What is Wash Trading Crypto?

What is Wash Trading?

Wash trading involves a trader buying and selling the same asset in order to mislead the market. It is a practice where a trader and a broker will collude with each other. It can, however, also involve an investor acting as both the buyer and the seller.

It is carried out with the aim of misleading other investors so that they believe that a particular asset is attracting larger volumes of trading than is actually the case. This may then prompt more legitimate trading in that asset. High-frequency trading firms and cryptocurrency exchanges have been accused of using wash trading to manipulate prices.

What is Wash Trading in Cryptocurrency?

With the past decade or so having seen the rise of both cryptocurrency and ever-faster computers, the conditions have been favourable for wash trading. The enthusiasm many have developed for investing in crypto and the ability to complete thousands of trades in a split second have presented greater opportunities for those looking to make gains through wash trading.

Even the most popular and well-known cryptocurrencies have experienced wash trading. With the cryptocurrency sector evolving rapidly and many new products continually coming on to the market, wash trading has been used as an underhand way of boosting an asset’s profile and, therefore, its value. A study conducted in 2022 by Forbes into 157 cryptocurrency exchanges found that more than half of all reported trading in Bitcoin was either fake or non-economic wash trading.

Such activity can flourish because even the most established digital currencies may often not have properly recognised methods for calculating daily trading volumes. Cryptocurrency exchanges may also be far from legitimate, as has been shown by a number of high-profile collapses. As the cryptocurrency market is also extremely volatile, quick buying and selling is often the norm – a situation that can lead to wash trading going unnoticed.

Conclusion

Wash trades have the effect of cancelling each other out eventually. But they serve the purpose of deluding the market to suit the aims of those carrying them out. Whether wash trading is used to boost the appearance of trading activity in an asset - thereby prompting an increase in legitimate trading in it - or to falsely inflate the price of an asset as part of a pump and dump scheme, would-be investors need to be aware of the dangers.