance as a way to generate FUD in the crypto market.
These examples of FUD — Chinese Twitter posts, the Iran mining ban, and Binance’s operations — ,increase pressure on cryptocurrencies and generate bearish market sentiment that may suggest a state of “fear, uncertainty, and doubt” is being artificially maintained on the market.
FUD, which may be of both natural and man-made sources, drastically influences the cryptocurrency market. It is an effective tool to manipulate the market, used at different levels and in different market conditions. To avoid becoming a victim of FUD, it is vital to carefully read any news sources and verify all information and data about the market. If market sentiment is amplified by negative news and the situation gets heated, you can expect sharp price fluctuations, which can lead to the capitulation of inexperienced market participants and further negative price action.