Web3.0 markets and traditional financial markets are both derived from the same financial logic, and therefore, are also subject to market manipulation. Many manipulation methods that plague stocks and other financial products, such as wash sales, panic-mongering, and pump-and-dump, also appear in the Web3.0 market. It is worth noting that due to the decentralized nature of the Web3.0 market and the lack of regulatory rules, these manipulation behaviors are more likely to succeed. Manipulators are behind the scenes and use a variety of means to manipulate prices for their own profit.

This article will explore common manipulation methods in the Web3.0 market and analyze how these behaviors affect the entire industry. It is hoped that investors can better understand and identify market manipulation behaviors and protect their assets.

Common manipulation methods in the Web3.0 market

Wash Trading

Wash trading is one of the most notorious market manipulation methods. Manipulators exaggerate the trading of digital assets by repeatedly buying and selling the same asset to create the illusion of high trading volume. In this way, they mislead investors into believing that the asset has high liquidity or value.

In 2019, a report by Bitwise Asset Management[1] stated that approximately 95% of Bitcoin trading volume on unregulated exchanges was fabricated through wash trading. This figure suggests that a large portion of digital asset trading activity may be driven by market manipulation rather than real market demand.

Spoofing

Spoofing occurs when a trader places one or more buy or sell orders for a particular asset (usually when all of their orders together account for a large portion of the total pending order book) to create the illusion of demand or supply, thereby manipulating market depth.

In other words, spoofing means that manipulators place large buy and sell orders in the market, but have no intention of executing them, in order to create the illusion of supply and demand. Through these false signals, manipulators can cause prices to fluctuate and profit from market reactions.

Bear Raiding

Short attacks are often used to maliciously drive down asset prices. Manipulators short sell or sell a large amount of an asset to trigger panic selling in the market, causing a chain reaction that leads to a continuous drop in prices.

Short attacks usually occur during periods of heightened market uncertainty, where manipulators further amplify market panic and prompt investors to sell their holdings. Therefore, this type of manipulation is particularly effective in a highly sensitive and volatile market environment such as the Web3.0 market, as any action could trigger an unexpected and significant price drop.

FUD

FUD is the process of spreading negative or misleading information to create doubts and incite panic in the minds of market participants. Common FUD is the creation of rumors, such as the government's upcoming crackdown on crypto assets, fictitious exchange hacking news, and exaggerated reports of project failures.

For example, Jamie Dimon, CEO of JPMorgan Chase, once called Bitcoin a “fraud”[2], which caused market panic even though his company later became involved in blockchain technology. While this is not necessarily direct market manipulation, such public comments can lead to panic selling and price volatility.

Sell Wall Manipulation

Sell wall manipulation occurs when a manipulator places a large number of sell orders at a specific price level, forming a virtual "wall" that prevents the price of an asset from breaking through that level. These large orders may intimidate other traders and make it difficult to break through the price limit.

However, once the manipulators have bought enough tokens at a lower price, they will withdraw their sell orders, causing the price to rise rapidly. This method is often used by market makers and high-frequency traders to accumulate assets at a low price.

Pump and Dump

Pump and dump is one of the oldest market manipulation methods, which artificially raises the price of an asset through coordinated buying (pump up) and then sells it after the price rises (dump and dump). This behavior is usually initiated by a group of traders or KOLs on social media, who hype low-liquidity tokens in private chat groups or social media to induce retail investors to buy. Once the price rises, the manipulators sell their holdings, leaving latecomers to take over and bear the losses.

In October 2024, the FBI launched Operation Token Mirror[3], creating a fake token, NexFundAI, to catch criminals committing fraud. The operation uncovered a $25 million pump-and-dump scheme in which traders manipulated the volume and price of tokens to lure unsuspecting investors. Once the price rose, the schemers dumped their holdings, causing the price to plummet. Ultimately, 18 manipulators were charged for market manipulation.

The role of market makers

In the Web3.0 market, the function of market makers is to provide liquidity and market depth through continuous buy and sell orders to ensure the smooth conduct of transactions. However, some market makers use their positions to manipulate, especially wash trading and spoofing. Because they control a large amount of asset liquidity, these illegal market makers can manipulate prices for their own interests, thereby affecting price trends.

Although market makers play an important role in any trading ecosystem, the decentralized nature of the Web3.0 market and the lack of information transparency in some areas provide them with more room for maneuver. For this reason, regulators such as the U.S. Securities and Exchange Commission (SEC) have begun to take action against some Web3.0 companies in an attempt to curb such abuses. However, as things stand, regulatory enforcement remains challenging.

How to guard against market manipulation

Although market manipulation is difficult to identify, doing the following can help you reduce your risk:

Investigate the token’s background: One of the easiest ways to avoid becoming a victim of pump and dump manipulation is to investigate the token’s trading history: for example, you can query the token’s historical information through Skynet[4]. Tokens with only a few days or weeks of trading history are more at risk because they have lower liquidity and are more likely to be selected for manipulation. Be especially wary of sudden price spikes in new or illiquid tokens.

Choose an exchange with high transparency: Some exchanges take the initiative to curb market manipulation by increasing information transparency and reviewing trading volumes. These exchanges regularly monitor transactions and provide transparency reports to ensure that trading volumes are not artificially inflated. Choosing to use a well-known exchange that provides market security protection measures can help you reduce the risk of losses from market manipulation.

Be vigilant and analyze carefully: Watch out for large orders that are suddenly withdrawn, surges in volume without reliable news support, and gossip without a credible source. Use tools such as blockchain explorers to help track transactions and verify the authenticity of surges in volume. Also, try to avoid making impulsive investment decisions based solely on social media buzz or rumors.

Building a safer future

As the Web 3.0 market matures, the landscape of market manipulation is likely to change significantly. The evolution of the market is inseparable from the strengthening of regulation. For example, the EU’s latest Crypto-Assets Market Regulation (MiCA) [5] aims to provide a comprehensive regulatory framework for digital currencies, enhance transparency and protect investors. By addressing issues such as market manipulation and ensuring that exchanges operate fairly, MiCA provides an example of how to promote trust and integrity in the Web 3.0 ecosystem through regulation.

In addition, the rapid development of decentralized solutions has also paved the way for a safer trading environment. Decentralized financial (DeFi) platforms often use smart contracts, which automatically execute and ensure fair trading rules. These developments make the actions of manipulators easier to detect, thereby reducing the occurrence of market manipulation. As industry technology advances, the mechanisms to protect the market from manipulation are also constantly improving.

Although these regulatory frameworks and technologies are constantly improving and advancing, participants in the Web3.0 field still need to remain vigilant. Due to the dynamic nature of the market, market manipulation methods may change as quickly as in traditional markets. At all times, investors should carefully identify signs of manipulation and understand regulatory measures to better protect their assets and help the market move in a healthier and more transparent direction.

[1] https://cointelegraph.com/news/bitwise-calls-out-to-sec-95-of-bitcoin-trade-volume-is-fake-real-market-is-or

[2] https://coinbureau.com/education/what-is-fud/#an-example-of-crypto-fud

[3]https://www.justice.gov/usao-ma/pr/eighteen-individuals-and-entities-charged-international-operation-targeting-widespread

[4] https://skynet.certik.com/

[5] https://www.esma.europa.eu/esmas-activities/digital-finance-and-innovation/markets-crypto-assets-regulation-mica