A paper titled “Crypto Wash Trading,” published by the National Bureau of Economic Research, also known as the NBER shows that almost 70% of the transactions on unregulated crypto exchange platforms are made up of wash trades. In other words, those transactions are fake.
A “wash trade” is defined as a trade that investors do through constantly selling and buying the same financial asset to distort its price and volume in the market. It ultimately demotivates investors from participating in the financial market. A wash trade is also known to break the confidence of a trader.
Artificial activity hampers the price of financial assets and is often used to manipulate the appearance of market activity. Wash trades are difficult to detect.
NBER was able to identify the transactions through statistical and behavioral patterns. A total of 29 unregulated crypto exchange platforms were analyzed. These were selected based on their ranking by a third-party website, representatives, and API compatibility. The research was primarily focused on exchange platforms that dealt heavily with BTC, LTC, ETH, and XRP.
Unregulated platforms were divided into two categories. The first category had exchange platforms ranked in the top 700 in the finance/investment section of SimilarWeb.com, and the second category had exchange platforms ranked outside the top 960.
The research concludes that wash trading is prevalent on unregulated crypto exchange platforms but not on regulated crypto exchange platforms.
First-category exchanges failed more than 20% of the tests, whereas second-category exchanges failed more than 60% of the tests. According to research, the volume of wash trading on unregulated exchange platforms approaches 77.5%, with a median of 79.1%.
Wash trades on 12 Tier-2 exchanges are projected to account for more than 80% of overall trading volume and even more than 70% after accounting for observable exchange heterogeneity.
BTC is up 0.66% at the time of writing to reach a value of $16,722.10. ETH has seen an increase of 1.45% to reach $1,217.28 while drafting this article. Review a cryptocurrency exchange list to choose a platform for crypto trading. Following the article, it is recommended to review the feedback for every platform. Being a part of the crypto community is another way to stay updated on developments like these.
Choosing a crypto exchange platform could be a bulky task; however, it can be eased up by checking if the platform is regulated or not. According to the research paper, wash trades are more prevalent on unregulated platforms, while regulated platforms are safer.
Investors can construct crypto-asset portfolios with the assurance that all transactions are real and not the result of market manipulation. The finding that roughly three-quarters of crypto transactions are fraudulent only applies to unregulated platforms, indicating that regulated platforms are a safe wager.