Wash trading in crypto: how fake trading volumes are created

There are unethical trading strategies in the cryptocurrency market that are used to achieve specific goals.

Some of these strategies aim to increase market activity — wash trading is one such strategy.

According to statistics, 88% of major exchanges manipulate trading volume to improve their rankings, and a report by Bitwise Asset Management estimates that 95% of trading volume is fake.

What is wash trading?

Wash trading in cryptocurrency is a manipulative form of trading in which the same asset is bought and sold simultaneously. In other words, during wash trading, the investor acts as both the buyer and the seller, executing fake transactions.

The goal of wash trading in crypto is not to generate profit but to create misleading indicators, such as:

Increased trading volume;
Trading activity and heightened interest in a cryptocurrency;
Manipulation of an asset's price.

The practice of wash trading was already widespread in traditional markets at the beginning of the 20th century. However, as the digital asset market gained popularity, wash trading in cryptocurrency also became a common form of fictitious trading.

Regulators such as the SEC (U.S. Securities and Exchange Commission) consider wash trading illegal due to its deceptive nature and artificial inflation of market volumes. Interestingly, wash trading was first prohibited in 1936, when the U.S. Commodity Exchange Act was adopted to end fictitious trading practices.

Despite these prohibitions, wash trading remained popular among exchanges and investors. In 2013, amid the development of automated high-frequency trading systems, wash trading experienced a new surge in popularity.

How is wash trading implemented in crypto?

Various techniques are used to create artificial trading activity through wash trading in cryptocurrency:

Multi-accounting (using multiple accounts) for wash trading in cryptocurrency. Under this approach, a trader uses multiple wallets or exchange accounts to manually execute fake trades. This can be done by both individual traders and coordinated groups.
Trading bots. This method eliminates the need for manual repetitive trading and instead relies on automated programs specifically designed for wash trading. This approach allows more trades to be executed and trading volumes to increase more quickly.
A combined approach — a combination of manual and automated wash trading.

The decentralized nature of blockchain networks has certain characteristics that make wash trading in cryptocurrencies easier. The main reason is that decentralized networks are largely anonymous. As a result, detecting fake trading activity associated with wash trading becomes more difficult.

In the case of centralized exchanges, their systems make it possible to quickly identify and block suspicious accounts involved in wash trading.

Why is wash trading dangerous in crypto?

Fictitious trading increases transaction volumes for a particular crypto asset, making it appear more attractive to investors. Through wash trading, projects can inflate the trading volume of low-liquidity digital assets by creating the illusion of high trading activity.

Artificially increasing trading volume through fake transactions can temporarily improve an asset's market position and rankings on services such as CoinMarketCap or CoinGecko. Attracting new participants drives the asset's price upward, enabling early holders to realize profits from the influx of investors.

However, exchanges themselves often engage in wash trading in cryptocurrency markets. Exchanges compete with one another for rankings and trading volume. Generally, the higher an exchange's trading volume and activity, the greater its liquidity and attractiveness to customers.

In some cases, due to wash trading, fake trading volume can exceed real volume by 25–50 times. There are even companies such as Gotbit that provide wash trading services for small and lesser-known exchanges.

Wash trading is also used to facilitate fraudulent schemes such as pump-and-dump* schemes. Wash trading in cryptocurrency can rapidly increase trading volume and create a positive perception of an asset within the community, as investors and traders generally have little trust in low-liquidity digital assets.

* Pump & Dump refers to a fraudulent scheme in which asset creators artificially inflate the price of an asset to promote it and attract investors, after which they "dump" their holdings and lock in profits.

Wash trading in crypto is used not only for traditional cryptocurrencies but also for other digital assets, including NFTs (non-fungible tokens).

A notable example of wash trading involving an NFT concerns the CryptoPunks collection, specifically CryptoPunk #9998. In 2021, it was allegedly sold for 124,457 ETH, which at the time was worth approximately $532 million. However, the transaction was not a genuine market purchase. The owner used a flash loan — an unsecured loan borrowed and repaid in a single blockchain transaction. First, the NFT was "sold" to a related wallet using borrowed funds. Those funds were then immediately returned to repay the loan, while the token effectively remained under the control of the original owner. As a result, the blockchain recorded a sale worth hundreds of millions of dollars, even though no actual transfer of capital or economic value took place.

How can wash trading be identified?

Despite the anonymous nature of the blockchain environment, specialists have developed tools for identifying wash trading and fictitious trading activity.

First, signs of wash trading can be detected by analyzing trading volumes. If an asset shows a sudden spike in trading activity without any significant news catalyst or noticeable price movement, it may be a clear indication of wash trading in cryptocurrency.

Additionally, wash trading can be identified by comparing trading volumes across different exchanges. For example, if trading volume for an asset increases significantly on one exchange but remains unchanged on others, this may indicate wash trading.

Another method of detecting wash trading is the presence of unusually stable trading activity, repetitive patterns, and consistent transaction intervals. Additional signs may include mirrored buy and sell orders that appear almost identical.

This refers to situations where orders with the same or nearly identical volume and price regularly appear in the order book at almost the same time. For example, one account places an order to buy 1,000 tokens at $1, while another account places an order to sell the same number of tokens at nearly the same price. Such transactions may indicate that both sides are controlled by the same market participant or by a group of related parties, artificially creating the appearance of active trading.

Wash trading can also be identified through market depth analysis. For example, if the ratio of trading volume to order book depth is excessively high, this may indicate the presence of wash trading.

Another way to avoid wash trading is to trade on reputable exchanges that provide mostly genuine trading volume data. Experts often cite exchanges such as Binance, Liquid, and Bitfinex as examples.

Conclusion

Wash trading poses a threat to the cryptocurrency market by facilitating unfair competition and distorting performance metrics for assets with only genuine trading volume.

At the same time, wash trading can mislead investors, making it more difficult to objectively assess crypto assets when deciding whether to purchase them and how to allocate them within a portfolio. Therefore, investors should prioritize reliable, regulated trading platforms to protect themselves from wash trading in cryptocurrency.