Crypto Market Manipulations; Explained by Pooyan Ghamari

 

All markets are to a certain degree subjected to outside manipulations by the players in the market. However, the crypto market has seen time and again extremely volatile ups and downs. Assets that blow up too fast and at the same time digital currencies that plummet just as fast. In the following sections, we will take a look at his explanations regarding market manipulations.

 

Networks that Purport to be Decentralized but Are Not in Actuality

 

          Many digital currency networks in the market purport to be decentralized. So much so, that they claim to have decentralization as their most important feature. However, is that really true? Let’s take into account a cryptocurrency that came to be with the promise of being decentralized – Bitcoin.

          First, let’s consider node distribution, 50 percent of all the nodes in the network of Bitcoin are from only 3 countries, pointing to a heavy centralization of the nodes in the network. Furthermore, 75 percent of all the nodes are in only 10 countries. The same is true for the distribution of miners and even mining pools. We can see serious centralization with regard to countries where miners are located in and the case of mining pools, where the real block creation of the network takes place, the four biggest BTC mining pools in the world hold about 60 percent of the entire Bitcoin network.

          But the real issue has to do with the ownership of the asset itself. This is where the true meaning of decentralization must be found. If the majority of an asset is held by a small group of people, can it really be considered decentralized?

          When it comes to the distribution of Bitcoin itself, the people of US, Romania, Czech Republic, China, Spain, Poland, Turkey, Japan, Switzerland, and South Korea have the most amount of Bitcoin. Those who store a great amount of Bitcoin are referred to as Bitcoin whales, and these whales can affect the prices in the market and change them in their own favor. One of the worst things that these whales do is to pump and dump the price. Simply put, pump and dump means increasing the prices artificially and then after traders are attracted to the market, whales would rush in and sell the coins with a high price and then leave. This will result in serious loss to all buyers and serious benefit for the whales.

By reviewing the Bitcoin addresses and the amount of Bitcoin they hold, we can get to some interesting results.

Amount of Bitcoin	Number of Addresses	Percentage of Addresses	Entire Bitcoin in Addresses	Percentage of Bitcoin out of All Available Bitcoin
(0 - 0.001)	15231095	48.66%	2,996	0.02%
[0.001 - 0.01)	7585797	24.24%	30,707	0.17%
[0.01 - 0.1)	5367010	17.15%	173,651	0.94%
[0.1 - 1)	2295233	7.33%	724,732	3.92%
[1 - 10)	666683	2.13%	1,731,410	9.37%
[10 - 100)	137586	0.44%	4,450,163	24.09%
[100 - 1,000)	13854	0.04%	3,476,495	18.82%
[1,000 - 10,000)	2091	0.01%	5,212,095	28.22%
[10,000 - 100,000)	103	0%	2,421,617	13.11%
[100,000 - 1,000,000)	1	0%	247,502	1.34%

 

This table shows that for example %0.01 of Bitcoin holders (2195 out of 31,299,453 addresses) have more than the 42 percent of the available Bitcoin, and %0.05 of Bitcoin holders (16,049 out of 31,299,453 addresses) have more than 61 percent of all Bitcoins! On the other hand, %72 of Bitcoin holders (22,816,892 out of 31,299,453 addresses) have less than 2 percent of Bitcoins altogether. These numbers indicate that the most amount of Bitcoins are held by a very small minority and most people are working with a very small percentage of Bitcoins in the market.

          This huge centralization of power in the form of assets owned, does not bode well for the real users in the market. And unfortunately, Bitcoin is only an example, similar cases are numerous in the crypto market, from all the major coins to lesser known ones.

 

Crypto Market; Manipulated by Pump and Dump and Futures Contracts

 

          So there is the main issue. Lack of real decentralization. In fact, the mere lack of decentralization is not the major issue here. The real issue has to do with the fact that there is serious and deep centralization in the market by a small group of people.

          The fact that decentralization is not real means that most assets are being held by a limited group of people. They hold on to massive amounts of digital currencies.

          This small group of people holding on to most assets are in fact the big players in the market who are behind the most well-known and major cryptocurrency exchanges in the world. They dominate the market based on the various digital currency pairs that they have created. And with the help of the bots, they can easily fluctuate prices.

          How exactly? By pumping and then dumping the assets they own.

          This limited group has vastly extensive information about the market, since they control the majority of the assets, so by looking at whether an asset is closed long or closed short, they can see which side is weightier. Then they will pump that side.

          Through this pumping they will influence the market and are able to liquidate investors’ money easily.

          In this way they can control the prices of assets in the market. And since they control the prices, they can control the volume of the money that is entered into the market.

          This centralized group of people can sell their assets as if they are loaning money from the bank. They manipulate the market by pumping and dumping, and so when they eventually buy back their assets, it is as if they are paying back the loan to the bank.

          However, there is a crucial nuance here. They do not pay the same amount back to the bank. Not at all. They sold at a much higher price, and when the prices come down the sale volume will be lower for them. This is how they can hold on to most of the money.

          So, what happens to the market in this situation?

          Assets have been taken out of the market and will never return to be circulated. This is one of the main reason the market crashes. Because new money does not enter the market.

          Those who want to sell, they bring the prices down so that others won’t sell. And the next step is to make the prices go lower, so new investors can enter the market.

          All this pumping and dumping is not the end. This group of people also influence the market so heavily that they cause fluctuations in the prices all the way from 10 to even 40 percent.

          What does this all mean for the real users?

          Their money, their life savings, will eventually be liquidated through all this price manipulation by a small group of people.

 

This article is written by Pooyan Ghamari | Blockchain and Technology Visionary