According to Investopedia, wash trading is a “process whereby a trader buys and sells a security for the express purpose of feeding misleading information to the market.”
One sign of wash trading is when the trading volume of a financial instrument increases where there is no sign of market demand beforehand. Further, the increase in volume tends to be short or it will remain stagnant.
When it comes to the cryptocurrency space, wash trading occurs in relation to trading activities of coins. Those who monitor their exchanges can see an unexpected increase in a coin’s trading volume. Once the trading volume increases, other investors tend to join the unnatural increase and at the end of the day, they are also the ones who tend to experience the downside when the financial instrument’s value crashes back to its true value.
Trading platforms tend to benefit from the increase as well due to their receipt of trading commissions and fees. There are also some who surmise that market makers and takers are paid to use wash trading tactics to increase the value of the financial instrument.
In a recent article by Crypto New Digest titled Cryptocurrency Exchanges engaging in High-Level Wash Trading to fake Trade volumes, indicates:
“Based on a report released in December 2018 published by the Blockchain Transparency Institute (BTI), the data collected indicates that Exchanges have been “wash trading” after initial studies were conducted. After 3 months and constant perfection of its algorithms, the Institute came to the conclusion that the volume of 80% of the central crypto exchanges has been manipulated.”
Moreover, the trouble with cryptocurrency exchanges and wash trading is that the article notes that:
”It’s not illegal as no regulatory framework exists for Cryptocurrencies and it’s difficult to hold Exchange accountable, even if a brokerage is accused there is no legal obligation as there as no laws in place.”
Thus, it is unlikely that exchanges can be held accountable if they do use wash trading tactics.