What is wash trading? The trading minute

Selling to oneself, over and over. Wash trading involves buying and selling the same asset to oneself, or between accomplices, to artificially inflate volumes and simulate a lively market. No risk taken, no real transfer of ownership, just noise in the order book and nice statistics on display. This practice has been banned on regulated markets for nearly a century, with the U.S. Commodity Exchange Act prohibiting it as early as 1936. Crypto, however, has long served as a real-world playground.

Key points of this article:

• Wash trading has allowed for the artificial inflation of volumes on crypto platforms, creating the illusion of a dynamic market.

• In 2019, the Bitwise report revealed that 95% of reported bitcoin volumes were fictitious, shocking the finance world.

Wash trading, the definition of a lying volume

The mechanics can be summarized in three lines. A trader places an identical buy order and sell order, which cross between their own accounts. The price hardly moves, but the displayed volume climbs. Repeat the operation thousands of times by robots and a moribund platform suddenly looks like a thriving financial hub. Why cheat? Because volume attracts everything: traders, rankings, token listings charged to projects, and once upon a time, data aggregators that sorted platforms by activity.

The victim is always the same. The trader who believes they are entering a liquid market and discovers, at the moment of selling, that the displayed depth did not exist. The closed circuit of wash trading. Diagram: Journal du Coin

2019, the Bitwise report: 95% of ghost volumes

The case study is a classic stone in the pond. In March 2019, asset manager Bitwise presented to the SEC, the U.S. stock market regulator, a study analyzing 83 crypto platforms, picked up by CNBC: approximately 95% of the bitcoin volume reported at the time was fictitious or non-economic. Only ten platforms displayed volumes deemed real, representing just 5% of the total announced, as detailed in the memo retained by the SEC. The figure made headlines worldwide within hours.

The irony of the case is worth noting. Bitwise was not trying to undermine crypto but to convince the regulator that the real market, once cleaned of its ghost volumes, was healthy and organized. Since then, aggregators and platforms have done considerable housecleaning. The reflex of distrust, however, must remain.

Detecting wash trading as a retail trader

A few reflexes are enough to avoid most traps. Beware of an enormous volume backed by a skeletal order book, with a wide bid-ask spread, it is the fingerprint of manipulation. Compare the volumes of the same pair across several reference platforms. And in niche markets, freshly listed memecoins or NFTs, consider the announced volumes as advertising until proven otherwise. Serious aggregators now publish trust scores by platform, use them before depositing any euro.

Let's broaden the scope. Wash trading once thrived in American bucket shops of the 1920s, before being banned from traditional exchanges, and crypto is replaying this story in fast forward, with regulation included, MiCA in Europe specifically targeting market abuses. Volumes sometimes lie. The stock of real commitments, however, is read elsewhere, on the side of open interest.

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