Investors are always concerned about the markets being manipulated by entities or individuals having large holdings of a single asset. The same apprehension exists even in the crypto markets as ‘whales’ can influence the price movements through high-volume trades.
Spoofing operates on a similar principle. However, where whales operate at scale, spoofing works based on quantity. It’s a tactic used by traders to influence markets in their favour, so they can make profitable trades.
So, what exactly is crypto spoofing?
Crypto Spoofing:
Spoofing is done by deliberately placing several buy or sell orders with the knowledge that they will not be executed. Unrealistic orders feed the market with a false sense of supply or demand. This causes asset prices to react and when this happens, the trader cancels these unrealistic orders and executes profitable trades.
Spoofing is invariably done by deploying trading bots and algorithms that automate this process. When the order is about to be executed, the bot or algorithm cancels the order. However, spoofing in the equity and commodity markets is illegal in countries like the USA and the UK.
How spoofers manipulate the market:
Imagine that you are a spoofer and want to sell your XYZ tokens for a profit. Let’s say you bought 100 tokens at $1 apiece, and the price is currently hovering at $1.10. If you sold your tokens now, you would make $110 in total with $10 in profit. Now you decide to deploy an illegal bot and place several buy orders for $2, creating fake demand in the system.
The markets absorb this newfound information about the demand at $2, and the prices start rising. This happens because investors begin to buy the asset with the hope that they will make gains when prices rise as somebody out there is willing to pay more for the same asset. They are basically fuelling their own dreams.
The bolstered buying activity finally jacks up the price of the XYZ token to $2, which is when your fake buy order is set to be fulfilled. However, the automated bot recognises this and immediately cancels all your fake orders. At this time, you have an opportunity to sell your 100 tokens at $2 each and make $200. Your realised profits now become $100 instead of the previous $10.
Conversely, if you wanted to buy cheaper, your bot would be programmed to flood the marketplace with innumerable sell orders. This would induce panic in the system, and investors would start offloading their tokens. This is because investors would fear that their held XYZ tokens were not as valuable as they thought and therefore think about cutting their losses before prices go south.
The increased selling activity would add pressure to the price of the token, and it would commence its downward trajectory. Let’s say that the price of the XYZ token has now dropped from $1 to $0.8. Now you could buy 125 tokens for the same $100 instead of just 100 tokens.
The impact on investors:
Spoof orders are tough to spot and weed out as manipulators place them at critical support or resistance levels. A ‘support’ is that price level below which asset prices are not expected to fall. Similarly, a ‘resistance’ is that level above which prices are not expected to rise.
For investors, crypto spoofing can be pretty harmful. They see prices rising or falling and make hasty decisions per these movements. However, the effect of artificially induced supply or demand never lasts. As soon as the market realises that the investor sentiments were influenced and temporary, the trading activity fizzles out, and prices readjust themselves to their initial levels.
Investors caught up in the Fear-Of-Missing-Out (FOMO) and trying to ride the trend are eventually left bereft of funds.
Such misconduct is why thorough research is recommended for any asset class you wish to invest in. If the existence of the asset adds value to any business or sector, it has the potential to grow and sustain itself every time it touches new highs. These values will also ensure it recovers from sudden dips or market corrections.
Does spoofing always work?
Spoofing adds even more uncertainty to the already volatile crypto markets. In fact, spoofing is often followed by ‘wash trading,’ wherein traders collude and make voluminous buys and sells, creating an illusion of increased demand or supply.
However, sometimes prices are already rallying or plummeting depending on the increasing investor faith or fear, respectively. At times like this, spoof orders can get fulfilled quickly as price volatility remains high amid the buzz. For a spoofer, this is dangerous and may result in unprecedented losses.
(Edited by : Anand Singha)
