Wash Trading

Wash Trading: What It Is and How It Works

(With the rise of cryptocurrencies, a form of market manipulation, Wash Trading was also used to mislead the market )

With the popularity of NTFS and cryptos, new types of scams came into the market, such as wash trading. Traders use this trading strategy to influence the crypto price and trading activity. In the past, many wash trading cases were reported; e.g., a south Korean exchange Bithumb was accused of supporting the wash trade worth more than $259.

It is a big scam that affects market prices in crypto and traditional markets. Therefore, it is prohibited by the commodity exchange act (CEA) and the Securities Exchange Act of 1934. 

Let’s understand wash trading in detail.  

What is Wash Trading? 

Wash trading is a scam where a trader buys and sells the same currency multiple times to deceive other market partners. In some cases, it’s a direct attempt to enter the market, while others lack investor knowledge. In many situations, investors and brokers both work to manipulate the market prices for the benefit of both sides.   

It also misleads traders by spreading wrong information in the market. Most often, this trading is executed by traders or brokers who collide with each other, while other times, it results from traders who act as both buyers and sellers of the security. 

As mentioned, wash trading creates fake hype between investors for security that trading volume is higher than they are, increasing the legitimate activity on the security.

A Forbes report says that half of reported bitcoin trading volume is either fake or wash trade. There are multiple reasons for wash trading in the crypto space. In all conditions and industries, the motive of this trading is the same to influence the price or trading activity.

Is it legal?

Wash trading is considered illegitimate in the U.S. It has no commercial value, but this type of trading is used in many situations. E.g.wash trades can be during a scandal to pay off the brokers. These types of trades also can generate a fake volume of trades to manipulate the market prices. 

Even though it is illegal in many countries and prohibited, the decentralized structure of cryptocurrencies makes it difficult to track down real scammers. Still, it’s used in many unregulated types of the market.  

It was prevalent in the traditional market. But in recent times, it has also invaded the crypto space. Similar to conventional assets stocks, Popular cryptocurrencies such as bitcoin and Ethereum also experience wash trading.

People use such trading to make a safe strategy to cover themselves. Trading in the crypto market is very different from the traditional market, which makes it vulnerable to wash trading. 

In the conventional market, stock trading uses KYC ( know your customer) to verify your details. In the blockchain space, trades are executed anonymously, leading to the risk of this trading type. Wash traders also invaded the NFT space. These types of traders are incurred by targeting the addresses. 

One notable example of NTF wash trading is cryptopunk9998. This NFT was initially sold at the price of 124,457 ETH -approximately worth $532 million. The ether used to buy this NFT was transferred to the seller, and then it was again transferred to the buyer to pay off the loan. 

Fake trading manipulated the market hence strictly banned in the traditional market. A simple attempt to avoid it could be aware of the market rules. Understanding when sales rules are applied can help you stay out of these scams. 

Final words 

This type of trading is illicit to manipulate the market price or trading volume. However, it’s hard to invade the crypto space due to the strict regulations of the blockchain. This type of trading can affect a variety of industries. There are regulations so traders can not benefit from this loophole and ensure safe trading practices. We hope this guide will be helpful for you for more such content, check our full website.