Cryptocurrency markets are on the rise, and they are under significant danger of unlawful trading. Among the most harmful of them is wash trading, which distorts information in order to mislead investors. As the regulators increase the restrictions, traders need to understand how this practice operates and how they can prevent it.
What is Crypto Wash Trading?
Crypto wash trading is a fraudulent activity that makes a trader purchase and sell the same digital asset multiple times. This is done to get the appearance of high trading activity, without the participation of real market participants. It deceives investors by making a token or a project appear more popular and valuable than it is.
This strategy can be traced to the days of conventional finance but has since become the norm in the cryptocurrency and NFT markets. To create the illusion of demand and create a market buzz, traders use several wallets or accounts. This has had the effect of attracting new investors to be deceived into making bad financial choices.
How Does Wash Trading Work in Crypto?
Wash trading often entails the trading of assets between necessarily attached accounts through automated bots. To present large trading volumes, these bots make thousands of trades within a few seconds. It aims to deceive traders that there is a high demand.
Exchanges without monitoring tools are targeted mainly by the traders. These platforms will provide them with the room to trade without being noticed. The price and volume of the asset increase at a rapid rate as trades are stacked.
This practice is also common in collusion between groups. They have access to wallets and trade between themselves. The outcome is exaggerated numbers that assist in attracting innocent investors.
How Does it Affect the Cryptocurrency Market?
The illusion of trading volume deceives the traders into thinking that a coin is more trading and in demand than it is. They base many investment decisions on the volume information, hence they purchase hurriedly when they observe the growing activity. Nevertheless, this book is man-made and a large number of investors are losing their money when the price all of a sudden falls.
The other significant effect of wash trading in crypto markets is artificial price inflation. The repeated exchanges between coupled wallets drive the price up with no actual purchase action in the market. Once the price has been made high, the manipulators would sell their assets, and the value drops, leaving traders with useless tokens.
The most harmful long term effects of wash trading are loss of trust and transparency. Investors start doubting the precision of market information, token price, and exchange efficacy. This has the effect of slowing down adoption, and serious investors are not attracted to legitimate projects in a distorted environment.
NFTs Are Also Vulnerable to Wash Trading
Cryptocurrencies are not the only objects of wash trading, as NFT markets are not less prone to it. Floors are overpriced by traders who transfer NFTs between wallets they own. This increases the value in the absence of bidding interest.
The buyers observe the overpriced prices and perceive that the NFT is a trend. They make investments, and the value goes down afterwards. Manipulators leave behind people with losses.
This is facilitated by NFT platforms that are poorly regulated. Artificial floor prices are on the increase without the check. This compromises the trust and transparency that is required in digital collectibles.
How to Identify & Avoid Wash Trading in Crypto
The process of identifying wash trading is to find any obvious warning signs that there is unnatural activity. These signs include:
- Unaccounted volume surges in the absence of news.
- The abnormal movements in prices occur in very short durations.
- The transactions between the same wallets are repeated.
- Massive exchange volume disparity.
To be secure, traders are advised to do a thorough research on the asset and not to invest in coins that are characterized by artificial hype. They should:
- Keep track of various platforms of volume.
- Observation Watch wallet behavior with public blockchain tools.
- Only checked and certified deals should be trusted.
- Never invest in trading charts.
Traders can remain vigilant and wary so as not to fall prey to manipulation. Exposure to wash trading is minimized through research, patience, and choice of platform. The better the investor is informed, the less risky the trading decision made.
Is Crypto Wash Trading Illegal?
Wash trading is not legal as it entails the false formation of information that deceives investors into believing that the market is in the right state. Regulators across the globe classify it as market manipulation. Law enforcement is putting more effort into checking and chastising such behavior.
The SEC and CFTC are putting more regulations on trading platforms in the United States. Those exchanges that do not halt the wash trading can be fined heavily or prosecuted. Proposals are being made to enforce the use of sophisticated detection devices.
Canada, the EU, Japan, and the UAE are some other countries that are making efforts to fight this problem. Exchanges are now required to disclose suspicious activity and enhance the verification of users. It is aimed at securing the investors and regaining confidence in the crypto market.
Conclusion
Wash trading remains a challenge to the crypto and NFT markets. It swells values and misleads investors, leading to losses and financial shocks in the market. Despite the progress of the regulating bodies and platforms, awareness is the most effective protection.
Risky investments can be avoided by detecting suspicious patterns at an early stage. Traders are advised to do their research and only believe in confirmed information. Through positive action and improved systems, the market may be set on the path of more equitable and transparent development.
