A recent study on over 150 crypto trading exchanges has reported that more than 50% of daily BTC trading volume is fake. Back in 2019, a leading asset management firm had revealed that more than 90% of BTC trade volume (reported) is not true. Another study conducted in 2020 reported that 70%+ trading volume boasted by non-regulated crypto exchange platforms is fake. Wash trading is a method by which crypto exchanges are able to show higher trading volumes even when so many trades had not taken place in the real world. It’s a form of market manipulation and the advent of high-frequency crypto trading system has only made the process easier. Unfortunately, wash trading is more prevalent in the crypto trading sphere than in the other trading worlds.
But, what is it meant by wash trading and who does that?
The post below offers a brief on wash trading so that innocent crypto investors and traders can save themselves from such nefarious tactics.
Wash trading in crypto
Well, wash trading, be it in crypto or any other trading world, is termed as “round-trip” trading.
What and why of wash trading?
In this type of trading, a trader/investor purchases as well as sells crypto assets (same asset) just at the same time. The trade shown would be made by multiple accounts of the same person as well. One agenda behind wash trading is to stimulate purchase of a crypto asset to pump up the prices. Thus, wash trading is more commonly witnessed with low-performing assets. Then, another agenda behind wash trade is to stimulate selling so that prices take a sharp dip. If the crypto takes a dip, the wash trader would be able to purchase the crypto at a low price that would eventually help to receive a taxation refund.
It’s to note here that it’s not always the individual investors or traders but also crypto exchanges that exchange in wash trade. The opening paragraph has already mentioned the shocking stats about fake reporting from crypto exchanges. Crypto exchanges take part in wash trading to flaunt high liquidity of their exchange platforms.
Not same as day trading
You might find similarity with day trading practices here which is perfectly legal and ethical- but it’s the intent that separates wash trade from an innocuous day trade. When it comes to day trading, a trader simply trades to gain profit for his portfolio. He doesn’t have an intention to affect or influence the trade of others for his own vested interests. But, wash trading is about all these that day trade is not. So, the process might look alike but it’s the sinister agenda of market manipulation that makes wash trading a dangerous process.
Two major aspects of wash trading
A trade can be officially termed as “wash trade” if it fulfils these two major conditions-
It must be proved that the trader has entered the wash trade consciously and deliberately. It must be noted that at times novice traders might engage in wash trading-like practices without knowing that their activities are actually manipulating the market. It would be unfair to tag them as “wash traders”. Thus, only those that execute wash trade with the agenda of market manipulation for vested interest should be labeled as wash traders.
The transaction, that is being tagged as “wash trade”, should result in wash trade.
In that regard, there should be adequate evidence to prove that the people or organizations involved in the transaction or trade must have both purchased and sold that crypto at the same time. There must also be sufficient evidence to prove that all the accounts involved in the trade share beneficial ownership.
Dangers of wash trading
Misconception about an asset
As wash trade is a “made-up trade”, the numbers that they show are never the actual deal. But, other traders don’t know about that. Put simply, it spreads misleading information about an asset’s status, price, and profit potential. Such misconceptions dangerously affect trading decisions of other innocent traders who fall prey to dirty market manipulation.
Misleading information about a crypto exchange
One of the major parameters while choosing a crypto exchange is the liquidity volume of the platform. High liquidity implies high trading volume- a key metric that attracts investors and traders to a crypto exchange. But, when an exchange shows inflated liquidity through wash trading, it only conveys a misleading message to the aspiring users of the exchange. Fake reports about high liquidity go a long way to trap down innocent users only to leave them with a poorly-performing exchange. In fact, these kinds of misleading data could be disastrous to the overall crypto portfolio of an investor or trader.
Depriving deserving exchanges of users
Wash trading antics by illicit exchanges pull in several innocent traders to their trap, thereby depriving deserving exchanges of members. In other words, it creates uneven and unfair ground in the crypto trading world.
Why is wash trading prevalent in the crypto world?
It has been officially labeled as illegal in the traditional finance world. Both the SEA and CEA have prohibited this manipulative trading activity. But, things are fairly easy in the crypt zone. It’s primarily because the crypto zone is vastly unregulated. The absence of hard-core regulation has made the crypto world a play-ground for hackers, scammers, and wash traders. One cannot expect any improvement or safety guidelines in regard to wash trading unless strong regulations are imposed to curb down manipulative tactics. buy bitcoin
However, if you are cautious enough, you would be able to save yourself from falling prey to wash trading activities. First, you must settle for cryptos that are already established names in the market for years. As these are already established names, these are hard to manipulate. Wash traders mostly manipulate low-performing cryptos. Thus, beware of those cryptos that are suddenly showing a meteoric rise. If the surge continues and if the crypto truly shows potential, then it might not be a wash trade.