Ever heard of a scam wick? It is when people trade cryptoassets and other tradable assets at prices far outside the trading range with the goal of triggering other traders’ stop loss orders. This creates a knock on effect of other people opening buy or sell orders in the direction that the scammer wants the asset value to move.
Here’s an example. Let’s say the price of an asset like Bitcoin is trading at $40,000 and many people are placing sell orders to short the asset as they believe that the price has further to fall. Trader X (the scammer) can take a look at all the open orders and see that many traders have executed stop loss orders at $41,000. If Bitcoin moves up to that level, many participants will have their S/L orders triggered as it means the market is moving against them. Once these orders are triggered it will prompt many people to place BUY orders as the market is moving higher, which in turn will drive the market to move higher. They will then open limit orders at around $41,500 while another party opens a limit sell order at $41,500. This will then trigger all the S/L orders and push the price of Bitcoin much higher.
The reason it’s called a scam wick is because looking at it on the candlestick chart, it will likely show a short body with a very long wick. To be able to identify a scam wick, you will look for a short body with an extremely large wick. That’s because with a regular candlestick the wick won’t be extraordinarily long within a trading period and end up near their opening price.
Scam wicks usually take place in one locality eg. one exchange, and they tend to need a perfect environment for the avalanche to begin. This includes, a flat market without a lot of volatility, a spark, which is an order priced outside the trading range, and then once the other traders jump on the wave, this accelerates the move faster particularly for leveraged trades, which can greatly amplify the value of the position. Sometimes these scam wicks are unintentional, they can be mistakes from an exchange, such as the one that took place at Binance at the latter part of 2021, which can be down to an algorithmic error or they can be simply a typo made by a whale. Traders who have really high leverage on their positions may be the biggest casualties seeing their losses amplified greatly.
How to Protect Myself?
Some exchanges offer greater protection against this from happening by trying to minimize the conditions necessary for a scam wick to take place, and stabilizing the liquidity, and some indeed have been accused of perpetrating it themselves.
HyperDex is a blockchain protocol which works more like a traditional asset manager, with model portfolios, yet is decentralized and automated with its algorithms seeking out the best opportunities to extend gains and minimize risks.
It offers 3 model strategies for a range of risk appetites and returns, which include Fixed Income, Algo Trading and Race. It overcomes scam wicks and other nefarious trading scams by apportioning the investor’s capital through its various products using algos and staking. Through this enhanced liquidity, it mitigates the risks of the individual investor and it offers a passive approach to investing for the user that doesn’t necessarily know how to take advantage of the best DeFi opportunities available.
It’s important to understand that you can protect yourself somewhat against scam wicks by using exchanges and products designed to negate their impact, although important to know that they do happen and they happen fast. Leverage should always be used with caution!