Crypto Market Manipulations and the Reasons Behind Heavy Price Volatilities

Last Modified:6 Oct 2022 08:31:19
Crypto Market Manipulations and the Reasons Behind Heavy Price Volatilities

 

by Pooyan Ghamari

Founder & CEO | Counos Blockchain Industry

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          One of the biggest criticisms that is always levied against the crypto market has to do with extreme and heavy price volatilities that this market goes through from time to time.

          Other than the sudden crashes in the market or so-called bear markets that take over the market from time to time, we are all too familiar with the sudden changes in the prices of an asset even overnight. Extreme soaring or crashing, mostly crashing, as a result of which numerous investors, both micro and macro, lose their money.

          Unfortunately, such occurrences are not an exception in the crypto market. We encounter them more often that they clearly pass the threshold of being called incidental. They have become part of the market. A toxicity that has besmirched the name of digital currencies and has caused countless people losing their life savings.

          But what is the reason for such occurrences? More importantly, who is behind them and benefiting from the loss of investors?

 

Lack of Real Decentralization

          A major contributing factor to all the market manipulations that take place has to do with the lack of real decentralization of assets.

          Unlike what most digital currencies purport to be, their networks are not truly decentralized. 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 centralizations 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.

 

Market Limitations

          The extreme fluctuations in the prices of digital currencies can be explained by the fact that the market is a limited market. Where there should be real decentralization, we can clearly see heavy centralization.

          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.