Crypto Scam Wicks: Avoid Getting REKT

Navigating the cryptocurrency space can be like a minefield for new investors.

Scammers, hackers, rugpullers, and middlemen all trying to take your hard earned money. 

One such method that is commonly observed in use by scammers are crypto scam wicks. 

Here's how you can stay safe.

What is a Crypto Scam Wick?

A crypto scam wick happens when a centralized entity or individual trades a cryptocurrency at a price significantly outside of its normal trading range with the intent of triggering liquidations or stop loss orders.

As a result, a cascade of buys and sells will occur, further pushing the price in the direction that the scammer intended.

Crypto scam wicks don't have a clear definition, but they tend to follow this pattern:

1. A violent price move occurs either up or down, outside of a cryptocurrency's normal price range.
2. After the violent price move, the price returns to the normal price in a short period of time.
3. This outlier price is usually only seen across one exchange, suggesting a local price feed issue or centralized ‘bad-acting.’

In order to better protect ourselves, we need to understand these important investing terms.

What is a Candlestick Chart?

A Candlestick chart is a type of financial chart that represents the price action of a particular stock, commodity, or currency. Candlestick charts contain four different data points:

1. High – The highest price paid that time interval
2. Open – The price of open on that time interval
3. Close – The price of close on that time interval
4. Low – The lowest price paid during that time interval

The real body represents the space between the open and the close. If the open is higher than the close, the candle is red. If the open is lower than the close, the candle is green.

The upper shadow of the chart represents the space between the open/close and the high. The lower shadow represents the space between the open/close and the low price. The shadows can also be referred to as wicks. 

Stop Losses and Crypto Scam Wicks

A stop-loss is a limit order placed on a centralized exchange which executes a buy or sell of a cryptocurrency once it reaches a certain price. Scammers will attempt to take advantage of this by buying a price up to a certain price to trigger the stop-loss. As a result, the price will move in the direction that the scammer intended. 

For example, let’s say the price of PLS is at 5 cents and many investors are shorting PLS. A whale or an exchange can see this information on-chain and try to raise the price of PLS to 7 cents to hit the stop-losses. If the price hits 7 cents it will trigger all of the liquidations in that range and cause the price of PLS to go even higher. 

The Challenge With High-Leverage Trading

Leverage trading is when an investor borrows money from a lender in order to potentially earn more money than they could have.

The problem with this strategy is that if you win, you owe them a percentage of the gains. If you lose, you lose extra and it’s all on you. 

For example, let's say you have $1,000 USD worth of crypto and take 5x leverage. You now have $5,000 to invest. However, now the price only needs to drop 20% to lose 100% of your investment. If the price of the crypto you were leverage trading wicks down briefly to 20% for more than a few seconds, you stand to lose your entire investment.

How To Protect Yourself From Crypto Scam Wicks

1. Don't Leave Your Coins on Centralized Exchanges

While you might buy your coins through a centralized exchange, it's important to send them to a cryptocurrency wallet that only you have control over.

2. Don't Leverage Trade (Especially with Low Liquidity).

They say smart men go broke three ways: ladies, liquor, and leverage. Avoid taking leverage in markets with low liquidity, or you could get rekt by leverage trading. 

3. Choose DeFi Protocols That Use Decentralized Oracles.

Scam wicks can have significant reprucissions for smart contracts, which are reliant on accurate price feed data.

That's why forward-thinking DeFi projects like the Liquid Loans protocol make use of decentralized blockchain oracles.

Liquid Loans uses Fetch Oracle, ensuring accurate price data and protecting users from scam wicks in the process.