3 Strategies for Traders to Avoid Tokens with Manipulated Volumes
3 Strategies for Traders to Avoid Tokens with Manipulated Volumes
Jul 1, 2024
3 Strategies for Traders to Avoid Tokens with Manipulated Volumes Identifying fake liquidity in Bitcoin (BTCUSD) and other cryptocurrencies is crucial for traders looking to avoid sudden sharp declines in low-volume markets. Such declines can make it difficult to execute stop losses and often lead to unexpected results. By understanding market maker dynamics, order book mechanics, and using practical indicators to detect artificial volume, traders can spot red flags and steer clear of potential pitfalls.
Market Maker Dynamics and Order Book Mechanics
Market makers provide liquidity by placing multiple buy and sell orders, but their activities are not always benign. They might manipulate the market through practices like spoofing—placing large orders near current prices to create a false impression of demand or supply—or wash trading, where they simultaneously sell and buy the same assets to inflate volume figures.
These entities often benefit from reduced trading fees or access to exclusive tokens, allowing them to influence market conditions. Despite their deceptive tactics, there are three reliable indicators that can help experienced traders detect anomalies and avoid getting caught in tokens that crash when a significant sell order is placed.
Traded Volume vs. Order Book Depth and Free Market Capitalization
When examining a crypto pair, compare the order book depth with the reported daily trading volume. A disproportionate relationship, where the order book depth is shallow but the trading volume is high, suggests possible manipulation. For example, if a crypto pair has an order book depth of $50,000 at a 5% level but reports a daily volume of $2 million, this discrepancy may indicate artificially inflated volume rather than genuine trading interest.
