When a company simultaneously purchases and sells the same asset to provide the appearance of heavy trading activity can be defined as an act of wash trading. Strategy of such a nature further deceives market participants into believing that an asset is more liquid or popular than it actually is simply through boosting trading volumes. Therefore, a lot of investors can be lured in under false pretenses that there is genuine demand residing in the market.
Wash trading has been prohibited in the sector of traditional finance by a number of financial laws that include the Securities Exchange Act of 1934 in the United States as well. Wash trading is still a major problem that is currently existing in the world because cryptocurrency markets are mainly unregulated in their nature. However, the process of enforcement might be really challenging in the places where several exchanges operate due to the loose nature of laws and legislations.
How Cryptocurrency Wash Trading Operates?
There are several techniques which are primarily concerned to carry out the procedure of wash trading in cryptocurrency markets which might include:
1. Individuals or Bots Self Trading
There are some traders in the market of cryptocurrency that utilize the trading bots or several accounts with the aim to buy and sell orders in simultaneous manner. This procedure has the ability to make a coin look extremely active in the trading market simply through inflating its trade volume. Action of such a nature can often go unnoticed if it is not closely examined thoroughly.
2. Manipulation Driven by Exchange
There are several cryptocurrency exchanges who are currently practicing the procedure of wash trading in order to draw in more users and give the appearance of a liquid market. There are also some exchanges that are into tucking away or unregulating the coins with the aim to falsify volume reports to seem more competitive against larger competitors. They use such deceptive tactics to lure the additional traders to their platform simply by doing this.
3. Sharks and Token Issuers
Wash trading has been a really commonly used tactic by the cryptocurrency projects and big cryptocurrency investors with the intention to increase the perceived demand for a token. This tactic has been frequently utilized to entice the investors during initial exchange offers (IEOs) and the introduction of new tokens at the same time. Spike in the prices can be brought on by false demand which might result in large losses as well.
4. Programs for Trading Incentive
However, there are several exchanges that subtly persuade users into wash trade with the aim to receive benefits like reduced fees, rebates, or native tokens simply through providing incentives for large trading volumes. Scammers can easily manipulate to take advantage of these incentives despite their fair intentions .
What is the effect of Wash Trading on the Crypto Market?
1. Inaccurate Market View
Procedure of wash trading gives traders a wrong sense of security regarding the liquidity and popularity of a coin merely by inflating market data. Investors are more likely to join in through assuming high demand only to discover later that the volume was fabricated in its nature. Illusion of such a sort might result in large financial losses when the real demand does not materialize.
2. Price manipulation
It is also possible that manipulators raise prices and provide the impression that an asset is being bullish with the inflating volume. Wash traders can also gain profit from their sales after real investors enter into the market that might leave others with overpriced assets. Retail investors are seen to be most harmed by this since it frequently results in abrupt price falls at the same time.
3. Concerns about Regulation and Trust
Regulators and institutional investors are fully discouraged from the varying nature of cryptocurrency markets due to the prevalence of wash trading on a wider level. Stricter regulatory crackdowns have ended up resulting in declaring that the digital assets are much vulnerable to fraud in their nature. The widespread use of cryptocurrency assets is still doubtful if this problem is not resolved on an institutional level.
4. Money Loss for Retail Investors
Trading volume has been frequently utilized by retail investors as a gauge of the legitimacy of the project itself. They are much prone to invest in some fraudulent schemes or extremely volatile assets without any genuine market support as they fall for manipulated volumes which might result in decline of confidence within the cryptocurrency markets.
What is the extent of the issue?
95% of the bitcoin trade volume claimed by the unregulated exchanges were either fraudulent or unprofitable as per the analysis done in the year of 2019 by Bitwise. There are more than half of the stated trading activity across the cryptocurrency exchanges which were probably falsified as per the analysis of Forbes done in the year of 2022. Such figures have helped in demonstrating how serious the problem is and how quickly regulations must be implemented in the specified sector. There is no doubt left when we say that wash trading is still a common problem even with more regulatory oversight.
By understanding and addressing cryptocurrency wash trading, investors can make informed decisions, avoid market manipulation, and navigate the evolving AML crypto landscape. Stay updated on the latest regulatory measures, trading risks, and best practices to protect your investments.
