Understanding Market Manipulation

A critic of cryptocurrency made the statement, “Why is Bitcoin so valuable when it is based on nothing.” My response, “What is the US Dollar based on?” The answer is the same. Nothing. So why is the dollar, pound, Euro, Yen, and many other currencies valuable?

The answer is because everyone agrees that it is. This universal agreement is the same that gives value to gold, stocks, and every other exchange-traded asset. When enough people believe something is valuable, they drive demand.

When driven to a frenzy, demand rises beyond supply. Think about popular Christmas toys where a $15 plastic doll goes for $500 on eBay. After the excitement dies, the demand and associated price drops. The $500 toy can then be purchased in abundance for $5 from a discount bin.

The most basic market manipulation uses this strategy to drive up prices artificially. It could be a billionaire’s comments, a media story, or social media strategies that drive prices up. Once everyone moves on, the price goes back down.

Pump and Dump

A more severe form of this manipulation is when an organized group works to prop up an asset just to sell soon after. It usually involves insiders buying an asset for a meager price and then convincing a large number of people that it has value. The result is a rise in price…