Wash Trading: How market manipulation occurs with cryptocurrencies?

Wash trading is a prohibited practice involving the simultaneous buying and selling of an asset to artificially increase trading volume. This deceptive strategy aims to gain personal advantages or create the illusion of high demand for an asset. Learn how Wash Trading works in the crypto market!

You may not know this, but the world of investments also has its ethical codes. One of the most common and detrimental practices to market ethics is wash trading, a form of market manipulation. In this text, we explain how this practice operates and why it is against Digitra.com's Terms of Use.

Wash trading is illegal when it comes to stocks. However, in the cryptocurrency market, which is still in the process of regulation, there is no regulatory guideline punishing the practice. Only the internal rules of companies operating in this market, such as exchanges, address this issue.

What is Wash Trading?

Wash trading is a deceptive strategy where a specific asset is bought and sold simultaneously with the purpose of artificially inflating trading volumes or gaining other personal benefits from that operation. This can be done between accounts of the same person or company, acting as buyer and seller, or by two or more parties combining their operations to create the illusion of high trading volume for an asset. It is important to understand how the crypto market works to stay informed about the law of supply and demand, which dictates the market. Learn more here!

This tactic is common in both the heavily regulated stock market and the largely unregulated cryptocurrency market. However, the latter is rapidly changing as authorities begin to enforce regulations to protect investors. Regulatory bodies across the globe are beginning to take steps to prevent wash trading. For instance, in 2018, the New York Attorney General's office released a report on cryptocurrency trading platforms, highlighting the potential for manipulative practices like wash trading. Since then, numerous jurisdictions have strengthened their regulatory frameworks to protect investors from such practices.

The practice of wash trading has been happening since the early 20th century in the stock market. It was originally employed to manipulate stock prices and deceive the public by making them believe that a stock was more popular than it actually was. The practice is now illegal in many jurisdictions because it undermines the principles of open and fair markets.

How does Wash Trade hurt the crypto market?

Indeed, wash trading harms the integrity of financial markets, including the cryptocurrency market, in two main ways. Firstly, it creates a false perception of supply and demand for a specific asset. This misleading information can lead other investors to make decisions based on artificial data, which can result in significant losses. Secondly, it distorts the true economic value of the traded assets, in this case, cryptocurrencies. In an efficient market, the price of an asset should reflect its real value, but wash trading distorts this price, creating a false market value.

Wash trading is particularly concerning in the cryptocurrency market due to its high volatility and the difficulty of identifying such practices. This facilitates wash trading, making the market susceptible to manipulative practices. It is up to companies and investors to contribute to preventing this manipulation from happening.

Why does Wash Trading keep happening?

One reason is that it can be challenging to detect, especially in markets like cryptocurrencies that operate globally. However, regulatory bodies are becoming more sophisticated and developing advanced tools to monitor and detect such practices.

In the world of cryptocurrencies, regulators worldwide are taking steps to prevent wash trading. For example, in 2018, the New York Attorney General's Office released a report on cryptocurrency trading platforms, highlighting the potential for manipulative practices such as wash trading. Since then, several jurisdictions have strengthened their regulatory frameworks to protect investors from such practices.

Although wash trading may be an enticing tactic for those who wish to manipulate market perceptions and gain benefits from it, it's crucial to remember the severe legal penalties and the damage it causes to the integrity of financial markets.

Does digitra.com ban Wash Trading?

At digitra.com, the practice is explicitly prohibited in the Terms of Use, which all users sign before starting to use the platform. If the compliance team identifies any account engaging in wash trading, it will be banned from the platform. These and other measures aim to maintain investor trust in digitra.com and contribute to a clean and efficient crypto market.

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