What Is a Wash Trade?
A wash trade is a deceptive trading practice where a trader buys and sells an asset without any legitimate purpose other than manipulating the market or creating misleading trading activity.
This type of trade can involve colluding parties executing opposite sides of the transaction to create a false impression of trading volume or price movement.
Illusory Liquidity
In cryptocurrency, wash trading has been observed most commonly in the context of non-fungible tokens (NFTs) and low-market capitalization altcoins.
These assets often have limited liquidity and are susceptible to manipulation schemes like pump and dump.
Wash traders engage in activities to artificially enhance the perceived liquidity and demand for these assets, enticing unsuspecting investors to participate and potentially driving up prices.
Unveiling the Facets of Wash Trading
Cryptocurrency trading can be facilitated by the lack of a standardized framework for calculating trading volumes across different exchanges.
This makes it easier to disguise the manipulative activity.
Crypto firms and exchanges may report varying trading volumes and statistics, which can contribute to false market signals.
Additionally, malicious actors may employ wash trading on certain exchanges to manipulate prices and create fear, uncertainty, and doubt (FUD) in the broader market.
How Prevalent is Wash Trading in Crypto?
The exact extent of wash trading in crypto markets is challenging due to the lack of coordination and standardized reporting mechanisms.
However, a 2022 study by Forbes revealed that over 50% of reported Bitcoin trading volume on 157 crypto exchanges can be attributed to wash trading.
Is Wash Trading Illegal?
Wash trading is generally considered illegal in traditional securities markets.
Note that the regulatory landscape for cryptocurrencies is evolving, and specific regulations regarding wash trading may vary by jurisdiction.
However, deceptive trading practices and market manipulation are generally frowned upon and subject to enforcement actions by regulatory authorities.
For more in-depth information on wash trading, refer to our comprehensive guide, “Dive Into Wash Trading.”