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"How Markets are Manipulated" | Crypto Uncovered Ep. 1

Jun 1, 2018

This video covers "How Crypto Markets are Manipulated"

If you are as passioned on Bitcoin, as we are, this is an eye opener. A quality video for the crypto world.

Do you think the markets are being manipulated to a far greater extent this year than ever before? Because if it keeps increasing, can this "moon" everyone keeps talking about ever come to pass?

Watch this video and you'll understand that the best strategy when investing in Bitcoin is to buy and hold (HODL).

Check out this YouTube channel

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hi everyone my name is Nicolas Merton and today I want to spend some time to kick-start a new series here on the data - channel where we focus in on specific topics that people tend not to talk about or cover in the traditional crypto media space being a content creator in the space I feel that I should to the best of my ability give you all behind the scenes look into what's going on in the cryptocurrency space and along with that give you the tools and mindset to interpret and understand what's happening in current markets and what topic could be more valuable in understanding markets than understanding market manipulation I stand in the belief that many people share the crypto currencies and blockchain technology are going to lead towards a new era of freedom for individuals across the world but freedom without oversight can lead to some serious issues at least in a sense of markets let's go ahead and spend some time today to talk about the varying levels of manipulation you can find in crypto currency markets for the first few forms of manipulation we'll be discussing I like to classify them as category 1 manipulation it's important to note that means a market manipulation under category 1 tend to be more well known or obvious to average investors and traders along with that as well even though some of these methods are considered illegal under securities law some of them are essential parts of any given market however they can leave dire consequences for misconceptions along with their activities the first 3 forms of market manipulation we'll be discussing are pump and docks market makers and algorithms let's go ahead and talk a little bit about what makes up a pump and dump first and foremost pump and dumps or P and DS as they're commonly referred to tend to be the most common method of market manipulation we find in crypto currencies and they prion the weakest and smallest investors speculating on the price action of crypto currencies there are a few steps that must be conducted in order to successfully execute a pump and dump the first step has to do with gathering speculators traders and investors to come in all at once a specific designated time that's been agreed upon in order to purchase up the cryptocurrency see and prop up the price this leads on to step two where new speculators will come in that are outside of the pump-and-dump group due to the recent price action that they've seen in the market with the related cryptocurrency by bringing in new liquidity this is giving an exit point for the pumpers to execute and sell their positions on a higher level and as the old saying goes what comes up must come down as the initial investors from the pump-and-dump group begin to sell their position we start to see a matching decline in price action in some cases this can drop the price all the way down to the initial bottom of the pump but in some cases it can leave it somewhere in the midway point this shows that in most cases new liquidity or new speculators have come in to acquire the cryptocurrency at a higher price providing an opportunity for the initial pumpers to sell some of their cryptocurrency at a higher price however the sad realization comes in for the new speculators when they realize that the volume or liquidity has dried up leaving them at the only opportunity to continue dropping their cryptocurrency as the price picks up momentum to the downside this is just one of many daily examples that are found within the cryptocurrency space from coordinated pump-and-dump groups it's important to note the pumping and dumping is not only an illegal activity and traditional and cryptocurrency markets but along with that as well in many cases if you participate in the pump and dump you can end up getting burnt in practically all cases there is a sense of hierarchy whereas the higher ups are guaranteed to benefit from the activity whereas in many cases the bottom feeders can be used and manipulated into buying and selling later than the initial investors the next topic we'll talk about in regards to market manipulation has to do with something known as market making this is done by people who are known as market makers and their job is as follows to make a market but to put this in simple English this basically means that a high-level trader someone with a lot of liquidity or in this case a lot of Bitcoin or aetherium will go through and start trading a specific cryptocurrency relatively back and forth it's important to state that in most cases market making isn't illegal and serves important functions in regards to any given market especially something like crypto currencies the function of a market maker is to bring liquidity into a market that is seeing high enough levels of volume to have steady trading or investing the method of market making is commonly found but not limited to newly launched I cos that hit exchange the reason that they utilized market making is in order to bring liquidity to their newly launched cryptocurrency that might be on a limited amount of exchanges or might be experiencing the issue of having a very spread out order book and this is where the market maker makes his profit not only will the market maker charge fees and commissions for the risky zon taking with his capital but as he continues to acquire more and more the cryptocurrency and as liquidity comes into the market he will use the