Wash Trading, A Form Of Market Manipulation, Is High Among Crypto Exchanges: Study

Zinger Key Points
  • Wash trading on unregulated cryptocurrency exchanges a widespread problem.
  • In first quarter of 2020, wash trading constituted $4.5T in spot markets and $1.5T in derivatives markets.

Some 70% of unregulated cryptocurrency exchange transactions are wash trading.

That's according to a new study from the National Bureau of Economic Research (NBER).

Wash trading, the practice of buying and selling a security for the purpose of creating the appearance of increased trading volume and liquidity, is a form of market manipulation.

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The study analyzed data from 29 unregulated cryptocurrency exchanges and found that wash trading was more common on exchanges with lower liquidity and higher spreads. This indicates that it may be used to artificially boost the attractiveness of these exchanges.

Highlighting the need for increased regulation and oversight in the cryptocurrency industry, the study, titled “Crypto Wash Trading” stated, “without proper regulation and with vertical integration not seen in other markets, crypto exchanges may potentially engage in market manipulation or even outright frauds.”

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Estimates Translate

According to the researchers, wash trading volume is, on average, as high as 77.5% of the total trading volume on unregulated exchanges, with a median of 79.1%.

Particularly, wash trades on the 12 Tier-2 exchanges are estimated to be more than 80% of the total trade volume, the researchers state.

These estimates translate into wash trading of over $4.5 trillion in spot markets and over $1.5 trillion in derivatives markets in the first quarter of 2020 alone.

Researchers say wash trading provides several incentives like upping the ranking of exchanges on data websites like CoinMarketCap. It may positively affect cryptocurrency prices over the short term.

Following the collapse of cryptocurrency exchange FTX, Ethereum wallet addresses connected to the defunct trading company Alameda Research exchanged multiple crypto tokens for Ether ETH/USD and USDT/USD earlier this week before bridging them to the Bitcoin BTC/USD network.

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Posted In: CryptocurrencyNewsMarketsAlameda ResearchCoinMarketCapCryptocurrency ExchangeDerivatives marketsEthereum wallet addressFTXMarket ManipulationRegulation in the cryptocurrency industrySpot marketsTrade volumeUnregulated cryptocurrency exchangewash trading
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