What Does Wash Trading Mean In Cryptocurrency?
When it comes to cryptocurrency we've often thrown with several terms and numbers and it can be pretty hard for the average user to understand what they all mean and we're always looking for simplification. This yearning for simplification has seen certain numbers become popular metrics for judging the success of a cryptocurrency as well as how it is progressing. Those numbers are normally
Market cap
Coin value
Transactions on the network
Active wallets/users on the network
Many novice cryptocurrency holders look at these figures and base how they are going to invest and where they are going to invest, which is why there is an incentive to fudge these numbers and massage them to attract investor capital.
One way to manipulate cryptocurrency is through wash trading, which has been a popular tactic for many coins especially during the bull run of 2017. The practice has died down since then in relative terms but it doesn't mean it been completely removed from the ecosystem and still thrives in obscure parts of the blockchain space.
What is wash trading?
Wash trading is a form of market manipulation in which an investor simultaneously sells and buys the same financial instruments to create misleading, artificial activity in the marketplace. First, an investor will place a sell order, then place a buy order to buy from themself, or vice versa
Wash trading is used to move the price up or down depending on the goals of the company while also improving the amount of trade volume per day and make the coin seem more actively traded than it actually is propping it up and making it more attractive to investors.
In some cases, we've even seen collusion with exchanges to assist in wash trading or actively misreport the data on a certain coin.
Why is wash trading so popular
Have you ever heard of the term fake it until you make it? Well that's primarily the reason why coins try to wash trade. To give off the appearance of being highly active and having ample liquidity in order to attract traders onto their platform.
While there is no direct financial harm observable for traders on platforms that engage in wash trading — the lack of meaningful market data can fool traders.
This could get investors to jump on a coin while its "hot" and encourage them into taking positions in illiquid tokens without realising that there is possibly no significant market activity available at all.
Keeping your eyes open
It's important to do your research before purchasing any coin and review multiple data sources and both positive and negative sentiment about a specific coin. Don't simply invest based on numbers, especially one or two basic figures and look at other fundamentals such as GitHub commits, partnerships, use cases and much more.
Thanks for stopping by.
Cheers.
This is a wide eye opener. I really have been having the wrong impression all this while not knowing such a thing like wash trading could be plotted and carried out. This is really bad. Thank you so much @Feebie for this information.