In a market characterized by insufficient spot liquidity, market makers are forced to focus on the growing perpetual swap market. To this end, various parties are racking their brains to establish a bridge between spot and futures trading, organically integrating the liquidity and profit and loss determination rules of the two. This ultimately led to the emergence of new token economics models and community expectation management models, creating a dramatic double-edged sword for the "demon coin."

The so-called "demon coins" are a combination of a series of specific market conditions: highly concentrated chips (i.e. "low circulation, high control"), and are listed on both the illiquid spot market and the highly liquid, highly leveraged perpetual contract market.

This article will analyze the complete lifecycle of this manipulation process, from the initial token economics design that facilitated the manipulation, to the manipulation of retail investor sentiment, to the precise execution of spot-driven attacks, with the ultimate goal of triggering chain liquidations in the derivatives market to generate profits.

Disclaimer

The purpose of this article is not to endorse such behavior or target any project or exchange, but to provide a technical, quantitative and objective mechanism analysis to help mature market participants identify and potentially avoid related risks.

Part I: Trap Construction: Preparations Before Rigging

The success of the entire operation depends on a carefully designed market structure in which the manipulators establish near-absolute control over the asset’s supply and price discovery mechanism before any retail investors participate in large numbers.

1.1. Creating Scarcity: A Token Economics Model with Low Circulation and High Control

This strategy begins not at the trading stage but at the token's conception stage. The manipulator, typically the project owner or a closely affiliated backer, designs a token economics model that ensures the vast majority of the token supply (e.g., 95%) is locked or held by insiders, leaving only a tiny fraction—the "circulating supply"—available for public trading during the initial issuance.

This "low float, high fully diluted valuation" model creates artificial scarcity. Because the number of tokens in circulation is limited, even a small amount of buying pressure can lead to rapid price increases and extremely high volatility. This dynamic is intentional, as it significantly reduces the capital required for manipulators to arbitrarily drive the spot price.

This token economics model is designed to create a market that is structurally vulnerable to the spot-driven liquidation strategies detailed in this report. While a normal project launch aims to build community through decentralization and fair distribution, the low float model does the opposite, concentrating power. Major holders gain near-total price control. Manipulators don't need to "hoard" later; they control the market from the outset. When this pre-designed asset is placed in a dual-listing environment, its token economics become a weapon.

Low liquidity ensures that spot prices can be easily manipulated, while futures markets provide a pool of leveraged participants to be exploited. Therefore, token economics are a prerequisite for this strategy. Without this level of control, the cost of manipulating spot prices would be prohibitively high. Choosing the right token economics is the first and most critical step in the manipulation playbook.

From a psychological perspective, high FDV creates the illusion of a large and ambitious project despite a low circulating supply, while low circulating supply creates initial hype and a “scarcity effect,” attracting speculative retail interest and setting the stage for subsequent FOMO.

1.2. Catalyst for Dual Listing: Building a Two-Line Battlefield

Listing simultaneously or nearly simultaneously on liquid spot exchanges and perpetual swap markets is a key component of this strategy. Platforms like Binance Alpha act as a "pre-listing token screening pool," signaling potential future mainboard listings and building initial hype.

The two battlefields are:

• Spot Market (Control Zone): This is where manipulators exert their overwhelming supply advantage. Since the circulating supply is extremely small, they can dictate prices with relatively little capital.
• The perpetual contract market (the harvest zone): This is where retail investors and speculative capital gather. It offers high leverage, magnifying retail traders' positions and making them extremely vulnerable to liquidation. Manipulators' primary goal isn't to profit from spot trading, but to leverage their control over spot prices to trigger more profitable events in this secondary arena.

The introduction of derivatives alongside spot assets creates a powerful synergy. It increases overall market liquidity, price synchronization, and efficiency, but in this controlled environment, it also creates a direct attack vector for manipulation.

Part 2: Market Warming Up: Creating Sentiment and Measuring Risk Exposure

Once the market structure is established, the next stage for manipulators is to attract targets into the harvest zone (the futures market) and precisely measure their risk exposure. This involves creating a false narrative of activity and demand, while using derivatives data as a "fuel gauge."

2.1. The illusion of activity: wash trading and fake trading volume

A new token with low trading volume lacks traction. Manipulators must create the illusion of an active, liquid market to attract retail traders and automated trading bots that use volume as a key indicator.

To achieve this, the manipulators use multiple controlled wallets to trade against themselves on the spot market. On-chain, this manifests as a circular flow of funds or assets between related parties. This behavior artificially inflates trading volume metrics on exchanges and data aggregators, creating a misleading impression of high demand and liquidity.

Despite the sophistication of the tactics, this type of activity can be identified by analyzing specific patterns in on-chain data:

• High-frequency trading occurs between a small number of unknown exchanges or market maker wallets.
• The buy and sell orders for the transactions occurred almost simultaneously, and there was no meaningful change in actual beneficial ownership.
• There is a mismatch between high reported trading volumes and shallow order book depth or low on-chain holder growth.

