In the past year, the primary market of the cryptocurrency industry has been sluggish, with some projects regressing to a pre-liberation state. Various human behaviors and "decentralized" regulatory loopholes have been fully exposed in this "bear market." Market makers in the industry are supposed to be the "helpers" of new projects, providing liquidity and stabilizing prices to help projects gain a foothold. However, a cooperative method called the "loan option model," which was widely celebrated in the bull market, is being abused by some unscrupulous actors in the bear market, quietly harming small cryptocurrency projects and causing a collapse of trust and market chaos. Traditional financial markets have encountered similar issues, but they have minimized harm through mature regulation and transparency mechanisms. I believe the cryptocurrency industry can learn from traditional finance to address these chaotic phenomena and create a relatively fair ecosystem. This article will delve into the operation of the loan option model, how it traps projects, comparisons with traditional markets, and discussions on the current situation.

1. Loan Option Model: Sounds Good, but Has Pits

In the cryptocurrency market, the task of market makers is to ensure sufficient trading volume through frequent buying and selling of tokens, preventing prices from fluctuating wildly due to a lack of buyers or sellers. For newly launched projects, finding a market maker to collaborate with is almost essential—otherwise, it is difficult to get listed on exchanges and attract investors. The "loan option model" is a common form of cooperation: the project side lends a large number of tokens to the market maker, usually for free or at a very low cost; the market maker uses these tokens to "make a market" on exchanges, keeping the market active. The contract often includes an option clause that allows the market maker to return the tokens at a certain price at a future point in time or simply buy them, but they can choose not to do so.

On the surface, this seems like a win-win deal: the project side gains market support, and the market maker earns some trading spreads or service fees. However, the problem lies in the "flexibility" of the option clause and the lack of transparency in the contract. The information asymmetry between the project side and the market maker gives some dishonest market makers the opportunity to exploit the situation. They take the borrowed tokens not to help the project but to disrupt the market, prioritizing their own profits.

2. Predatory Behavior: How Projects Get Trapped

If the loan option model is abused, it can severely harm projects. The most common tactic is "dumping": the market maker dumps all the borrowed tokens onto the market, causing the price to plummet. Retail investors see something is wrong and follow suit, leading to complete market panic. The market maker can profit from this, for example, by "shorting"—selling the tokens at a high price, then buying them back at a low price after the price collapses, pocketing the difference as profit. Alternatively, they may use the option clause to "return" the tokens at the lowest price, resulting in absurdly low costs.

Such operations can be devastating for small projects. We have seen numerous cases where token prices are halved within days, leading to a direct evaporation of market value, making it nearly impossible for the project to seek further financing. Worse still, the lifeblood of cryptocurrency projects is community trust; when prices collapse, investors either perceive the project as a "scam" or completely lose confidence, causing the community to disband. Exchanges have requirements for trading volume and price stability; a price crash can lead to delisting, effectively dooming the project.

To make matters worse, these cooperation agreements are often hidden behind non-disclosure agreements (NDAs), making it impossible for outsiders to see the details. Project teams are often composed of technical newcomers who have a weak awareness of financial markets and contract risks. Faced with seasoned market makers, they are completely led by the nose, unaware of the "pits" they have signed into. This information asymmetry turns small projects into "prey" for predatory behavior.

3. Other Pits

Additionally, we have encountered numerous cases reported by clients. Market makers in the cryptocurrency market, aside from the pitfalls of the loan option model through dumping borrowed tokens to suppress prices and abusing option clauses for low-cost settlements, have a host of other tricks specifically designed to harm inexperienced small projects. For instance, they may engage in "wash trading," using their own accounts or "aliases" to buy and sell among themselves, creating false trading volume to make the project appear popular, attracting retail investors. However, once they stop, the trading volume plummets to zero, leading to a price crash, and the project may even be kicked out by the exchange.

Contracts often hide "invisible knives," such as high margin requirements, outrageous "performance bonuses," or even allowing market makers to acquire tokens at low prices and sell them at high prices after listing, creating selling pressure that causes prices to plummet, resulting in significant losses for retail investors while the project side bears the blame. Some market makers exploit their information advantage, knowing in advance about positive or negative news for the project, engaging in insider trading to inflate prices, enticing retail investors to buy before dumping, or spreading rumors to suppress prices and accumulate tokens. Liquidity "kidnapping" is even more ruthless; they make the project side dependent on their services, threatening to raise prices or withdraw funding, and if the contract is not renewed, they dump the tokens, leaving the project side helpless.

