A wash trade is a market manipulation technique that has been used by a trader to carry out the buying and selling of the same asset, for instance, cryptocurrency, to create false trading activity. The trader’s objective is to create an illusion of a more active and liquid market than it actually is which might result in other investors having wrong concepts regarding the asset’s price, and thus its popularity or value, and hence, being misled.
When there is a wash trade taking place, the trader who is actually the one doing the trading incurs no gain or loss as he is dealing with himself or his number of accounts that he has control over. The fake trading will lead to a rise in the trading volume which will be interpreted as high demand. The unaware investors will take it as real interest and thus will be buying the asset, this will lead to a temporary increase in the price.
For a long time wash trading has been banned in the traditional financial market and is one of the practices that regulators in the crypto sector are increasingly scrutinizing. Some exchanges, especially the ones that are not regulated, have been accused of allowing or even encouraging wash trading as a way to lure users.
The market integrity is negatively impacted because of the practice through the creation of distortions in price and trading data. It is hard to identify wash trades, but the use of blockchain analytics tools and more stringent supervision are among the factors that have been helping to reduce their occurrences. In short, wash trading is a method of fake market activity meant to mislead and manipulate perception.
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