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Unraveling Manipulation and The Fake Liquidity Games.
Hello everyone,
In this post, I want to shed light on one of the often misunderstood topics of the "market cap" and how easily it can be manipulated, especially so when "whales" are in control of a large % of the supply.
Above you can see a pie-chart graph that displays in great detail the asset allocations of various projects.
Let's take a look at some of the dangers of projects with severely restricted supplies.
Understanding the Market Cap Mirage: Price vs. Value
Market capitalization, a widely used metric, that can be deceptively simple.
It's calculated by multiplying the last transaction price by the circulating supply.
However, this method doesn't factor in the nuances.
Insiders, foundations, venture capital funds, whales, can exploit this vulnerability by controlling a significant portion of a cryptocurrency's supply, especially if the asset is restricted or limited.
This control enables allows them to manipulate prices, creating an illusion of both demand and liquidity.
As a result, unsuspecting investors might make decisions based on manipulated data, leading to substantial financial risks.
In the case of Bitcoin for example, a significant portion of the supply consists of BTC that have been inactive for years, if not decades. These coins are either lost, or held in long-term storage, and their owners have not moved or traded them in a very long time.
They do not contribute to the liquidity of the market.
This is already a well established concept and I am confident that this is not your first time hearing about this, however in the case of Bitcoin, compared to all of these "Insider/VC funded projects" most of Bitcoin's distribution was completely organic, there is no single entity or organization who controls a significant percentage of the available supply today.
When a substantial portion of the total supply is held by a small number of holders, it can significantly affect both the market cap and the perceived value of those assets.
Here's how:
1. Artificial Market Cap & Circulation Supply.
It can lead to a situation where the circulating supply available for trading is relatively low. This can artificially inflate the price of the currency in the market, as the limited supply can drive up demand, leading to higher prices and subsequently, a higher market capitalization.
2. Perceived Value and Market Manipulation:
The concentration of a large portion of the supply in the hands of a few holders can create a perception of scarcity, a supply mirage, which might attract more investors.
Large holders, often referred to as "whales," have the ability to influence the market by making large trades which cause rapid price fluctuations, increasing volatility potentially leading to mass liquidations, especially for those who are trading with options.
3. Liquidity Issues and Wash Trading:
Concentrated ownership makes it easier to do market manipulation tactics such as wash trading and artificial liquidity creation.
In simpler terms, a handful of holders can create fake buy or sell orders, deceiving other traders and investors into making decisions based on false market data.
These manipulative practices distort the markets, leading to severe price fluctuations and liquidity issues, especially so if the liqudity consists of fake orders.
Wash trading and creating artificial liquidity are manipulative practices that can be easier to execute when a cryptocurrency has a low trading volume or a highly concentrated supply.
4. The Effect of a Concentrated Supply:
In assets with restricted supplies, a small number of holders can coordinate wash trades more effectively. They can manipulate prices and volumes without significant investments because they control a large portion of the supply. This activity can deceive other traders and investors by creating a false sense of market depth and liquidity.
In both cases, a concentrated supply will allow a small group of holders to engage in these manipulative practices more easily without taking on too much risk.
Ever come across a project with an incredibly limited supply?
While scarcity often attracts attention, it can also come with great risks.
Assets with restricted supplies are more susceptible to price manipulation, artificial scarcity, and illiquidity.
When a handful of holders control the majority of tokens, they can create an illusion of rarity and demand.
It's essential for us as investors, to approach projects with meticulous scrutiny.
We must look beyond market caps and take a look under the hood, into the tokenomics, distribution, and ownership structures.
By understanding who holds the supply and how it's distributed, we can make better informed decisions, safeguarding our investments from manipulative tactics
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