Wash Trading Crypto Currency: Is it legal?

The global financial market can have its highs and lows, but those outcomes often occur due to significant shifts in international trade and economic conditions. In addition to such factors, the parallel existence of cryptocurrency & wash trading crypto practices also affects the global financial market.

Fiat money is currently one of the top ways to acquire crypto tokens besides serving as a utility for purchasing products and services on the blockchain like crypto NFTs, smart contracts, etc. Hence, the sporadic uses of collective cryptocurrencies can shift the market and make it prone to bullish or bearish conditions, which is often liable to inquiry for wash trading because such a type of practice can disrupt the global economy.

wash trading crypto

Moreover, the growing number of cryptocurrencies further poses the threat of loss of liquidity in the market. Users acquiring them can hold them for a long time without engaging in trade practices, ultimately preventing the concurrent flow of fiat money and the crypto economy. So, how much does the activity of crypto wash trading contribute to bringing such conditions, and is it legal?

What is Wash Trading?

Wash Trading is a concept within which an exchange will make trades with itself to inflate the asset’s value or present greater liquidity than what is otherwise available in the market. Applying such practices allows new exchanges to acquire greater market shares within a short span of time to attract traders.

wash trading crypto

Any exchange platform will earn its profit by levying transaction fees on each trade, whose volume can grow substantially with an increase in traders using the exchange platform, accelerated by the inflation in trading volume created by the practice of wash trading.

Since it’s another method of manipulation of the economy, such activities are illegal in most countries. Besides being a punishable offense, such actions can have numerous long-term and short-term effects on the global economy and trade practices.

Effects of Wash Trading

Wash Trading is also called round trip trading because it portrays two types of behavior:

  • Execution of fictitious trades that aren’t subjected to market risks.
  • The purchase and the sale of the same instruments at the same or similar price for accounts with the same or common ownership benefit.

The latter behavior derives a wash result, and the entities that initiate or assist it are called wash traders. These behaviors pose the following wash trading effects:

  • Enact a false impression of an active trading market.
  • Declines the stability and integrity of capital markets.
  • It invites a financial crisis and can lead to critical financial crashes.
  • Incites an increase in wash sales which can serve towards tax evasion.
  • Make decentralized assets appear more valuable than others.

Wash Trading in Cryptocurrency

Cryptocurrencies have a strong potential of attracting traders and investors after their enormous growth in the past two years. Since many cryptocurrency exchange platforms exist that capitalize on the crypto trade by imposing transaction fees on each trade transaction, capturing a greater market is essential for their long-term growth.

The additional influx of traders on an exchange platform can also increase the value of the cryptocurrency made by the respective exchange platform. Wash trading crypto practices can assist this objective, and the lack of proper regulations around cryptocurrency trade further contributes to an increase in such acts.

Wash Trading crypto exchange can also affect NFTs. The trade of such tokens can rise to invite more investors into the market, further growing decentralized exchange platforms’ business. NFT wash trading also creates a hype that may result in inflation of the asset cost compared to its actual value.

Crypto Wash Trading Outcomes

As mentioned previously, wash trading motivates traders to make more trades on respective platforms or by using particular instruments, thereby benefiting the crypto artist, the NFT platform, the crypto market cap, and the prospect of building the use cases of a cryptocurrency.

In addition to these results, the following are some other outcomes achieved via wash trading crypto exchanges:

  • Portraying the success of stale NFT tokens and establishing a false market.
  • NFT trade manipulation serves to incentivize all the participants under false pretenses.
  • Creates grounds for disregarding or manipulating tax laws for tax evasion.
  • Disrupts the state of the economy market to make it vulnerable and volatile.

Crypto Wash Trading Detection

In sync with many other capital regulation authorities from respective countries, the IRS already lawfully deems wash trading as an illegal activity. Mostly, such acts can be detected in a few ways when Fiat Money is involved but detecting crypto wash trading becomes problematic as it allows anonymity. Still, evidence of such acts in the crypto market has surfaced previously using specific pattern detections.

Coinbit, one of the largest cryptocurrency exchange platforms in South Korea, was stated according to a newspaper publication to have faked 99% of its transaction volume between Aug 2019 to May 2020. Later, the police seized the exchange for fraudulent behavior, and to date, many similar speculations have been made for several other crypto exchanges.

So how do we start detecting crypto manipulation activities in the crypto market? Well, here are a few patterns whose recognition can identify acts of crypto manipulation.

  • Value Pumping & Dumping
  • Whale Walling
  • Stop Hunt
  • FUDs

Value Pumping & Dumping

Market participants engage in the act of pumping the value of a coin by investing more capital into it. Doing so will serve to inflate the value and the importance of the respective crypto coin in the market, thus attracting more investors.

After the new investors have invested in the hype coin, the market participants will sell their coins for a sizable profit. Such activities have been observed with the growth of penny stocks and unknown crypto coins, whose market graph commonly represents significant market movement without proportionate exchange events.

A well-known example of such an event is the unprecedented growth of the Doge Coins in the crypto market. Its value grew by thousands of percent overnight, which after the hype, now sells for near half its peak value.

Whale Walling

It is also known as order book spoofing among many communities, and it’s an act of placing large orders to establish the illusion of enlarged demand or supply. In the earlier past of Bitcoins, such activity was witnessed where orders for thousands of bitcoins were placed, making potential holders sell their coins.

It invited whales to buy more bitcoins, which would be pulled out soon after the markets reflected clustered sell. It also manipulated the price discovery analytics in presenting users with the potential to hold long positions, which would collapse after the whale liquidates the assets.

Stop Hunt

In such an act, the prices of crypto assets would be driven low enough for triggering stop loss markers made by market participants. Different traders will run the price down to trigger the auto stop-loss markers of market participants to offer whales to grab a similar volume instantly.

Such an event will reflect quick market recovery, making other potential participants believe less in the volatility of the asset. These types of occurrences can isolate market participants with assets that aren’t owned collectively, whose collapse is determinant solely on the decision of whales who won’t refrain from initiating it when it serves their purpose.


Instilling Fear, Uncertainty, and Doubts within the market is, to date, one of the most common ways to manipulate the market. Essentially, it is driven by creating and spreading rumors and fake news in the form of insider information which will invoke fear within newbie investors and unseasoned traders who will seek to escape the market.

Spotting fake news is challenging, especially with numerous online publications and platforms selling custom narratives instigated by unknown parties to drive the market according to their will.

The only way to combat such manipulation is to analyze the information on an individual level by researching and studying the market behavior besides learning about data and facts to implement decisions instead of buying or selling with the hype.

Crypto Wash Trading Prevention

While the prospect of the anonymity of crypto exchange on the free blockchain aligns conveniently for crypto wash traders, preventing it is still possible in the following ways to actuate the market to make it less volatile:

  • Designating market fees to a particular threshold shall make the trader lose a significant percentage of the trade with crypto wash trading activities.
  • The provided incentives and rewards should be lesser than the cost of the attack to prevent acts of crypto market manipulation.
  • Platforms supplying crypto market statistics should innovate methods to recognize crypto wash trading and present accurate data with caution warnings to depict the possible issues.
  • Create material or information that can educate new traders and others about past and future cases of the crypto market.

Final Words

Establishing proper regulations for crypto exchange and trade can demotivate wash traders from manipulating the crypto market in the long run. Furthermore, aggregators can also assist by providing transparency of information besides making cryptocurrency holders and traders more accountable for their actions on the blockchain.

While no immediate solution can discourage crypto wash traders, the growth of cryptocurrency and the study of tokenomics with newer concepts for regulating the crypto economy can stop such activities at large.

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