What Is Wash Trading?

While there are a lot of trading activities that balance at the edge of legality, wash trading crosses that edge. This trading activity is prohibited under the Commodity Exchange Act (CEA) and the Securities Exchange Act of 1934. Why so? What is wash trading and how can you protect your assets from it? Let’s check in detail.

What Makes a Wash Trade?

In some cases, wash trading involves direct market manipulation. In others, it occurs because a user doesn’t know how to trade. Wash trading happens when an investor sells one asset, in our case, it is a coin or a token, and immediately replaces it with an asset that is almost the same as the sold one. So, the investor’s portfolio doesn’t change.

Such actions may be performed to influence the price of the asset. Considering the high volatility of crypto, wash trading is used to impact the prices of coins.

For example, if you start selling a token, you will see that its price starts dropping. It is very visible in cases of tokens with a small supply. It is also noticeable if big amounts are sold.

Other users think that investors dump the token because of some reasons that are not open to the public and start dumping the token, too. Meanwhile, you replace the token with something that has the same characteristics.

To perform wash trading, one needs to understand what benefits it can deliver. For example, one won’t be dumping a token just randomly. That’s why wash trading is frequently connected with insider trading which is also illegal.

Are Wash Sales Illegal?

Wash trading is illegal because it involves price manipulation.

Example of a Wash Trade

For example, when you have an asset and sell it at a loss to discount the sum from taxes, it is wash trading.

One of the most prominent examples of wash trading in crypto is the case when EOS and Ethereum were traded on many exchanges during the EOS ICO to inflate the coin price artificially.

Source: Integra

How to Detect & Avoid Wash Trading

The most reliable way to detect and avoid wash trading is to know what exactly constitutes wash trading. For example, when similar trades are posted within a short timeframe, it may be about wash trading.

It is important to know how time frames work in the case of wash trading. There is a 30-day timeframe. It means that the time frame extends to 30 days before the sale and 30 days after the sale. So, you have to wait 61 days if you want to replace the asset in your portfolio to be on the safe side.

Wash Trading in Crypto Trading

Cryptocurrency trades are not easy to track and the prices are very volatile. That’s why wash trading is popular in crypto.

One of the most prominent examples of wash trading in crypto is connected with NFT trading. In the Chainalysis report, one can see that multiple NFTs were sold to wallets multiple times. This is a classic example of wash trading, and profits from it amassed to $9mln.

Conclusion

Wash trading is illegal. While in crypto, regulators didn’t pay much attention to wash trading cases, now, the situation is changing. The world of crypto is becoming more regulated and thus, such cases may be treated just like wash trading cases in the non-crypto world.

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