Who benefits in cryptotrading on unregulated market

1 Year ago / Articles

In traditional security markets, participants trade in a regulated environment where investors are offered the same access to public information by company shareholders, while various financial establishments strictly watch the compliance with all regulations. However, the young and volatile cryptocurrency market abides by completely different rules, and players’ actions remain outside of the regulated environment in most cases. We determined which kinds of cryptocurrency investors and traders make the highest profits in the current cryptocurrency market.


Insider Trading Among Traders

Regulation # 10b5–1 of the Securities and Exchange Commission (SEC) on unscrupulous market practices defines insider trading as ‘any transactions involving securities by individuals with access to significant non-public information’. SEC considers insider trading to be a manipulative trading method, using which contradicts the government regulations in regard to the security market, which is why this kind of trading is illegal for almost all traditional markets. 

But when it comes to the unregulated (for now) cryptocurrency market, the more popular trading this asset becomes, the more frequent are the incidents of insider trading, including the occurrences among big players. Below are the most known examples of insider trading among trading platforms, crypto project companies, and even financial regulators.


Employees of Coinbase and Bitcoin Cash 

On December 19, 2017, one of the largest cryptocurrency exchanges in the market, Coinbase from California, announced that it’s going to add a new cryptocurrency, Bitcoin Cash, to the listing. 

This cryptocurrency appeared earlier in August of 2017 as a result of the hard-fork of the Bitcoin network. Members of the crypto community noticed that the price and the volume of trading Bitcoin Cash increased sharply shortly before the official announcement of the cryptocurrency exchange to add it to the listing. If one coin costs about $1,850 on December 18, by the end of December 19, the rate of Bitcoin Cash rocketed by 126% and reached $4,182.


GDAX, another cryptocurrency exchange, also announced adding Bitcoin Cash. On December 20, the cryptocurrency rate on this exchange peaked at $9,500.


The result of such a sharp volatility leap of a relatively new cryptocurrency was that both platforms stopped selling Bitcoin Cash over fears that it was caused by the insider trading among the employees of the cryptocurrency exchanges. The CEO of Coinbase, Brian Armstrong, wrote about it in the official company blog and mentioned that even though the company policy prohibits employees from trading cryptocurrencies using significant non-public information, Coinbase would conduct an internal investigation of the situation to find evidence of insider trading.

On March 2, 2018, a class action lawsuit against Coinbase and its employees was initiated on behalf of all cryptocurrency exchange users who had opened orders for buying and selling Bitcoin Cash from the 19th to the 21th of December and suffered financial losses. Plaintiff, represented by the cryptocurrency exchange user Jeffrey Hansen, accuses the platform of artificially high prices for Bitcoin Cash.


Skycoin Team

On June 17, 2018, an audio recording of the CEO and founder of Skycoin known as Synth was published on Twitter. He says that some team members speculate the price of the project cryptocurrency and that he is aware of the incidents of insider trading among them.

 The audio recording of Synth admitting that he knows about the lasting insider trading among the members of his team, the administrator of his Telegram channel (Sudo), and a private group specializing in insider trading.

Throughout the recording, Synth is discussing the sharp increase in the rate of the SKY cryptocurrency that had occurred on May 24 before the coin was added to the listing of Binance, the largest cryptocurrency exchange, with Sudo, the administrator of a Telegram channel. According to the project manager, such a growth was cause by the insider trading among the team members, as well as by the activity of the pump and dump groups members who speculated the price of SKY for the sake of deducing maximum profit from third party investors. As a result, the price of the cryptocurrency grew from $9 to $38. However, after the recording was published, its rate began to plummet, and now one SKY coin costs $6.24.

The project and the cryptocurrency were launched in 2013 under the same name for the purpose of supporting ‘the basic values’ of Bitcoin, which was originally created by Satoshi Nakamoto as the first cryptocurrency in the world. To do that, the project is developing its own ecosystem that offers Skywire, a user internet, a messenger, a social network, and VPN services. 

If the information about the insider trading turns out to be true, this case will be investigated by SEC, which will lead to unfavourable results both for the project and the traders taking part in the unlawful insider trading.


