, an avid cryptocurrency investor, warned his followers that the discovery and regulatory crackdown on wash trades could potentially set up another implosion in the industry.Wash trading is essentially when a firm or party trades with itself to artificially boost prices, give the illusion of liquidity, and generate interest from other investors, according to Timothy Cradle, the director of regulatory affairs at Blockchain Intelligence.
The NBER paper studied 29 crypto exchanges that were classified as regulated or unregulated, with unregulated exchanges being sorted into two tiers based on size. The authors found wash trading was virtually absent on regulated crypto exchanges, but made up an average 77.5% of trading volume on unregulated exchanges. Tier-1 unregulated exchanges had a slightly lower proportion of wash trades at 61.8% of transactions, compared to 86.2% of transactions Tier-2 unregulated exchanges.
The paper also found a higher incident of wash trading in the few weeks after the crypto market saw positive returns, or experienced a drop in volatility."Price increases could draw retail investors' attention and encourage speculation. Therefore, crypto exchanges are incentivized to pump up volumes to vie for better ranking and more clients."
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