Table of Contents
Market manipulation in crypto has become disturbingly normalized through sophisticated market making arrangements that would constitute fraud in traditional finance.
Key Takeaways
- Market makers in crypto receive option agreements with strike prices 25-50% above launch, creating direct pump incentives
- The Movement scandal involved contracts that appeared to plan coordinated price manipulation worth $38 million in profits
- Real token floats are often misrepresented, with market makers controlling 4-5% of tokens while only 5% truly circulates
- Exchanges like Binance have significant power to enforce transparency standards but lack economic incentives to do so
- Founders face misaligned incentives between building long-term value and satisfying investor exit demands within compressed timeframes
- Traditional finance regulations against spoofing, layering, and front-running customer orders don't exist in crypto markets
- Self-policing through standardized market maker disclosures could create accountability without complex international regulatory coordination
The Movement Scandal: A Case Study in Crypto Market Manipulation
The Movement blockchain's token launch became a watershed moment exposing systemic problems in crypto market making. CoinDesk revealed that Movement's foundation signed contracts with market makers Wet3 Report and Runtech that appeared to incentivize coordinated pump and dump schemes. These arrangements netted the firms $38 million before Binance banned Wet3 Report from its platform.
The scandal highlighted a fundamental difference between crypto and traditional finance market making. In traditional markets, market makers earn money purely from bid-ask spreads while providing liquidity. Crypto market makers, however, receive token loans representing large percentages of circulating supply plus option agreements with strike prices significantly above launch values.
"These option agreements normally have basically so they have a loan from the project of tokens which they market make with and often times this is like a large percentage of the project's float," explained Jose Medo, founder at Deli Labs. The larger the percentage controlled, the more manipulation becomes possible.
Movement's case revealed another troubling dynamic: the documents weren't signed by founder Rushi but by another team member, suggesting complex internal power structures that obscure accountability. The foundation had given up control to someone else, creating what Taran Severwal called "all a show" that "should probably just go to zero."
How Crypto Market Making Really Works
Unlike traditional finance where market makers operate under strict regulations, crypto market making exists in a gray area with perverse incentive structures. The standard arrangement involves market makers receiving substantial token loans plus call options with strike prices 25-50% above a post-launch benchmark, typically a 7-day time-weighted average price.
This structure creates direct financial incentives for market makers to manipulate prices upward. If they can drive the token price above the strike price, they can exercise their options for substantial profits. The arrangement gives market makers significant control over price discovery since they often control 4-5% of the actual circulating tokens.
Omar Shakib from Second Lane noted the transparency problem: "Most of these market makers don't talk to each other very often. They're like separate entities working separately on multiple exchanges. The only person who knows this is obviously the foundation and the exchanges."
The lack of transparency extends to token float misrepresentation. Projects routinely count treasury tokens as part of the circulating supply on sites like CoinGecko, making the real tradeable float appear much larger than reality. When retail investors see a 60% circulating supply, they don't realize 55% sits in treasury and team-controlled wallets that will never move.
The Power of Exchanges and Regulatory Gaps
Centralized exchanges wield enormous influence over crypto market structure but lack incentives to reform problematic practices. Exchanges profit from trading fees and benefit from the low-float, high-FDV (fully diluted valuation) meta that generates volatility and volume.
"Exchanges make money on fees. They make a lot of money on the low float high FDV meta. They make a lot of money on these market making arrangements," Medo observed. This creates a situation where the entities with the most power to enforce standards are economically incentivized to maintain the status quo.
The regulatory landscape compounds these problems. Unlike traditional finance, which developed comprehensive rules against market manipulation over decades, crypto operates with minimal oversight. Regulations that exist in traditional markets - prohibitions against spoofing, layering, and front-running customer orders - simply don't apply to crypto.
Hester Peirce's proposed safe harbor rules include requirements for projects to disclose market maker arrangements, representing one potential regulatory solution. However, the global nature of crypto markets complicates enforcement, with major Asian market makers operating outside traditional regulatory reach.
Founder Psychology and Misaligned Incentives
Crypto founders face unique psychological pressures that traditional startup founders don't encounter. The constant visibility of token prices creates comparison dynamics where founders building legitimate products watch meme coins reach billion-dollar valuations while their serious projects struggle for attention.
"It's tough coming to a desk and seeing a memecoin trader make 20 mil from one coin called goat and you think to yourself what are you in it truly to build," Severwal explained. This dynamic pushes founders toward short-term extraction rather than long-term value creation.
