Wash trading refers to a situation where an investor buys a share/any financial instrument from a broker and sells it via another broker. This type of trading constitutes market manipulation and is not legal in regulated markets.
In crypto terms it basically means you can open two accounts on an exchange and you continuously put small orders at a higher price with one account, and buy those orders with your second account. In the order book, other people will see that the price is rising, and the orders will be adjusted accordingly.
Investors under wash trading buy & sell their own entity without incurring any market risk and also with the existence of such sales and purchases.
Exchanges don’t mind you doing this, because they’re still collecting fees on your transactions. The ones that don’t have fees don’t mind either, unless you start overloading their systems or attracting regulator attention. If an exchange does have rules on wash trading (some do), they’ll just kick you out for breaking them.
According to the Commodity Exchange Act, wash trading is illegal but the bitcoin exchange Bitfinex allows it. Here is how:
- Order to buy/sell bitcoin or any currency Bitfinex supports trading for,
- Opt an order that exactly match your earlier order,
- At last, trading will be executed against your own order.
However, if there was no wash trading, then a system of such exchange must update that your own orders are not identical. It is evident that wash trading leads for the unexpected market manipulation that is the reason other exchange platforms are not permitting it for their operations.
Wash Trading happens on every exchange
Binance has trading competitions for volume. People are wash trading with themselves constantly to win the prizes.
Also, did you ever ask yourself how those little shitcoins out of top 75 have tens of millions in volume daily? No one is seriously buying that amount.
The founders of those coins are almost certainly wash trading with themselves to make the coin appear to be highly liquid.
In theory wash trading is illegal and breaks rules of most crypto exchanges. However, no one is actually enforcing those rules on users and no one ever heard of a user being banned for having multiple accounts on one exchange.
Crypto has spoofing, wash trading, insider trading, Ponzi schemes, money laundering, and tax evasion. That is it’s current state. And most of the biggest exchanges are in on it.
However, once we are the point where regulation catches up with crypto market – wash trading will have its time. SEC has a 7 year time frame to retroactively check and punish wash trading. So, those who committed it are still not in the clear zone as it might come back to bite them.