As the entire cryptocurrency industry is gearing towards more regulations and transparency, wash trading crypto, a common malpractice in the industry, comes under intense fire and increased scrutiny from many actors. But what exactly is wash trading and how does it affect the crypto markets? Learn more by reading this article.
What is Wash Trading?
Wash trading is the process of expressly buying and selling a stock, bond, or commodity to create false, misleading, and/or artificial activity in the market. This buying and selling of assets are done at a small loss due to fees but the actual value does not change hands as it is generally done by few participants throughout the transactions. Wash trading can be done between investors, traders or investors. Washing is considered illegal in most countries, including the USA, as it falsifies trading volume.
A definition of trade washing by the IRS is the selling at a loss of a security that was bought within 30 days. To note, the IRS does not accept losses due to wash trading to be deducted for tax purposes.
An example of wash trading would be trader A sells 10 BTC at $ 4,000 and trader B buys 10 BTC at $4,000. The trade goes through and both traders now enter trades in the opposite direction; with trader B selling and trader A buying at the same $ 4,000 price. Both traders have near no cost except for possible transaction fees but the trading volume on the exchange increased by 40 BTC.
For other traders, this would make the BTCUSD trading pair activity on the exchange look deceitfully active and may lead them to believe the exchange has good liquidity or make them take the wrong decision. This is especially true for new tokens released on not reputed exchanges as the pumping artificially creates volumes and undeserved buzz around the coin.
Wash trading crypto- how bad is it?
The cryptocurrency markets currently remain largely unregulated and as such face many challenges when it comes to wash trading practices from exchanges. According to a recent survey by the Blockchain Transparency Institute, or BTI for short, 23 out of 25 renowned exchanges, or 92%, had largely wash traded volume in 2018; with many exchanges having under 10% of the reported 24h volume being real. In another investigation of 131 exchanges, the total reported trading volume for all exchanges was a little over 67% fake and this number included the 100% real volume of two major reputable exchanges; meaning that without these two exchanges the large majority of the reported volume would be 80% to 99% fake.
Wash trading crypto and wash trading bitcoin in particular seem to be common malpractices on spot and derivatives exchanges as they increase the perceived total trading volume of the exchanges and makes them look more attractive and reputable to unsuspecting traders. However, as 90% of referral volume for new and aspiring exchanges comes from listing or ranking websites such as coinmarketcap, this makes overstating their daily trading volume a very attractive choice for this exchanges and makes standing out much more difficult for exchanges advocating for more transparency, regulations, and not resorting to wash trading their trading volume like Bybit.
But new exchanges trying to demark themselves from the competition is just one of the many reasons this malpractice is so widespread in the crypto industry.
The first reason is the inflated activity creates a buzz around tokens, coins, and projects and make them look more attractive than they really are to unsuspecting traders and investors. This, in turn, drives the price higher and, was, much like new exchanges, used by many new projects, and ICOs, to create an artificial interest in them at launch.
The second reason this malpractice continues to plague the industry is related to the first one. New projects wishing to expand their visibility could do so by being listed on exchanges with high trading volume as these are perceived as potential sources of traffic and revenue. But, as previously mentioned, many of these exchanges actually inflated their volume through wash trading done by bots and their high trading volumes were fake. They, then, asked for high listing fees from projects and organizations lured in by the publicity prospects.
Wash trading discredits the entire industry as it prevents traders, institutions, and projects from getting an accurate vision of how the market is doing and where it is headed.
With ICOs scam, wash trading is another factor influencing the bad reputation cryptocurrencies suffer from in traditional finance. Increased regulations, transparency from exchanges, and scrutiny from unbiased organizations are the only way to end these disreputable malpractices and make cryptocurrencies more appealing to traditional financial investors and revitalize the markets.
This concludes today’s article detailing wash trading crypto, how it affects the entire industry and how wash trading Bitcoin discredits and disservices the traders, institutions, and markets. We hope you learned a lot, enjoyed the read and stay tuned for more great content.
Bybit is a cryptocurrency derivatives exchange with 100x leverage BTCUSD perpetual contracts; providing a fairer, faster, and more human trading environment.