Wash trading, i.e. the artificial inflation of trading volumes, is a popular marketing tool of some exchanges in the crypto-market. Research by the Blockchain Transparency Institute has shown that some reported trading volumes show wash trading of up to 90%.
Wash trading is a manipulative trading practice whereby an investor simultaneously buys and sells a financial instrument in order to create deceptive or artificial activity in the market. The primary objective of wash trading is to create a false impression of increased trading volume or market demand, potentially influencing perceptions of the popularity or value of the traded asset. This practice is generally considered to be unethical and, in many financial markets, illegal. Regulators aim to detect and prevent wash trading in order to maintain fair and transparent market conditions.
Significance in the crypto market
Wash trading is a known issue in the crypto market, with exchanges making adjustments in there metrics to account for inflated volumes. Smaller exchange used high trading volume as a marketing to receive a higher listing on analytic website like CMC. CMC reported Of the top 100 exchanges listed on Coinmarketcap, 73 exchanges have more than 90% wash trading.
In the area of NFTs the method is used to inflate the value of collections. Malevolent actors do this by trading between their own accounts to create the impression of a high demand. Because NFT collections have a traditionally low collection size (typically around 10,000), it is fairly easy for a single person to own a substantial amount of the assets of a collection. This allows them to manipulate the market in their favour.
