In traditional finance, ‘wash trading’ is the term used to describe a form of market manipulation where an investor immediately sells and buys the same financial assets to create fake or misleading activity in a marketplace. So a trader will sell an asset, only to immediately buy it back at a reduced price, therefore artificially inflating market volume.
Wash trading in the cryptocurrency world is similar in that it creates a false impression of market volume and liquidity. Notably, some cryptocurrency exchanges have been caught wash trading from multiple ‘ghost accounts’ to manipulate markets.
The more liquidity an exchange has, the more attractive the platform will be to investors. High trading volumes are associated with trust and popularity which benefit projects and exchanges alike. The world of crypto is relatively unregulated and wash trading and manipulation are not illegal nor restricted.
Saying that, it is not respected behavior by crypto communities. For exchanges, projects, and individuals to keep a legitimate name in the space, they can’t be seen to involve themselves in such behaviors.
Within the NFT space, wash trading and general insider trading are just as prevalent as with any other sector in the crypto space but trust within the relatively tight-knit communities is paramount, and maintaining a good reputation is of importance and value.
In this world, there are many blurred lines as to what exactly is acceptable. An individual’s standards also come into play. This is a frontier, and boundaries are being tested in many ways.
Here are some examples of market manipulation in the NFT Space:
Unfair and manipulative market behaviors are something that we, at NonFungible.com, are specifically keen to expose within the NFT ecosystem and we have often been among the first ones to alert the community about projects or individuals that are participating in such negative activities.
One of the most exceptional elements of the blockchain is having transactions permanently recorded on a distributed public ledger, and so ultimately most bad players’ actions are traceable. Being held accountable on the other hand is a different matter!
Manipulation of markets is likely as old as trading itself, the enduring classic ‘pump and dump’ schemes are an inevitable part of the process of exploration. As is true with any investment, putting money into a project requires you to do your due diligence, do in-depth research, and focus on managing your risk.