2.2. Decoding the Derivatives Market: Open Interest and Funding Rate Analysis

Manipulators don't trade blindly. They meticulously monitor the derivatives market to assess the effectiveness of their warm-up efforts. The two most critical indicators are open interest (OI) and funding rates.

Manipulators use open interest and funding rates not as predictive indicators like ordinary traders, but rather as a real-time feedback and targeting system. These indicators act like a "fuel gauge," telling them precisely when the market is fully penetrated by unilateral leverage, maximizing profits from a liquidation storm and making it self-sustaining.

A regular trader seeing high open interest and a positive funding rate might think, "The trend is strong, maybe I should go long," or "The market is overextended, maybe a reversal is about to happen." Their perspective is probabilistic. Manipulators controlling spot prices, on the other hand, have a deterministic perspective. They know they can force prices down. Their question isn't whether a reversal will occur, but when it will trigger its most profitable range—in other words, when to "cut their losses." Growing open interest tells them that the number of leveraged positions is increasing. High funding rates tell them that these positions are overwhelmingly one-sided. The combination of these two indicators allows manipulators to quantify the size of the "liquidation pool." They can estimate the dollar value of positions that would be liquidated at various price points below the market. Therefore, they aren't predicting market tops; they're waiting for the perfect moment to create them. Open interest and funding rates are their signals that there's enough "fuel" in the system to launch a successful attack.

• Open Interest (OI) as a measure of "fuel": OI represents the total number of open futures contracts. A rising OI, especially during an uptrend, indicates that new capital and new leveraged positions are entering the market. This isn't just existing traders swapping positions, but rather an expansion in the overall size of the bet. For manipulators, a rising OI confirms a growing pool of potential liquidation targets.
• Funding Rate as a Sentiment Measure: Funding rate is the payment exchanged between long and short position holders to anchor the perpetual contract price to the spot price.
• High Positive Funding Rate: The futures price is higher than the spot price. Longs are paying shorts. This indicates extremely bullish market sentiment and a high concentration of leveraged long positions.
• High negative funding rate: The futures price is lower than the spot price. Shorts are paying fees to longs. This indicates extremely bearish market sentiment and a high concentration of leveraged short positions.
• Combination of Signals: Manipulators await a specific combination of signals: a sharp increase in open interest, accompanied by a persistently high funding rate (either positive or negative). This combination indicates that a large number of retail traders have established leveraged positions in the same direction, forming a dense cluster of liquidation levels below (for longs) or above (for shorts) the current price. This is the "fuel" for cascading liquidations.

2.3. Narrative Warfare and the Creation of FOMO

While conducting quantitative pre-launch, manipulators often also launch a "soft power" offensive. This includes using social media, paid influencers, and press releases to build a compelling narrative around the token.

Announcing fake partnerships, heralding "significant developments," or simply promoting a "get-rich-quick" narrative can trigger intense FOMO. This psychological manipulation drives retail traders into the futures market, allowing them to place leveraged bets, directly feeding into the OI and funding rate indicators that the manipulators are monitoring.

Part III: Execution: Weaponizing the Mark Price

This is the kinetic phase of the operation, where manipulators leverage their control over the spot market to launch direct, precise attacks on the derivatives market, weaponizing the exchange’s own mechanisms.

3.1. Mechanical Connection: A Deep Dive into Mark Price Calculation

The key to this strategy is that perpetual swap liquidations are triggered by the Mark Price, not the Last Traded Price. This is a crucial distinction. The Last Traded Price can be highly volatile and easily manipulated within a single exchange, so exchanges use the more robust Mark Price to prevent unfair liquidations.

While the Mark Price formula varies slightly between exchanges, it's fundamentally based on an index price plus a decaying funding rate component. The index price is the volume-weighted average of the asset's spot prices across multiple major exchanges.

This design creates a direct and unavoidable chain of cause and effect:

Manipulator’s spot market behavior → Spot price change → Index price change → Mark price change → Triggering liquidation.

By controlling the dominant spot market for a new, illiquid token, the manipulators effectively control the primary input variable for the mark price calculation. They are not influencing the liquidation mechanism, but rather dominating it.

Manipulators are exploiting exchanges' inherent risk management systems—namely, mark prices and automated liquidation engines—as a tool for profit amplification. This system, designed to protect exchanges and traders from excessive risk, becomes a mechanism for "harvesting" when a single entity controls the underlying spot price. Exchanges introduce mark prices to prevent manipulation based on the latest traded price on a single exchange, assuming that the aggregated index price is difficult for any single actor to manipulate. This assumption holds true for highly liquid, decentralized assets like BTC or ETH. However, for a new token with low liquidity, the index price may consist of only one or two "exchanges" (some of which are simply liquidity pools on decentralized exchanges). By controlling a majority (e.g., 98%) of the circulating supply, manipulators can easily control the price of the most important input variable in the index price calculation. Thus, manipulators weaponize the exchange's safeguards.

