3 (Highly) Unethical Practices Of Crypto Exchanges

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As of 9th November 2019, there are 301 Cryptocurrency exchanges on Coinmarketcap. Why is that so? Here are some reasons for this saturated market:

  • Running a Crypto exchange is one of the few business models that have proven to be profitable in the Crypto space
  • Even with a saturated market, market dominance is still pretty much up for grabs. This is still a nascent industry!
  • Running a profitable Crypto exchange is not the be-all and end-all. It is a great starting platform for companies to expand into other Blockchain businesses

While a new industry provides great opportunities for consumers, there are also many risks in the Blockchain / Crypto industry. Most prominently when trading on Crypto Exchanges.

As someone with 2 years of working experience in this field, I have both personally seen and heard from others regarding some more than questionable practices carried out by Crypto exchanges.

Here is a more detailed sharing of 3 questionable practices that have not been given much coverage in the media. Read and decide for yourself what you are going to do with this knowledge!

P.S. As the purpose of this article is not to name and shame specific exchanges, I will not be Pros and Cons of accepting cryptocurrency for your business naming any examples. This article is to provide you some food for thought when trading on these platforms.


1. “Pump and Dump” Graveyards

This is not an uncommon concept in the financial world. Unlike the stock market which is regulated, Crypto exchanges take this to another level.

In any project listing, the project will have to provide the exchange with a significant amount of their tokens to conduct giveaways and contests. This is excluding the amount needed to conduct market-making.

When it comes to Initial Exchange Offering (IEO) projects or any altcoins that have a low market capitalization, the project team will hold 70 to 90% of the tokens.

This helps projects participate in “pump and dump” schemes in collusion with exchanges. That alone isn’t enough, though.

To get the token price to multiply by 2, 3 or even 10 times in a few months or less, exchanges have to create a Fear Of Missing Out (FOMO) effect among the community.

2. Spreading FOMO To The Community

This is done by giving “signals” of price pumps to community leaders of Crypto channels and groups. Exchanges also create fake member accounts to share the news of the price pump to their community or the project’s community.

What does this lead to? Users buying in at high prices and the exchanges selling to these users tokens at high prices. Making themselves and probably the project a nice profit.

Well, you might say “But quite a number of the IEO tokens still give me a profit from their IEO price. So how is that a “pump and dump scheme?”

While that is (unlikely) true, these are some questions I would like you to ponder about:

  • Is the volume low enough to easily carry out price manipulation?
  • Can it be that the exchange is maintaining the current price for the next pump?
  • In this emerging industry, how many tokens have strong use-cases and demand for them?

This probably makes me sound like a real sceptic, but I think it’s time for many in the community to look at these practices for what it is. Going into trading crypto with our eyes wide open is the next step to making the space a healthier one.

3. (Non-existent) Massive Campaign Giveaways

Car giveaways, BTC giveaways, and massive altcoin rewards. How much of their rewards do you think exchanges actually give out?

Answer: We will never know.

Firstly, token rewards are distributed to the accounts of users on the exchange. Unless you received these rewards in your own account, there is no way of verifying whether you have received the rewards.

Secondly, exchanges can provide the list of winners, either masking part of their email addresses or showing the full details. These can be fake email addresses made up by the exchanges.

Car or iPhone giveaways? Photos of the winners receiving prizes can be photoshopped or a member of the team can be the one to have “won” the prize.

It will be better not to count on being a winner of contests held by exchanges.

4. What You Can Do

Love it or hate it, exchanges are here to stay. I personally believe that as the industry matures and becomes regulated, these practices will be the exception rather than the norm.

Before that happens, what can you do to protect yourself from these bad practices? Firstly, do not be greedy. Being enticed by FOMO, attractive prize giveaways, etc all come from greed. Once you see all these for what it is, you will no longer be manipulated.

I am not preaching that you abstain from taking part in trading campaigns, especially on exchanges where you have received rewards from previously. Just remember to participate with open eyes.

Secondly, trade tokens that have relatively higher volumes that are spread out evenly across a few exchanges.

In this case, the chances of price manipulation are harder, as a price pump on one exchange will be brought down to market price almost immediately. Hence better safeguarding your interests as a retail investor.

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About Author
Jia Yung Lee
Jia Yung Lee
A freelance Blockchain writer with 2 years of experience, Jia Yung writes and publishes content of Blockchain projects on various Crypto and Blockchain publications. You can find his opinion articles at blockconstellation.com

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