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What is Crypto Wash Trading and Why Does It Matter?

crypto wash trading

The cryptocurrency market is only a decade old and the lack of regulation continues to be one of the great concerns investors have when it comes to allocating capital. Additionally, the lack of regulation creates an environment where price manipulation techniques can thrive unharmed. Wash trading is one of the most popular and in case you are not yet aware of what that means, today we want to give some brief details.

Wash trading explained

Wash trading is a market manipulation technique that implies an entity (exchange platform, investor, or cryptocurrency project owner) buys and sells cryptocurrencies to create the impression of increased interest in a particular token. Various studies point out that the adjusted daily volumes reported by most of the cryptocurrency exchange platforms are 90% fake and are artificially inflated via wash trading.

This is an aspect that makes it hard for a retail trader/investor to see what are the cryptocurrencies that are worth investing in. Risk sentiment could be heavily influenced when market participants rush into a token after seeing large trading volumes reported. A self-reinforcing is set into motion and can generally result in “pump-and-dump” situations.

Why exchanges want higher trading volumes

It’s in the interest of cryptocurrency exchange platforms to record high trading volumes since their revenue is thus much higher. At the same time, new cryptocurrency projects need to see interest in their tokens increase. That will increase the price and the market cap and could spur new investments as other market participants are noticing these details.

Although this topic is controversial and little discussed, all people interested in the cryptocurrency market must be aware of these practices, since their decision-making process could be influenced by market manipulation techniques like wash trading.

How investors/traders can protect themselves?

We’re now in 2020 and COVID-19 could put cryptocurrencies in the spotlight. As investors look for diversification with cryptocurrencies, the real interest could be seen in the increase of daily adjusted volumes. Wash trading should gradually decline as the industry reinforces stricter rules, but until then, the average investor/trader must find protective measures.

The bigger the exchange by daily adjusted volumes, the higher the degree of wash trading. That means it will be important to work with cryptocurrency exchange platforms that have a long track record in the industry. At the same time, some exchanges are operating from countries prohibiting wash trading. In the United States, wash trading had been banned since the 1930s and there is no surprise exchanges like Coinbase or Kraken (based in the US) are now some of the most reliable names in the industry.