Some even promote "all-in-one" services, such as marketing, public relations, and price manipulation, which sound impressive but are essentially just fake traffic. After inflating prices, they crash, leaving the project side spending a lot of money while causing trouble. Even worse, market makers may serve multiple projects simultaneously, favoring large clients while deliberately suppressing the prices of small projects or transferring funds between projects to create a "zero-sum game," leading to significant losses for small projects. These traps exploit the regulatory loopholes in the cryptocurrency market and the inexperience of project teams, causing project valuations to evaporate and communities to disband.

4. Traditional Finance: Similar Issues, but Better Managed

Traditional financial markets—such as stocks, bonds, and futures—have also encountered similar troubles. For example, "bear market attacks" involve selling large amounts of stock to depress prices and then profiting from short selling. High-frequency trading firms sometimes use ultra-fast algorithms to seize opportunities, amplifying market volatility for their own gain. In the over-the-counter (OTC) market, lack of transparency also gives some market makers the chance to engage in unfair pricing. During the 2008 financial crisis, some hedge funds were accused of maliciously shorting bank stocks, exacerbating market panic.

However, traditional markets have developed mature methods to address these issues, which the cryptocurrency industry could learn from. Here are some key points:

• Strict Regulation: In the U.S., the Securities and Exchange Commission (SEC) has a set of "SHO Rules" that require ensuring stocks can actually be borrowed before short selling, preventing "naked short selling." There is also an "up-tick rule" that allows short selling only when stock prices are rising, limiting malicious price suppression. Market manipulation is explicitly prohibited, and violations of Section 10b-5 of the Securities Exchange Act can lead to severe penalties, including bankruptcy or imprisonment. The EU has similar "Market Abuse Regulations" (MAR) specifically targeting price manipulation.
• Information Transparency: Traditional markets require listed companies to report agreements with market makers to regulatory agencies, and trading data (prices, volumes) is publicly accessible, allowing retail investors to view it through Bloomberg terminals. Any large trades must be reported to prevent secret "dumping." This transparency discourages market makers from acting recklessly.
• Real-time Monitoring: Exchanges use algorithms to monitor the market, detecting abnormal fluctuations or trading volumes. For instance, if a stock suddenly plummets, it triggers an investigation. Circuit breakers are also useful; when price fluctuations are too large, trading is automatically paused, giving the market a breather and preventing panic from spreading.
• Industry Standards: Organizations like the Financial Industry Regulatory Authority (FINRA) set ethical standards for market makers, requiring them to provide fair quotes and maintain market stability. Designated Market Makers (DMMs) on the New York Stock Exchange must meet strict capital and conduct requirements; otherwise, they cannot operate.
• Investor Protection: If market makers disrupt the market, investors can hold them accountable through class-action lawsuits. After 2008, many banks were sued by shareholders for market manipulation. There is also the Securities Investor Protection Corporation (SIPC), which provides some compensation for losses caused by broker misconduct.

While these measures are not perfect, they have significantly reduced predatory behavior in traditional markets. I believe the core lesson from traditional markets is the combination of regulation, transparency, and accountability, creating a multi-layered safety net.

5. Why is the Cryptocurrency Market So Vulnerable?

I believe the cryptocurrency market is much more fragile than traditional markets for several reasons:

Immature Regulation: Traditional markets have over a century of regulatory experience and a well-established legal framework. In contrast, the global regulation of the cryptocurrency market resembles a jigsaw puzzle, with many areas lacking clear regulations against market manipulation or market makers, allowing bad actors to thrive.

Small Market Size: The market capitalization and liquidity of cryptocurrencies are far less than those of U.S. stocks. The actions of a single market maker can drastically change the price of a token, while large-cap stocks in traditional markets are not so easily manipulated.

Inexperienced Project Teams: Many cryptocurrency project teams consist of technical geeks who know little about finance. They may not even realize the pitfalls of the loan option model and can be easily misled by market makers when signing contracts.

Habit of Opacity: The cryptocurrency market often relies on non-disclosure agreements, hiding contract details tightly. In traditional markets, such secrecy has long been under regulatory scrutiny, but in the crypto world, it is the norm.

These factors combined make small projects targets for predatory behavior, eroding trust and the healthy ecosystem of the entire industry bit by bit.

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