benefit of the spread between the bid and the ask the bid being the price that he purchased as well as the ask where he's going to be selling it to new coming investors now it's important to state that market makers aren't bad apples and they're serving a functioning role within markets to make them liquid and tradable however at the same time they can leave symptoms behind that give off the impression that institutional investors or larger investors are getting involved in any given cryptocurrency so I recommend to all of you to look out for mark and maker volume it's not too hard to spot most of the time and in fact not only does it tend to come out of nowhere with no major increase in price action but along with that as well the volume bars tend to be very similar on a daily basis and last within category one it's time to talk about algorithms and the difference between general trading algorithms and hyper frequency trading many people still operate under the misconception that markets are generally run by human participation however the facts tell another story and we can see that in traditional markets there's been a recent dominance of algorithms or BOTS trading back different types of assets and currencies and the same is going to be for crypto currencies even though it still remains as a relatively human market that doesn't mean we should ignore the unhuman aspect of it let's go ahead and focus in on basic trading algorithms first trading algorithms at their core are simply programs that have been coded in languages like Python to set an execution of an action off of certain rules or standards we could think of this in a simple if-then scenario if XYZ currency hits a specific price then buy or sell and if you continue to research just how complex you can get with building algorithms you can start to understand why they're so important and play a massive role in modern-day markets these algorithmic traders very similar to that of professional day traders or swing traders look for certain standards in the market such as previous price history and applying a strategy of when to sell whether it goes the way they want towards the profit zone or towards the downside in which they want to avoid at all costs and at the end of the day the programmer who's behind the bot hopes that he'll be able to have more winning trades than losing and provide a nice profit from the funds that he's provided to the trading algorithm but it's important to note that algorithms offer a set of benefits that humans simply can't live up to including the ability to cut out all emotion and follow strict rules as well as being able to trade at a very high frequency speaking of high frequency trading let's go ahead and talk about what high frequency trading really is and what its implementations all markets really are to put it simple high frequency trading operates much like that of the bots we were discussing earlier off of predetermined algorithms without any human intervention however unlike most trading algorithms high frequency trading puts a high emphasis not only on following a certain set of rules and objectives but also beating others to the market at a very high frequency and speed in order to execute transactions before others they do this in order to beat out any other high-frequency traders who are trying to do the exact same thing they are so what exactly is the objective of a high-frequency trader the main objective of a high-frequency trader is to gain information on current price action as well as open orders before anyone else can the shocking reality about all of this is that it happens within milliseconds if not microseconds the reason high-frequency traders need to do this is in order to beat out competition who are looking for in efficiencies or opportunities within given markets let's go ahead through a hypothetical situation of high-frequency trading inside cryptocurrency markets to get a better understanding as to how all this could look let's say for example that Bitcoin has been on to climb for the past few hours in his steadfast towards the big even level of $8,000 across the board most investors and traders know that at 8,000 it's not only probably a good opportunity to buy but that most humans tend to want to buy around eight thousand dollars retail and institutional investors want to buy in we have algorithms represented at the bottom right who know this as well as the high-frequency trading bots in the middle now as the price drops below 8,000 there lies an opportunity to get into Bitcoin below 8,000 and as the price rebounds we have to ask ourselves who was the one who was able to buy in that situation while it was no other than the high-frequency trader because they had the quickest connection to clock in the buy order on the exchange this can be through a variety of different methods whether it be location internet connection etc but thanks to this higher connection they were able to acquire Bitcoin at a lower price than other investors thereby providing the opportunity to resell that Bitcoin within a fraction of seconds or minutes back at a higher price for a profit now the profit might not seem like much at first but given the fact that the time to execution for trade was so small and the fact that the algorithm can go about doing multiple trades throughout the day these small profits can truly start to add up and provide a wonderful opportunity for those who can take advantage of the time delay between other participants in the market now it's important to state that even though hyper frequency trading is a controversial and powerful means of trading that at the moment in crypto currency markets there isn't too much hyper frequency trading going on and in fact it's nowhere close to where it is in traditional markets however with large players like coinbase providing low latency service to hyper frequency traders there's no doubt that in the next few months and years it's going to become more and more prevalent now that we've gone over basic forms of market manipulation like pump and dumps as