In this article, you will learn what is wash trading in crypto. All sorts of schemes exist in trade that skirt the very edge of legal activity, with some taking the plunge straight over the edge. Wash trading is a form of day trading with enormous ramifications for the trader or traders involved.
What is Wash Trading in Crypto?
Wash trading in the context of crypto refers to a manipulative trading practice where a trader or group of traders buy and sell the same asset among themselves, creating the appearance of volume and liquidity in the market, but without any actual trades taking place. This is Typically done to give the impression that there is more interest in a particular asset than there actually is, which can help to artificially inflate the price of the asset and attract other investors.
Wash trading is considered illegal in many jurisdictions and is prohibited on most reputable cryptocurrency exchanges. It is often used to manipulate the price of smaller or less liquid cryptocurrencies, where even small amounts of trading activity can have a large impact on the price.
Wash trading can be difficult to detect, as the traders involved may use multiple accounts or employ other tactics to disguise their activity. However, some exchanges and regulatory bodies have implemented measures to try to identify and prevent wash trading, such as monitoring for unusual trading patterns or requiring exchanges to report trading data to regulatory authorities.
The Problem With Using Volume in the Cryptocurrency World
The use of volume makes sense in a world with strict regulatory oversight — high volumes would indicate liquid markets with a good number of traders. However, if market malpractices like wash trading are not regulated — such as in the case of cryptocurrency — volume becomes quickly a poor indicator.
After all, in the traditional markets, brokers and exchanges are able to flag wash trading by monitoring for patterns such as two accounts going back and forth on the same market for large amounts of trading volume. However, that requires access to account-ID data , and such information is usually kept private and confidential by exchanges. Third-party aggregators would have no means of obtaining that information. Besides, brokers and exchanges in regulated financial markets are required by law to conduct market surveillance, unlike in cryptocurrency markets.
Bottom Line
The cryptocurrency space may derive a model that will give us yet our best chance at identifying exchanges and market pairs in the most objective, accurate manner possible today. This is our best chance at fighting volume inflation. This article is about what is wash trading in crypto.
