Wash trading has recently become a more significant issue for exchanges, investors, and regulators in the sector of cryptocurrency and NFT particularly. It is quite important to comprehend what wash trading means in order to properly navigate this complex financial market.
Today in this article, we will define wash trading, look at actual cases, and talk about how it is applied in the NFT and cryptocurrency markets, including the function of sites like Binance.
What is Wash Trading?
Here we are going to begin with the fundamentals of wash trading. The illegal practice of a trader where they simultaneously purchase and sell the same asset to give the false impression of market activity is considered as “wash trading.” It is similar to trying to convince yourself that a thing is more valuable or in demand than it actually is if we put it in a simpler way.
You must be wondering what is the objective behind doing this? It is to trick other market players simply through manipulating the volumes or prices.
Depending on the market, the definition of wash trading may differ slightly, but the basic idea is always the same: it involves fabricating activity to deceive onlookers.
An Example of Traditional Wash Trading
Just supposed that XYZ Coin is the cryptocurrency that Alice owns. She wants XYZ to seem well-liked and actively traded in order to draw in additional purchasers from the market. Then she creates two accounts with an aim to sell XYZ and buy it at the same time and price. There is not any actual ownership shift but a manipulation which took place. However, it appears to the outside world that XYZ is a hive of activity.
This is a classic example of wash trading which has been observed in commodities, stocks, and more recently, cryptocurrency and NFT markets also.
Is Crypto Wash Trading a Growing Problem?
The practice of crypto wash trading is very common and particularly in unregulated marketplaces. An analysis conducted in the year 2023 from the National Bureau of Economic Research which suggested that wash trading may be responsible for more than 70% of trading activity on certain unregulated cryptocurrency exchanges.
Such sort of happening has ended up distorting the image of token liquidity and demand, deceiving institutional and individual investors alike. It is highly possible that when investors rush into a market believing a coin is “hot,” they are entering into a controlled one.
Wash Trading on Binance and Other Exchanges
There are allegations of wash trading which have been made against even well-known platforms like Binance. Then regulators discovered early on that certain market makers were inflating volumes simply through wash trading cryptocurrency pairs.
The incident brought up significant issues regarding the function of exchanges in preventing manipulation, even if Binance denies any involvement and keeps bolstering its surveillance mechanisms. What measures are in place to protect the regular investors if users are engaging in covert wash trading?
The stricter international inspection has been prompted by the focus on Binance wash trading and comparable trends on other major exchanges.
Is NFT Wash Trading Faking the Hype?
It is interesting to know that NFT wash trading is a new development that came with the introduction of NFTs.
The process is as follows:
If the NFT owner is making several wallets and trading the same NFT between them while frequently increasing prices. These fake sales have generated the buzz simply through giving the impression that the asset’s worth is rising or that the artist is becoming more well-known.
It is simple to falsify the ownership transfers because NFT transactions are publicly visible on the blockchain and are not always connected to actual individuals. The NFT wash trading was responsible for hundreds of millions of dollars in fraud volume according to a Chainalysis analysis in 2022 alone.
As a result, it becomes difficult to trust price trends and compromises the integrity of digital art marketplaces.
How to Spot Wash Trading
There are several warning indicators despite the fact that wash trading can be complex which are as follow:
- Unusual trading volume: It might show as a sudden spikes without any news or updates
- Repetitive trades: Same amounts and prices between two or more wallets at the same time
- Self-trading wallets: Wallets that transact almost exclusively with each other
- Low liquidity tokens: Easier to manipulate without being noticed by the legal authorities
These patterns can be found through the utilization of blockchain analytics tools and keeping an eye on on-chain activity, which platforms and investors alike should do on a regular basis.