South Korean Financial Regulators

In January 2018, the Financial Supervision Service of South Korea (FSS) reported an investigation of the cases of insider cryptocurrency trading among its own employees. According to Korea TImes, the CEO of FSS, Choi Heng-sik admitted that before the government officially had announced stricter rules for local cryptocurrency exchanges, the employees of FSS had been actively selling all cryptocurrency they owed, which means that insider trading had taken place.

Nevertheless, currently, the financial regulator of the country does not consider digital assets to be a security, a currency, or a financial asset, which is why cryptocurrency trading is not covered by the law prohibiting government workers from trading at exchanges. This is why insider cryptocurrency trading is not prohibited, even though the fact of unlawful usage of insider information can cause sanctions for FSS employees in the future.


Whale Investors

Every member of the cryptocurrency market knows about whales, large cryptocurrency investors. Often enough, its the whales who are accused of manipulating the cryptocurrency market and adjusting its course according to their interests. However, very few can boast on knowing such investors personally. Personal data of whales and their identities are strictly confidential. Nevertheless, their existence is not questioned, there is even a number of scientific researches of the cryptocurrency market proving it.

For example, in May of 2018, the Journal of Monetary Economics published an article devoted to the sharp increase of the Bitcoin rate in 2013. According to analytics, only one member of the cryptocurrency market conditioned the growth of the first cryptocurrency from $150 to $1,000 at the time. On June 13, 2018, the Financial Department team of the University of Texas at Austin presented a scientific paper that connects the speculation of the price of Bitcoin and the movement of a large sum of USDT stable-coins.

  • According to  Anthony S, the founder of the cryptocurrency investment platform hodbolt, most often, the whales apply one of the four schemes to manipulate the cryptocurrency market, which makes other players lose their investments. 


Hunting For Stop Loss Orders

According to this manipulation scheme, the whales deliberately influence the price of a digital asset and reduce it. Hence, the traders who have set stop loss orders (an order for the broker to close the deal to limit the losses when a certain price level is reached) lose their cryptocurrencies which become available to the whales at a lower price.

This strategy works best for the assets with a low trading volume and small order books. When the amount of coins is sufficient, the whales can lower the price of such assets, which causes a chain reaction of orders for selling at the market price.

Let’s see how this manipulation looks in the market using an example. Imagine a scenario, in which:

  •  There is a coin traded at $150;
  •  There are orders for purchasing it when the coin costs between $110 and $150, their total is 10 BTC;
  •  There are also orders for purchasing it when the coin costs between $90 and $110, their total is 10 BTC;

The whales aim at lowering the price of the coin and making it drop to $100 or below, which will serve as a logical psychological barrier for some traders who have set stop loss orders at this level. This goal can be reached by doing the following:

  •  To lower the price from $150 to $110, they place a selling order with the total of 10 BTC.
  •  Asset investors will sell their shares, especially if there is permanent whale pressure for selling.
  •  As soon as the price bottoms at $100, brokers represented by cryptocurrency exchanges launch stop loss orders. This will ensure further asset price reduction.
  •  The newly sold coins are purchased by the whale for $90 or less.
  •  As soon as the price improves and restores its level, the whales sell all their coins.


 Hunting for Short and Long Positions

This strategy requires the involvement of a cryptocurrency exchange supporting margin trading. There are two main types of margin trading,  the long position, or dealing for a rise, when traders bet that the price of a crypto asset will increase, an the long position, or dealing for a fall, when the price of a cryptocurrency is expected to decrease. Let’s see how this manipulation looks in the market through the example of the Bitmex cryptocurrency exchange and Bitcoin:

  •  A trader sets a long position with a $100 margin (amount of guarantee) and a 100:1 leverage, which makes $10,000.
  •  The price of bankruptcy for such a deal is $9,900 (market price at $10,000 minus the margin).
  •  However, Bitmex eliminates the deal forcibly if its price drops to $9,950, which is only $50 lower (0.5%) than the entry price.
  •  When the market price of the deal reaches the settlement mark, Bitmex forcibly closes it at th bankruptcy price, $9,900.
  •  When a settlement occurs, traders lose all margin and pay higher commissions given the leverage of 100:1.


