The cryptocurrency sector has been around for more than 11 years now, but even so, this is considered a new and young industry.
Due to their innovative nature and potential for disruption, cryptocurrencies are still mostly feared by the leaders in traditional finance. As time goes by, this is slowly starting to change, but there are still plenty of issues that need to be sorted out.
The crypto sector is still developing, and at this time, no one can predict what it might look like once it reaches its final stage. As such, the crypto industry is still too young to be regulated, and with no regulations, a lot of illegal practices, such as market manipulation, are still quite strong and noticeable.
Market manipulation in crypto
Market manipulation in the crypto industry is fueled by greed, as the ability to control the way prices move leaves plenty of room for making a profit. This is a practice that is commonly used by a lot of bad actors, including some crypto whales — large coin holders; as well as less-than-reputable exchanges, hackers, and others.
However, while it is a practice that is often encountered, it is easy to confuse it with legal practices, such as market-making. In fact, market making is commonly confused with practices such as wash trading, while in reality, this couldn’t be further from the truth.
Wash trading, by definition, is buying and selling assets to and from yourself to artificially inflate an asset’s volume. Since cryptocurrencies have no real-world asset to keep their value in check (apart from stablecoins), their price is highly volatile.
Basically, a cryptocurrency is only worth as much as people believe it is worth. So, if traders see that a certain coin has huge trading volume, they would assume that it has worth, and that owning it holds potential for earning gains.
This leads to a chain reaction where more traders would start buying the said cryptocurrency, thus increasing its volume and price even further. Then, the person who started manipulating the market would end up selling a huge portion of their own funds, which would earn them a major profit, but it would also crash the price of the coin.
As a result, everyone else who invested in the coin would lose money as the price fell.
So, what is market-making, then?
Market making is a completely different practice that is neither new nor illegal. It is present in traditional markets too, and there is no regulation that classifies it as an illegal action.
There are companies that provide market-making services, such as Kairon Labs, that offers three different services for its clients:
- Market making
- Helping with exchange listings
- Advisory on go-to market strategies
The company’s founder, Jens Willemen, recently spoke about market-making in an attempt to clear out some misunderstandings and misconceptions.
He said: “Market making is all about consistently quoting prices on both sides of the order book to create liquidity. Market makers do not trade directionally and thus don’t care in which way the market is going. For a market maker, profit is derived from covering the spread. Market manipulation is directional in nature because it implies that the price of an asset is manipulated up or down.”
With no regulations currently guiding the crypto industry, there are no clearly stated dos and donts in the sector. However, Kairon Labs, as well as others like it, try to self-regulate and stick to sensible strategies that should not be deemed illegal, even when the official regulations do arrive.
The company has adequate KYC and AML procedures, it creates real liquidity, and minimizes slippage for those looking to exit or enter positions, and more.
In the end, it is difficult to recognize market manipulations, otherwise, they would have been seen through and their effects wouldn’t be as harming. But, with the crypto industry’s volatility, lack of regulatory clarity, and generally young age — everyone is waiting for great opportunities, and no one wishes to be left behind.
Some practices, such as market-making, can help make projects great. Market manipulation, on the other hand, can completely ruin projects that otherwise have great potential. Because of that, it is important to differentiate the two, and support the one that can help the crypto industry grow.