Cryptocurrency Spoof Trading: How To Spot Fake Market Manipulation?
The current landscape that exists in cryptocurrency coin trading is as close to the wild west as any of us would feel comfortable being. By that, it's meant that there is a certain level of uncertainty that prevails between coin traders and the ‘Whales' that move between them.
As a result, the phenomenon of Cryptocurrency ‘Spoofing' has become an increasingly common strategy deployed by those who believe they can get away with it. And while this practice is frowned upon and outlawed on cryptocurrency exchanges, the same is definitely not true for individual traders, which run the risk of this more than anyone else.
But the best way to combat spoofing is by knowing what it is, how it works and how to avoid it, and these are exactly what this article hopes to show you.
What Is Spoofing?
While it sounds like a simplified name for what may be a highly technical scam, the name pertains to how simple the scam is. Spoofing refers to people placing fake orders from crypto traders with no intention of completing them.
So why place orders? It's in order to create the illusion of a market sentiment, so as not to raise suspicion from users. The party conducting the spoofing is doing this in order to alter cryptocurrency prices in a way that favors them. Whatever coins their market sentiment is influencing, it's believed that these are ones in which they have a stake in.
So why does this work in the world of cryptocurrency trading as opposed to exchanges? It's due to the fact that exchanges are gradually eradicating the anonymity of its users, while traders and spoofers are able to retain this secretive status, preventing them from being outed as scammers.
In the past, particularly in research regarding coin exchanges and their use of Tether, the USD backed cryptocurrency, that they have also been, to some capacity, encouraging some level of macro-economic spoofing. This is part of the reason that the authorities have been focusing their attention on these exchanges.
There are more weapons that crypto trading ‘whales' have in their scam arsenal in terms of tricking coin traders, however. Often, ‘Whales' combine this spoofing tactic with others such as stop-loss hunting and ‘Wash trading'.
The latter [Wash Trading], refers to someone that purchases their own cryptocurrency lots in order to falsely lead traders into thinking there's legitimate market activity.
How To Identify Cryptocurrency Spoofing
It can be a serious challenge for anyone to identify cryptocurrency spoofing whenever it happens, it's simply because these orders have nothing that differentiates them from other transactions, other than that they're removed shortly after. But there are some hints that someone is actively attempting to spoof by these cues.
The first being that the spoof may show up as a sale of a large block of cryptocurrency, whether buying or selling. Looking at the below figure, you can see one particular lot stands out, as no other sale has such a large quantity of crypto behind it.
In the wake of the trade, should the buy and sell walls collapse after it, there's a high probability that the individual was attempting to spoof. The reason for the collapse may have been either because the Spoofer's attempts had failed, or, they'd succeeded.
Where High-Frequency Bots Come In
With technology, you'd expect things like human scammers to become less effective right? Not true for the cryptocurrency world, as the advent of new, high through-put APIs and cryptocurrency trading bots, it's become far easier and far more profitable to commit spoofing scams.
The only difference is time and speed, both of which API's and trading bots have in spades.
This need for speed and perfect timing means that a great number of whales that have spoofed, use some form of trading bot in order to do it. These bots are literally able to ‘paint' order books, while establishing and withdrawing bids within milliseconds due to being able to react with the same speed to trends in the market.
The use of trading bots effectively makes the task of identifying spoofers all the more challenging, due to the fact that these bots can react far faster than any human can. In this situation, the best that can be done is to monitor the trading books during periods of high traffic and keep vigilant of any collapses in the buy and sell walls. If there are, then that might be an example of a spoofer at work.
Is There Anything Being Done In Order To Prevent This?
Currently, a lot of attention is being directed at cryptocurrency exchanges which, according to the Department of Justice in the US, have been participating in a certain level of spoofing in relation to the value of Bitcoin.
This is certainly a step in the right direction in preventing spoofing from being permitted on what are supposed to be ‘reputable' exchanges. The problem is that little of that same attention is being given to individual traders that may find themselves more susceptible to spoofing.
What's more, the US has little to no jurisdiction over those coin exchanges that have their operations based elsewhere. It hasn't stopped the DoJ from sending subpoenas to exchanges such as Bitfinex, a coin exchange based in the British Virgin Islands, however.
Cryptocurrency Spoof Trading Conclusion
Cryptocurrency markets, while seeing a meteoric rise to popularity, are still in dire need of regulation in order to protect individual users from malicious activities such as Spoofing on their platforms.
One consolation is that government regulatory agencies have stood up and taken notice of this illegal activity and gone so far as to begin legal proceedings in order to bring [some] them into line. Admirable? Yes but there's no way for them to be wholly successful in these proceedings.
Inevitably, personal intuition needs to be the regulatory framework for right now when it comes to preventing yourself from falling victim to scams like Spoofing.