How Much of a Problem Is Bitcoin Wash Trading?

Bitcoin and the rest of the crypto world have had a difficult time as crypto winter settled in and shows little sign of turning into a crypto spring. The main problem for Bitcoin, as well as the stock market, is that inflation hit a forty year high and the Federal Reserve has been raising interest rates and is not yet done. But there have been other problems. Many crypto exchanges and DeFi businesses based their business operations on the assumption that crypto always goes up and ended up going bankrupt and even committing fraud in attempts to stay afloat. A last “nail in the coffin” of the crypto world may be the high incidence of Bitcoin wash trading that, when addressed, could precipitate another crypto plunge.

What Is Wash Trading and Why Should You Care?

Why you should care about Bitcoin wash trading is that wash trading is illegal in the stock market, which is regulated. A wash trade is where a trader both buys and sells a stock or other security and the trades are designed to mislead the market. The point is to create the illusion that the stock or other security is trading at higher volume than it really is. This type of scam is often used by a trader working with a broker in order to eventually profit from price movement caused by the illusion of the stock being popular and ready for a bull market. The problem for the average trader or investor is that they use technical indicators to assess market sentiment, see the jump in trading volume and even a rise in stock price and buy the stock only to see the price fall when the wash trading stops. Not only is wash trading illegal in US markets but the IRS does not allow phantom losses from wash trading to be deducted from income taxes.

How Bad Is the Bitcoin Wash Trading Problem?

Studies of the problem indicate that as many as seven in ten Bitcoin trades could be fake wash trades. The National Bureau of Economic Research reports that in non-compliant crypto exchanges as many as 70% of Bitcoin trades are fake wash trades. Serious crypto investors are concerned and Mark Cuban has warned his followers about this problem and how when regulators go after the problem it could cause another plunge in not only Bitcoin but all crypto prices. There are many risks when buying and selling cryptocurrencies including having your crypto exchange hacked and losing all of your tokens or even losing your information for accessing your wallet. The wash trading problem goes to the heart of buying and selling crypto because it makes the information at hand unreliable.

Can Regulation Solve the Wash Trading Dilemma?

Forbes writes about the wash trading problem. They estimate that wash trading may happen in as many as 80% of trades in unregulated exchange. It turns out that regulated crypto exchanges are as rare as hen’s teeth. One mentioned by Forbes is BitYard which has been around since 2019 and has licenses in Singapore, Australia, and the US and complies with financial industry regulations. The point is that if someone is looking at the trades on these exchanges the odds are greater that illegal activities such as wash trading will be discovered early instead of late or not at all and this market manipulation will be a thing of the past. If the problem is not dealt with effectively Cuban’s prediction could turn out to be true as waves of Bitcoin holders sell their holdings in a rush to the door.

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