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Unlike traditional financial markets, cryptocurrency exchanges are largely unregulated and virtually every Bitcoin (BTC) and cryptocurrency trader is familiar with various stories detailing the degree of manipulation of certain aspects of price action on the cryptocurrency market.
Despite this, many traders believe there is little that can be done to avoid the whims of whales and unethical market makers who shape the market to their advantage. Strategies such as spoofing and hidden orders are common obfuscation tactics experienced traders use to influence cryptocurrency prices.
Keeping track of manipulator moves is a game of cat and mouse, but there are strategies retail-sized traders can use to get around them. Let’s take a look at three strategies whales use and how a trader can avoid being duped by them.
Hidden orders
Hidden orders are used to place large undetected offers and requests in the trade order register. They allow automatic replenishment (iceberg) after each filling, thus avoiding detection on the order books of the bags.
Order example of an iceberg. Source: OKEx
This strategy is the opposite of a buy / sell wall, where a trader fakes the market by placing large orders with no intention of executing them. Hidden orders typically carry large quantities and are readily available to anyone who uses them in most cryptocurrency exchanges.
Most buy and sell walls are not meant to be built; they are meant to represent a high flow, but are usually canceled by the time the market reaches their levels. Very few whales would self-signal the flow before running it.
An easy way to avoid being tricked by a hidden order is to not monitor the order book like a hawk. The less you rely on measuring the depth of your order book, the better. Most exchanges allow traders to minimize their order book from viewing the trading screen.
Some traders see order book flow as an essential part of their trading routine and more sophisticated monitoring programs are readily available. It is worth noting that market makers and algorithmic traders know how to manipulate those too.
Wash out trading by using multiple exchanges
Whales sometimes fool the general public by posting large trades on heavily monitored exchanges while simultaneously doing the opposite on a smaller one. Professional traders might also do this to profit from funding rate arbitrage, wash out trading, but sometimes they simply aim to hide their actual flow.
Market makers are generally paid to bring the flow to small venues and benefit from increasing their volumes on more significant exchanges in exchange for lower trading fees. Although this strategy is legal, it inflates volumes and is often used to fool traders into a non-existent buying and selling flow.
Traders looking to avoid these tactics can ignore large individual trades and focus on longer price trends to avoid being misled.
Forced liquidation
As crazy as it may sound, sometimes a whale will raise prices to liquidate their exposure. This is particularly true when the market is already over-indebted, a scenario that can be measured by a significant funding rate imbalance. To benefit from this tactic, whales simply open an opposite position of a similar size.
Forcing a liquidation often leads to a cascade of similar order flows and while most short sellers will suffer and the whale will have its large short positions liquidated, the entity responsible for the forced liquidation also increases earnings on previous long contracts. .
There is no way to predict whether an entity is building this type of strategy, but there is an important indicator that you can monitor to avoid being on the wrong side of such moves.
BTC futures contracts by expiration date. Source: Skew
Comparing the premium on long-term contracts with perpetual futures provides an unbiased tool that helps evaluate the positions of professional traders. A neutral market should show an ascending curve, ranging from a premium of $ 50 to $ 150, which equates to 0.5-1.5 percent depending on the maturity.
A flat or inverted curve signals that whales are heavily distorted by bearish sentiment. On the other hand, any premium above 1% for contracts that expire within three months is a bullish indicator.
Main dishes
As stated earlier, professional traders go to great lengths to avoid getting caught. They do the exact opposite when they intend to use buy and sell walls to benefit from the resulting FUD and FOMO.
Unfortunately, there is no 100% verifiable and transparent indicator that can track manipulative tactics, especially in a market that has near zero commissions for large traders.
As markets continue to grow, but also remain beyond the reach of financial regulators, obfuscation and spoofing strategies could become more widely used.
As a general rule, retail traders should learn to take a longer term view of cryptocurrency price action instead of looking at charts measured in minutes because a bird’s eye view provides a more general sense of trend and trend. what is happening in the market.
The views and opinions expressed herein are solely those of author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your research when making a decision.
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