Just Like Stocks, Cryptocurrencies Have Risks

Although no one could predict the patterns in which cryptocurrencies move with the same kind of precision that we do with stocks, these assets do share certain common traits with equity investments.

First, like some stocks, cryptocurrencies are volatile and sensitive to any kind of related news (like how Bitcoin (available on Coinbase) plunged on news that China would ban the cryptocurrency). Second, both types of markets depend on demand — although the demand elasticities may vary here and there. Lastly and most importantly, both are susceptible to pump-and-dump schemes and manipulation, which is why we are seeing the values of some cryptocurrencies stagnating.

How Cryptocurrency Is Manipulated By Bots

This article will provide a guide to casual investors about how the value of a cryptocurrency could be manipulated and the perils of investing in it — and it’s a bit different compared to similar schemes involving stocks.

You may have noticed that the value of a cryptocurrency is changing constantly. Part of the reason that’s the case is a lot of the trading involving cryptocurrencies is actually done by automated bots. The same applies to stocks — there are some programs that buy or sell stocks automatically when triggered by certain events. No human involvement is required to do these transactions, at least not physically or directly.

The result is that the group of investors who programmed these bots could use these “tricks” to keep the price of an asset within a designated range. They could also artificially inflate, or “pump”, a coin’s price by drawing in unaware investors and then “dumping” the currency at a coordinated time — a classic pump-and-dump scheme.

Sure, the stock market has been infiltrated by bots as far back as three decades ago, eventually causing a market crash, but the machines of modern days are much more advanced and well-equipped than ever to make trades with the precision and optimization necessary to maximize a manipulator’s benefits.

Basically, it’s a way for some to win big and some to lose big.

Bot Trading Works Even Better On Cryptocurrency

What’s even better for manipulators is that the crypto market is unregulated, unlike the stock market, so there’s no governing body to clean up any mess potentially created by bots. This is why automated trading through bots is probably the most commonly used maneuver for large investors to benefit from cryptocurrencies right now.

Another problem lies in that fact that there are so many coins out there and more and more are popping up — any one of them could be part of a pump-and-dump scheme.

Investors should examine previous cases of such schemes to avoid potential losses. For instance, investors went big on NEO in November thinking that it could be the next Ethereum (available on Coinbase), but the coin eventually became a playground for bots, causing its price to drop by tenfold in a matter of seconds.

Others that have been soaring recently like PACCoin and Tron (available on Binance) are also showing such signs. The bigger the gains, the more we should evaluate the likelihood of a pump-and-dump happening.

Signs Investors Should Look Out For

Fake news
Suspect websites — lack of background information
Groups of people promoting a certain coin
Cryptocurrency always appreciating in value

Featured Image: depositphotos/spaxiax