What Is a Wash Trade?

In a wash trade, a trader buys and sells an asset for no obvious reason other than feeding the market misleading information. It can occur between colluding parties, which execute opposite ends of a trade for their own gain. This form of trading can also mislead investors by making trading volumes appear much higher than they are in reality.

Wash trading in crypto has been most common in the NFT space and in altcoins with a low market capitalization. These assets have low liquidity and lend themselves to manipulation like pump and dump schemes. Parties engaged in wash trading make the assets appear more liquid and sought-after than they are in reality, which can trick unsuspecting investors into buying and pushing up the price. 

Since cryptocurrencies are traded across different exchanges and don't have a standardized framework to calculate trading volumes, wash trading is easy to disguise. Crypto firms and exchanges can, therefore, come up with different trading volumes and statistics, like all-time highs. Furthermore, malicious actors may use wash trading on some exchanges to spoof the price on other exchanges, thereby creating FUD in the market. 

How Much of Crypto Is Wash Trading?

The precise share of wash trading in crypto markets is impossible to define since markets do not coordinate information and share no common analytical framework. Still, a 2022 study by Forbes found that more than half of all reported Bitcoin trading volume on 157 crypto exchanges can be described as wash trading. 

Is Wash Trading Illegal?

Wash trading securities is illegal. According to the IRS, a wash sale is a sale that happens within 30 days of purchasing a security and generates a loss. 

You can read more about wash trading in our Dive Into Wash Trading.