Hence, for the settlement to occur, a small price change in the wrong direction is required. As a result, traders lose margin and pay high commissions. Since currency exchanges are well aware of the price required to launch the deal settlement, they have both the possibility and the financial stimulus to artificially manipulate asset prices through trading bots, for example.



Noteworthy, there is no evidence proving that Bitmex deliberately participates in such manipulation schemes. However, Anthony S thinks it’s suspicious that the periods of low trading volumes alternate with rapid volume leaps. As a result of such harsh changes, traders are left with nothing but high commissions.





Spoofing is another fraud and manipulation strategy in the cryptocurrency market. It involves placing orders significantly higher or lower in price than the current price and withdrawing them before they are removed. The goal of spoofing is confusing traders by giving them false signals.

Here’s how it works in practice:

  •  A spoofer places a large buying order to set off a bull signal in the market.
  •  At the same time, the spoofer places real orders of a smaller size which allows to sell or buy coins expensively.
  •  After a few of the smaller orders are completed, the spoofer withdraws the large buying order from the trade before the deal is over.
  •  Once the asset price starts growing as the result of the bull signal, the spoofer sells his or her coins at a higher price.

This scheme can work both ways.


As for the well-known cases of spoofing, there is an example of an anonymous trader nicknamed ‘Spoofy’ who was placing orders for different crypto assets at Bitmex with the total sum over $50 million. He or she was fooling other market participants who thought that the price of a particular asset is rising because of the big order, while there were no deals. As soon as the price would reach the mark required by the trader, he or she would sell their shares and receive significant profit.


 Wash Trading

This strategy is called wash trading and involves a whale making deals with him or herself, closing buying and selling orders. This happens in order to:

  •  Increase the trading volume artificially to launch the bull signal; 
  •  To manipulate the price in the market with smaller order books.

Wash trading requires a few steps:

  •  A deal is made for selling or buying an asset.
  •  A similar deal for the same sum and volume is created.
  •  The trade occurs within the scope of the orders of one user.

This type of manipulation is very hard to notice, let alone prove that it is fraud since it looks just like a normal deal.


Organizers of Pump and Dump Groups

Numerous articles are devoted to the danger of participating in pump and dump groups. This manipulation scheme was first used in the American stock market long before cryptocurrencies appeared. The principle of this scheme is rather simple, its participants try to make the price of an asset higher artificially, intending to sell it beneficially.

Actions of pump and dump groups can be divided into four key steps:


  1.  Pre-pump: the organizers of the scheme choose and altcoin that the group will pump. Most often, coins with low market capitalization are used. After that, the organizers of the pump buy the asset in small shares over a period of time to avoid a sharp increase of the price.
  2.  The first pump wave: afterwards, a signal about the start of the first pump wave is sent to closed groups. Promoting participants of these groups start buying the altcoin and making its quotes higher.
  3.  The second pump wave: when the rate of the altcoin goes up, group promoters launch the second pump wave, third party investors take part in it. To achieve this, promoters spread information about a ‘promising’ altcoin through various sources, for example, at BitcoinTalk or Reddit, in popular social networks. Telegram channels also play an important part. Signals about the start of a pump at different currency exchange platforms are sent there. Their goal is to attract third party investors and increase the demand for the cryptocurrency.
  4.  Dump: if the campaign is successful, third party investors start buying the altcoin, while the organizers and participants of closed groups start selling their coins bit by bit. However, once the rate of the altcoin stops to grow, the pump turns into dump, and the remaining coins are sold rapidly. 

The organizers of pump and dump groups receive the most profit from third-party investors and actions of the promoting participants, when this scheme is applied. Moreover, they are also the owners of the closed channels used to pass on the signals about the upcoming manipulation stages to other participants. Participants often have to pay high entrance fee for joining such channels and closed communities.


Only registered users can post a new comment. You are welcome, Log in.

Comments (0)
    No Comments