well as market participants who can lead to fluctuations and price volume and market orders let's go ahead and spend some time to talk about forms of market manipulation that are less known by average traders and investors and can lead to serious impacts on markets in category two we're gonna be talking about two forms of market manipulation that are not only commonly found but are technically illegal under US securities law the two methods of market manipulation we're going to be discussing about are washed trading and spoofing let's go ahead and take a look first at wash trading in what it entails simply put the method of wash trading is a form of market manipulation when an investor or two coordinated investors simultaneously sell and buy the same financial instruments to create misleading artificial activity in the marketplace now some might look at watch trading and ask how its market manipulation and also who's the gain in the process well it depends on who's doing the wash trading it can be used for a variety of different reasons and benefits in traditional markets the common users of wash Trading or generally brokers aiming to generate more Commission fees however as we step into crypto markets we see that wash trading is being used for a variety of different reasons in use cases the biggest example of washed trading within crypto currencies is most likely found within the exchanges where many have not only been caught but many others have been accused of utilizing washed trading to push up high artificial levels of volume in order to attract investors this is why it gets the label of wash trading because the same exact asset is being exchanged between one individual between two different accounts or to select parties who have coordinated the wash trade mitigating practically any risk in the process wash trading can also be used to manipulate price or lead to misconceptions and how a market is evaluating an underlying currency or asset a good example of this was when bit the next a well-known critic of the popular exchange bit Phoenix called out an example of washed reading that was going on on Krakken which held the only USD tether to u.s. dollar pairing for the entire cryptocurrency so why would this be seen as washed trading in fact why would USD tether want to wash trade it's only dollar pair many would argue that whoever was conducting the washed trading was doing it in order to give off the illusion that the market was continuously evaluating USD tether at at exactly one dollar but it's important to note that this isn't an anomaly in crypto markets and that in many cases weekly even daily we can spot forms of washed trading happening without any oversight or regulation on the exchanges where it's being conducted now that we understand what washed reading is let's go ahead and take a look at the second form of market manipulation in category 2 known as spoofing the objective of spoofing can be to leave a bid or ask or an order to buy or sell that's not meant to execute on the open exchange spoofing can be used in a variety of ways to lead to misconceptions or manipulation within the order book but the most common example that we tend to see in crypto markets is when a very large investor with a lot of Bitcoin cash or other cryptocurrency usually a whale why that means though is about setting a limit or ask order that's never meant to be fulfilled however gives off the perception that there's a large amount of investors that are set to either buy or sell at a given price providing a level of support or resistance in the perception of other investors the reason why this form of market manipulation is so powerful yet so deadly at many times is because it gives us the illusion that we know what the larger players are going to do we can obviously see their orders in the order book right so that means that they're going to either sell or buy at those given orders but if the large institutional whale can convince enough people to buy or sell before his order in the market prices having steadfast or disorder on the book he can use tools such as high frequency trading to guarantee that his order does not get fulfilled and that he can cancel it before it's too late this instantly removes the buy or sell wall that was support or resistance for the underlying cryptocurrency and can leave a lot of investors burnt off of the misconception that there was institutions ready to buy or sell spoofing is a daily phenomena within the cryptocurrency space this is due to the fact that there's a lack of regulation or oversight on these exchanges and because of this spoofing can be found on not only a variety of exchanges but also in a variety of crypto currencies outside of Bitcoin it's important to note that the example presented earlier for spoofing is just one of many means of manipulation that spoofing can provide another common use case of spoofing can be to set market orders for buys or sells for Bitcoin for example and start to slowly cancel them out giving the perception that people are either selling into the orders or buying into the orders the important takeaway from all this is to take the order book with a grain of salt and understand clearly that it can be manipulated by Wales and large investors to give off false perceptions in the market that's going to be it for this episode I'll surely beer eat a Killeen the topic of market manipulation in the future as well as some other big topics that I've promised to cover such as the developments and OTC markets as well as the ICO space if you want to see a topic covered please leave it down below in the comments I love getting your feedback and I'd like to know what you all think about this type of series if you want to see more of this content or if it's just not for you either way thank you all so much for watching and I hope you found the information that I presented as valuable and something that you can take away to become a better trader better investor and a better spotter of market manipulation.

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