Chain liquidations were not a secondary objective of their actions, but rather their primary goal. The forced market orders generated by the liquidations provided the manipulators with a massive amount of liquidity to close out their large futures positions at extremely favorable prices.

3.2. Short Squeeze Script (Harvesting Shorts)

Prerequisites: Manipulators observe falling prices, rising open interest, and deeply negative funding rates (funding rates can also be used as a means to induce longs and shorts), indicating that large leveraged short positions are accumulating. Retail investor sentiment is bearish.

Phase 1: Position Building: Manipulators quietly build a large long position in the perpetual contract market, often absorbing selling pressure from retail shorts. They are happy to temporarily pay negative funding rates, viewing it as the cost of setting a trap.

Phase 2: Spot Market Attack: The manipulator uses a small portion of their massive token holdings to execute a series of large buy orders on the spot market. Due to the extremely small public float, this action requires relatively little capital to trigger a massive, almost instantaneous price surge.

Phase 3: Chain Liquidation:

• The surge in spot prices immediately pushed up the index price.
• The index price then pulled up the mark price.
• The rising mark price hit the liquidation level for the most leveraged short positions.
• These liquidations are enforced as market buy orders, further adding upward pressure on prices.
• This creates a feedback loop or a "short squeeze": forced buying drives up prices, liquidating the next tier of shorts, which generates more forced buying, and so on. This chain reaction continues until most short positions are eliminated.

3.3. Multiple Kills, Multiple Scripts (Harvesting Bulls)

Prerequisites: Manipulators observe rising prices (often driven by their own wash trading and hype), surging open interest, and high positive funding rates (funding rates can also be used as a means to induce long and short positions). Retail investor sentiment is enthusiastic and they are using a lot of leverage to go long.

Phase 1: Position Building: The manipulator establishes a large short position in the perpetual contract market. They collect funding fees from many long positions and profit while waiting.

Phase 2: Spot Market Attack: The manipulator dumps a small portion of their token holdings into the spot market. This sudden, massive selling pressure immediately causes the spot price to plummet.

Phase 3: Chain Liquidation:

• The plunge in spot prices pulled down the index price and, therefore, the mark price.
• The falling mark price triggered the liquidation of leveraged long positions.
• These liquidations were forced into market sell orders, further adding downward pressure on prices.
• This creates a “long killing long” or chain liquidation effect, where forced selling triggers more forced selling, clearing out long positions like dominoes until the excess leverage in the market is cleared.

Part 4: The Aftermath: Profits, Risks, and Identification

4.1. Profit Realization

Profitable Closing: The primary profit comes from the large futures position established during the first step of the execution phase. During the cascading liquidation, a large number of forced market orders (buys during a short squeeze, sells during a bull squeeze) flood the market. This provides the manipulator with perfect, high-volume exit liquidity, enabling them to close their multi-million dollar position at a very high profit.

Secondary Profits: Manipulators can also profit from the spot market action itself. After a market crash liquidates longs, they can buy back their tokens (or even more) at a significantly lower price. After a market pump liquidates shorts, they can sell their tokens to capitalize on the FOMO-driven rally.

4.2. Risk Analysis of Manipulators

Capital Cost: While spot market manipulation is effective, it is not without cost. Executing a pump or absorbing the slippage of a dump requires significant capital.

Exchange Intervention: Exchanges like Binance/OKX/Bitget have internal market monitoring teams. Egregious manipulation, especially if discovered, can result in account freezes, asset delistings, or investigations. Cases have shown Binance/Bitget firing investigators who exposed manipulation by major clients, highlighting the complex and sometimes conflicting environment.

Counterparty Risk: This strategy assumes the manipulator is the only whale in the pond. While unlikely given a 97% control position, there is still the possibility that another large entity could attempt to manipulate the market in the opposite direction, potentially leading to a costly price control battle.

4.3. Red Flags and Defensive Analysis for Retail Traders

Token Economics Red Flags (from Part 1): Verify on-chain holder concentration. If the top 10 holders control over 90% of the supply, the asset is structurally compromised and presents a high risk of manipulation. Avoid tokens with very low initial circulating supply.

Market Activity Red Flags (from Part 2): Be wary of tokens experiencing price surges accompanied by suspiciously high trading volumes, but without real community growth or utility. Cross-reference trading volume with on-chain transaction counts and holder growth to identify potential wash trading.

Derivatives Red Flags (from Parts 2 and 3): The strongest warning sign is a sustained and rapid increase in open interest accompanied by extreme funding rates. This suggests the market is overleveraged and ripe for a dramatic "purge" event orchestrated by entities controlling spot prices. Analyzing the rate of change in open interest can be more revealing than its absolute value.

By understanding the structure of this strategy — from its structural foundation in token economics to how it is executed through mark price — sophisticated market participants can better identify these carefully crafted traps and avoid becoming the “liquidity” that manipulators intend to harvest.

Know that it is so, and also know why it is so.

May we always maintain a heart of awe for the market.