The venture capital structure in crypto amplifies these misalignments. VCs hold portfolios of bets and want maximum skin in the game from founders, while founders have a single bet representing potentially life-changing wealth. This creates tension around when and how founders can take liquidity.
Side deals between foundations and major investors further complicate matters. These arrangements, which would require disclosure in traditional finance, remain hidden in crypto. The lack of transparency means retail investors cannot assess the true risk of insider selling pressure.
Case Studies in Float Manipulation
The Mantra case illustrates how sophisticated float manipulation works in practice. Founder JP used OTC sales to extend sell pressure into the future while using the proceeds to bid into empty spot order books. This "time arbitrage" strategy pushed Mantra from a 100 million market cap to over 12 billion FDV - a 100x increase achieved through artificial scarcity.
"He extended the sell pressure to people in the future. Took that money and bid spot now into empty order books," Severwal explained. The strategy worked because the real float was minimal, with 87% of supply controlled by one cluster of wallets, while CoinGecko showed 50% circulation.
Similar dynamics played out with Worldcoin, which achieved a $120 billion FDV while maintaining "probably the smallest float anyone's ever seen in crypto." These cases demonstrate how float misrepresentation can create artificial price appreciation that ultimately harms retail participants.
The success of these strategies created copycat behavior across the industry. Founders began viewing market manipulation as legitimate strategy rather than fraud, with many attempting to replicate Mantra's playbook before its eventual collapse.
The Retail Exodus and Market Fragmentation
One consequence of widespread manipulation has been retail's exit from crypto markets. Where previous cycles saw retail participation drive genuine price discovery, current markets are increasingly dominated by institutional players engaging in "PVP" (player vs player) trading.
"Retail participants are probably down like 90% from three or four years ago. Crypto is just PVP right now - one trading firm trying to profit from another trading firm," Severwal noted. This exodus reduces the organic demand that could support legitimate projects.
The proliferation of tokens has created additional challenges. While the 2021 cycle had relatively few tokens, current markets feature thousands of infrastructure coins competing for attention. This fragmentation makes asset selection exponentially more difficult for retail investors.
However, some experts push back against viewing this as purely zero-sum. "If we're actually building technology here, then this isn't zero sum, right? It's positive sum," Medo argued. The challenge lies in distinguishing legitimate technological innovation from speculative vehicles designed purely for extraction.
Solutions and Path Forward
Multiple stakeholders proposed solutions focusing on transparency and better incentive alignment. For exchanges, the recommendation centers on enforcing disclosure standards for market making arrangements, real float calculations, and side deals as listing requirements.
Self-policing emerged as a promising near-term solution. Just as security audits became standard practice without regulatory requirements, market maker transparency could become an industry norm. "It matters who audits you, right? If people are using shady market makers it's going to end up reflecting poorly on them," Medo observed.
For founders, the advice focused on building genuine products rather than chasing quick extraction opportunities. "Build something real that you believe in for the long term and raise way less money," Medo recommended. The prevalence of vaporware projects attempting to capture trending narratives represents a waste of talent and capital.
VCs received similar guidance about funding discipline. Avoiding copycat projects and enforcing transparency standards with portfolio companies could help realign incentives across the ecosystem.
The regulatory path forward likely involves working through exchanges rather than attempting complex international coordination. Since major exchanges want to serve US users, US regulatory pressure could effectively force global compliance with transparency standards.
Common Questions
Q: What is a crypto market maker option agreement?
A: A contract giving market makers the right to buy tokens at predetermined prices, typically 25-50% above launch values, creating pump incentives.
Q: How do crypto market makers differ from traditional ones?
A: Traditional market makers earn from bid-ask spreads only, while crypto market makers receive token loans and option agreements tied to price performance.
Q: Why don't exchanges stop market manipulation?
A: Exchanges profit from trading fees and volatility generated by manipulative practices, creating economic incentives to maintain the status quo.
Q: What is float manipulation?
A: Misrepresenting the amount of tokens actually available for trading by counting treasury and team-controlled tokens as circulating supply.
Q: How can retail investors protect themselves?
A: Research real token float using on-chain tools, verify market maker arrangements through project disclosures, and avoid projects with suspicious tokenomics.
The Transparency Imperative
The crypto market manipulation crisis stems fundamentally from information asymmetries that would be illegal in traditional finance. Creating transparency around market maker arrangements, real token floats, and founder incentives represents the most actionable path toward reform.
While regulatory solutions may eventually emerge, self-policing mechanisms could deliver faster results. The industry has demonstrated ability to adopt standards organically when aligned with long-term value creation rather than short-term extraction.
