The controversial topic of wash trading within cryptocurrency exchanges has again come to the forefront with the release of a new research paper. The National Bureau of Economic Research (NBER) published a working paper titled “Crypto Wash Trading,” which studied 29 unregulated exchanges and found that an alarming 73% of the volume on these platforms is made up of fake transactions.
Wash trading, also known as “painting the tape,” is a fraudulent practice in which a trader simultaneously buys and sells the same asset to create the illusion of increased demand and manipulate the price. This can be done through false accounts or by a single trader executing trades through multiple accounts.
The NBER study analyzed statistical and behavioral patterns to determine which transactions were legitimate and which were not. The findings suggest that the issue of wash trading is widespread within the cryptocurrency market and highlight the need for greater regulation and oversight. The release of this research paper comes at a time when exchanges are under increased scrutiny following the FTX fiasco.
However, it is well known that artificially inflating trade volume through the buying and selling of securities among affiliated parties can have short-term benefits for those engaging in the behavior. This is because fake transactions can often boost the rankings of exchanges on data and statistics websites such as CoinMarketCap. These rankings are often used as a key metric for investors when deciding where to trade, and as such, a higher ranking can lead to increased attention and potentially more real trades.
Furthermore, wash trading can also impact the prices of cryptocurrencies on the exchanges in the short term. This is because fake trades can create the illusion of increased demand, leading to a temporary price increase. However, it is important to note that these price increases are based on something other than real market conditions and are, therefore, not sustainable in the long term.
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