Analysts believe that stop hunting manipulation was a factor in the liquidation of BTC derivative positions.
According to some analysts, the drop in BTC price on Saturday, December 4, 2021, was caused in part by stop-losses being triggered from leveraged positions, resulting in massive liquidations. The stop losses could have been caused by whale market manipulation, such as stop hunting, which can be seen by looking at the order books of different exchanges to identify high sell walls, as well as sources such as Coingecko. Whales will occasionally engage in market manipulation in order to drive small traders out of the market.
When a cryptocurrency exchange lends funds to a trader to create long or short-term positions, this is referred to as leveraged trading. A trader can put $50 into BTC and borrow $450 from an exchange to trade with. The trader is said to have taken a leveraged position at that point. If the price of bitcoin falls to the point where the trader loses his initial deposit, the exchange will liquidate the $450 in order to protect their capital, and the trader’s position is lost.
Stop Hunting Is What?
Market manipulation, according to Binance, entails activities that distort an asset’s price and present a false picture of market behavior. Market manipulation can take many forms, including wash trading, whale wall spoofing, and pump and dump schemes. Because cryptocurrency markets are largely unregulated, they are vulnerable to manipulation by a few bad actors.
Wash trading occurs when a person or exchange buys and sells a cryptocurrency in rapid succession in order to inflate the total volume traded, attracting the attention of investors, whose subsequent activity creates even more misleading price behavior.
Whales will sometimes place large sell orders in order to persuade other investors to sell as well. When the price of the cryptocurrency falls due to large sell-offs, the whales remove their sell orders from order books and buy more cryptocurrency at a lower price. This is known as whale wall spoofing.
Pump and dump schemes involve people working together to buy small market-cap altcoins and then sell them once they gain traction with investors.
Whales can create an array of sell orders to lower the price of a coin, triggering stop-loss (order to buy or sell a stock when it reaches a certain price, placed with a broker) positions that investors have set, resulting in an automated sell-off, allowing whales to buy the asset again, this time more cheaply, causing the market to recover. This is known as stop-hunting, and it can be linked to any type of whale manipulation. Typically, investors use technical analysis to determine their stop-loss positions.
Ways to Avoid Quitting Hunting
Examining order books can provide evidence of stop hunting manipulation. However, because order books contain transient information, it is prudent to examine other data. Verify an order book’s asset data from multiple sources, such as Coingecko or Coinmarketcap. Decisions should only be based on historical trends, not on short-term movements. Decentralized exchanges avoid the order book system, but they pose additional risks to traders.