After the crypto sector hit the bottom of the overall trade sector in 2022, investors stepped into 2023 with hopes to see an improvement to the market sentiment. Billionaire crypto supporter Mark Cuban has predicted that the year of 2023 will have its own share of scandals. The illegal practice of wash trading, Cuban has predicted, will trigger more financial issues for the already volatile and scrutinised industry. The American business tycoon has sounded an alert to all centralised exchanges to begin devising strategies to identify and report wash traders.
What is Wash Trading of Crypto Assets?
When a group of traders or bots purposely engage in the buying and selling of the same crypto asset to inflate its price, that process is called wash trading. This way, a broker and a trader often come together to mint profits after injecting orchestrated misinformation into the market.
The prices of the crypto asset could remain risen by the time the wash traders are working with them, but soon after they halt their activities, the price of the asset may drop down — exposing other unsuspecting investors to financial risks.
Not just in the crypto sector, wash trading also poses dangers to the investors of other assets like stocks.
3/ This is a huge red flag and something that all crypto investors should be aware of; wash trading can lead to market manipulation and artificially inflated asset prices, ultimately resulting in an implosion of the market.
— Shrey Jain (@Shreyjain3110) January 6, 2023
The US has made wash trading an illegal and punishable offense.
Usually, wash traders exploit centralised exchanges to perform their actions. Some of the popular centralised exchanges include Binance, Coinbase, Kraken, and KuCoin among others.
In March 2021, Coinbase agreed to deposit $6.5 million (roughly Rs. 53 crore) to settle claim that its former employee was wash-trading Bitcoin and Litecoin. The claim was levied by the Commodity Futures Trading Commission (CFTC), which also reportedly alleged that Coinbase was reporting inaccurate information around trading on its platform.
In 2022, a Forbes report analysed the trading activities on 157 centralised exchanges and found that over fifty percent of all Bitcoin trade volumes that cropped up, were fake.
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