Wash Trading Remains a Major Issue in Crypto Market, NBER Paper Finds

• Wash trading continues to plague the crypto market, according to a paper published by the National Bureau of Economic Research (NBER).
• 29 major exchanges, such as Binance, Coinbase, and Huobi, were studied from July 9th to November 3rd, 2019.
• The paper found that an overwhelming number of unregulated crypto exchanges accounted for a sizeable portion of wash trades with 70% total reported volume.

Crypto trading has been on an ever-increasing trajectory since its advent a decade ago. With a growing number of crypto exchanges, investors have been flocking to the crypto market to benefit from its high returns. However, this has also resulted in a surge of fraudulent activities in the market, such as wash trading.

Wash trading is a form of market manipulation where an investor simultaneously sells and buys the same financial instruments in order to artificially drive up the volume and liquidity on an exchange. This in turn leads to misleading trading signals, as well as an inflated market value of the asset being traded.

A paper titled „Crypto Wash Trading,“ published by the National Bureau of Economic Research (NBER), set out to understand the prevalence of wash trading in the crypto market. The paper studied 29 major exchanges, such as Binance, Coinbase, and Huobi, as well as lesser-known exchanges from a period of July 9th to November 3rd, 2019.

The paper found that an overwhelming number of unregulated crypto exchanges accounted for a sizable portion of wash trades. The researchers found that these exchanges had a total reported volume of 70%, with their rankings on third-party websites moving up by 46 positions. This demonstrates the impact of wash trading in inflating the volume and liquidity of an exchange.

The paper also noted that some of the Tier-1 exchanges had a wash trading volume of around 8%. This figure is significantly lower compared to the Tier-2 and Tier-3 exchanges, which had a wash trading volume of around 36% and 47%, respectively. The researchers found that the Tier-2 and Tier-3 exchanges tended to be more susceptible to wash trading than the Tier-1 exchanges.

The paper concluded that wash trading remains a persistent problem in the crypto market. It noted that the lack of regulatory oversight and the lack of transparency in the crypto market are to blame for the prevalence of wash trading. It further suggested that regulators and exchanges should work together to create a more transparent and secure trading environment.

Overall, wash trading continues to be a major issue in the crypto market. While the prevalence of wash trading may be difficult to eliminate entirely, regulators and crypto exchanges should continue to work together to mitigate the impact of wash trading in the market. This will help to ensure that investors have access to accurate and reliable trading signals, allowing them to make more informed trading decisions.