Wash Trading Explained

Wash trading is a form of market manipulation, where a single market participant is both buying and selling the same asset, typically between different accounts or organizations all under the same control, with the goal of driving up the perceived value of the asset. It works best with tokens that have a relatively small market cap or trade volume, hence altcoins are often targets of this type of fraud. Wash trading however, is not always done by the creators of the coin itself. There are also groups that specialize in selecting abandoned or unknown crypto tokens that are ideal for price manipulation using wash trading.

How does it work?

To execute a wash trade, an investor puts both a sell order and a buy order for a security. He actually sells the security to himself, which is essentially a form of insider trading.

Executing a price fraud using wash trading continues to be relatively easy once the right token is chosen. For the past few years, the crypto market has been simply too hot. People were looking for chances and seeing opportunities to get rich quickly. Fear of missing out (FOMO) further contributed to this phenomenon. And nowadays, when the market has been sliding steadily for pretty much a year, people bitter from devastating losses are desperately looking for some way to recover their money, which, again, results in many of them seeing opportunities where there is none, or where in reality is a simple fraud. 

How to detect a wash trade

A typical example of a wash trade would include a group that has or can access a lot of online visibility via social media and other means of online communication, such as Telegram and Discord channels or Reddit boards. By the time the price of the selected token starts to rise, the scam has been long planned out. The key for them is to create a successful marketing campaign that brings in enough individuals to whom they can unload the worthless tokens to at a high price. 

If you see a coin with very low market activity suddenly exploding out of nowhere, for no apparent reason, then it is best to overcome the FOMO and stay out, as this is a very typical sign of a wash trade or a pump and dump scheme. The group that is behind the scam has already taken 3-6 months to slowly and quietly buy up as many tokens as possible for barely any money, before they start to trade the tokens between different accounts all under their control at an ever-increasing price, thus giving the illusion, that the token is skyrocketing in value. This is typically supported by some kind of marketing campaign that promotes the token. 

The irony is that sometimes they openly admit that the token is rising in value only because they are buying it up. Still, many people may join with the promise of “outsmarting the market” and “shooting the token’s value to the moon”. In reality, the inner circle that has planned the fraud is just unloading the worthless tokens to anyone who takes the bait, as fast as possible, before everything falls apart. Usually within a few days or even a few hours, the value of the token plunges to zero, leaving those who failed to resist the FOMO with virtually nothing.

How to avoid wash trading

There are many ways to avoid being involved in a wash trade. If you stick to cryptos with a reasonably high market cap, chances are that such scams would be too hard to carry out. That being said, even a coin with a huge market value can go bust, so you should always be wary of unproven or unclear and seemingly unsustainable concepts, such as tokens with excessively high yield farming returns. If you choose to invest in altcoins with a low market cap, or startup altcoin projects, the only way to avoid being implicated in a scam is to rely on excessive research and experience. Let’s summarize the said above:

1. Learn to detect wash trading by spotting its typical signs. 
2. Do not buy coins whose price skyrocketed out of nowhere. 
3. Be careful while investing in altcoins with a low market cap.
4. Do your own research before purchasing an unknown asset. Or any asset at all. 
5. Read the SimpleSwap article to stay away from any type of crypto scam.

Conclusion

As Warren Buffet once said: “The key to making money in investing is never losing money”. It is usually better to miss out on a few real opportunities than betting your money on a dozen non-existing ones. If you are into small altcoins and new altcoins, always do excessive research, before you get involved! Remember: A deal that sounds too good to be true, is usually too good to be true!