Some analysts have indicated that the drop in price of BTC on Saturday Dec. 4, 2021, was contributed to in part by the stop-losses being triggered from leveraged positions, resulting in massive liquidations.
The stop losses may have been the result of whale market manipulation, including stop hunting manipulation, which can be observed by looking at the order books of different exchanges to ascertain high sell walls, and also sources like Coingecko.
Whales sometimes engage in market manipulation to flush small traders out of the market.
Leveraged trading is when a cryptocurrency exchange loans funds to a trader to create long, or short-term positions. A trader can invest $50 in BTC, borrow $450 from an exchange for trading. The trader is then said to have adopted a leveraged position. If the bitcoin price goes down such that the trader loses his initial deposit, the exchange will liquidate the $450 to preserve their capital, and the trader’s position is lost.
What Is Stop Hunting?
According to Binance, market manipulation involves activities that contrive an asset’s price and give a false picture of market behavior. Market manipulation can take on many forms, from wash trading to stop hunting, whale wall spoofing, and pump and dump schemes. The fact that cryptocurrency markets are largely unregulated makes them susceptible to manipulation by a few bad actors.
Wash trading is when a person or exchange buys and sells a cryptocurrency in quick succession to inflate the total volume traded, which attracts attention from investors, whose subsequent activity creates further misleading price behavior.
Whales sometimes set significant sell orders to influence other investors to sell. Then when the price of the cryptocurrency decreases due to large sell-offs, the whales remove their sell orders from order books and purchase more crypto at a lower price. This is called whale wall spoofing.
Pump and dump schemes involve individuals colluding to buy small market-cap altcoins and sell them once they gain traction from investors.
Whales can create an array of sell orders to reduce the price of a coin, to trigger stop-loss (order to buy or sell a stock when it reaches a certain price, placed with a broker) positions that investors have set, causing an automated sell-off, which allows whales to buy the asset again, this time more cheaply, causing the market to recover.
This phenomenon is called stop-hunting, and can be linked to any type of whale manipulation. The investors usually use technical analysis to determine their stop-loss positions.
Ways To Avoid Stop Hunting
Evidence of stop hunting manipulation can be gleaned by examining order books. But because order books contain transient information, it is wise to look at other data. Verify an order book’s asset’s data from more than one source, like Coingecko or Coinmarketcap. Only base decisions on historic trends, not short-term movements. Decentralized exchanges bypass the order book system, but present other risks to the trader.
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