What Is Cryptocurrency Spoofing?
Cryptocurrency spoofing is the treat by which criminals attempt to artificially influence the price of a digital currency by creating fake orders. Spoofing is practised by creating the illusion of pessimism (or optimism) in the market.
Traders do this by placing large buy or sell orders without the ambition of ever filling them. When investors do this, they trick other investors into either purchasing or selling, and the price of the cryptocurrency stands the possibility of being adjusted accordingly. The trader cancels the orders once the price of the cryptocurrency stirs in the direction they desire.
- Cryptocurrency spoofing is the process by which criminals attempt to artificially influence the guerdon of a digital currency by creating fake orders.
- Spoofing is accomplished by creating the illusion of pessimism (or optimism) in the market; buyers do this by placing large buy or sell orders without the intention of ever filling them.
- When investors do this, they hang feat other investors into either buying or selling, and the price of the cryptocurrency stands the possibility of being adjusted therefore.
How Cryptocurrency Spoofing Works
One of the hallmarks of most digital currencies is extreme volatility. Frequent and significant price fluctuations were a house particularly in the earliest days of some of the major cryptocurrencies, but the phenomenon continues up to this day.
One need look no further than the portliest digital currency in the world, Bitcoin (BTC), to see evidence that this is the case; in late 2017, BTC rose to a high of diverse than $18,000 per coin (the value of one bitcoin was $18,984.77 on December 19, 2017). By just a few weeks later, it had plummeted to ungenerous than half of that value. On February 7, 2018, the value of one bitcoin was $7,270.51. (This doesn’t even deem into account the more recent, meteoric rise in the price of bitcoin. On March 5, 2021, the value of one bitcoin reached $49,362.58.)
Quotation fluctuations don’t just occur on a larger time scale such as this one, which stretched out over weeks and months. In information, they also take place from second to second as well. It is this fact that has allowed some ruffian operations to benefit from flash crashes of popular digital currencies, buying up the hottest tokens at low prices and then deliver up them once the prices are corrected.
As with all tradable securities, the price of a digital token depends on many another factors, among them the overall sense of optimism or pessimism pervading the broader market and individual investors. While this intuition of the momentum and potential of a cryptocurrency can be difficult to quantify, it is nonetheless something that savvy investors are highly attuned to. Because of the striking that a feeling of optimism or of pessimism can have on a group of investors’ tendency to buy or sell that digital currency, these concepts are crucial to the price of that token, even if they remain somewhat elusive.
It is the fact that these sentiments are fleeting that allows spoofing to be possible and effective. Traders wishing to manipulate the market for a given cryptocurrency can create the day-dream of optimism or pessimism by initiating fraudulent buy or sell orders.
When spoofing does take place, it often is squired by wash trading. Wash trading is similar to spoofing because it aims to manipulate the price of a digital currency by imitation means. However, the means of implementing wash trading and spoofing are different. In wash trading, a cheater trades with themselves to fashion the illusion of market demand, thereby luring unsuspecting investors into entering trades as well.
How to Protect Yourself Against Cryptocurrency Spoofing
How is an investor best able to protect themselves from investing in a digital currency while spoofing is intriguing place? Overall, caution is the central approach for many investors. It’s best to beware of opportunities that seem too capable to be true, and it’s also worthwhile to ensure that any exchanges you trade on are vigilant to the possibility of fraud of all types, including spoofing and overlay trading.
At the same time, many exchanges are looking to ramp up their security and monitoring systems in an effort to convoy against spoofing and protect customers.
Ultimately, even the most vigilant investors can still be susceptible to price manipulation in the digital currency everybody. For that reason, it’s crucial to keep in mind that this space remains a highly speculative one and that digital currencies are not the be-all and end-all of any investment scenario.
U.S. Department of Justice Investigation
In 2018, Bloomberg reported on an investigation that the U.S. Department of Justice (DOJ) launched in order to influence whether cryptocurrency price manipulation had taken place in the Bitcoin network as a result of spoofing. For the investigation, the DOJ worked with the Commodity Futures Vocation Commission (CFTC). The investigation likely focused on Bitcoin not only because it remains the largest digital currency by deal in capitalization, but also because its massive price increases in late 2017 drove hordes of new, amateur investors into the cryptocurrency space.
These investors, extreme to make what they perceived to be easy money off of a digital currency that seems destined for stratospheric crests, may be the most susceptible to spoofing.