Wash trading in cryptocurrency refers to a type of market manipulation whereby someone buys and sells the same asset multiple times in a short period to deceive other cryptocurrency traders into believing that there is a higher demand for it than there is, thereby artificially driving up the market price.
In the cryptocurrency space, wash trading is a way artificially generating interest in a cryptocurrency in the hopes of attracting more investors and driving up the price further. When successful, they can then trade their cryptocurrency at a much higher rate than they would otherwise been able to do this. When a whale does tis and then sells a large amount of cryptocurrency, it is called ‘dumping’ and can quickly cause the overall market value of the cryptocurrency to plummet since the supply now exceeds the demand.
The purpose in doing so is to artificially increase the share or cryptocurrencies market value, by making it appear as though there is a greater demand for the commodity than there is. This in turn increases the price of the asset. This is illegal and punishable by heavy fines and even jail time, if the party’s activities are discovered.
Wash traders usually rely on bots to trade to each other through multiple wallet addresses. It is risky since the bad actor will still be incurring transaction fees, but the trader can usually afford the loss. These attacks are usually team-efforts that are accompanied by inside-traders promoting bullish remarks on social media to further increase the hype. Sometimes cryptocurrency exchange platforms will engage in such activities so as to encourage real platform users to trade on their platforms by deceiving them into thinking that more people are trading than is actually the case, thereby making them feel more secure in doing the same. An example of this occurred in August 2022 when Forbes published findings that at least 51% of the daily Bitcoin (BTC) trading volumes across 157 cryptocurrency exchange platforms were actually false trades conducted by bots.