As "washing trade" continues crypto scam – NPR | Jewelry Dukan

The massive number of fake Bitcoin trades can be traced back to an age-old practice of manipulating markets. It’s called “wash trading”.


People obsessed with cryptocurrencies got some news from a recent headline in Forbes stating, “More than half of all Bitcoin trades are fake.” Paddy Hirsch and Wailin Wong of NPR podcast The Indicator say the culprit could be an age-old practice used to manipulate markets.

PADDY HIRSCH, BYLINE: There are many ways unscrupulous traders can generate this type of fake volume. But one of the most common is what is known as wash trading. This was sort of a new term for us, unsurprising given that wash trading has actually been banned on regulated market exchanges in the United States since 1936. But what exactly is wash trading? Kim Grauer is a lead researcher at Chainalysis observing the crypto space.

KIM GRAUER: Wash trading is a trading strategy where the buyer and seller are effectively on either side of the trade and a person is essentially selling themselves an asset to create the illusion that a particular asset is being traded far more than he actually is .

HIRSCH: For example, imagine you are a writer who has self-published a novel. You really, really want to get your book on a bestseller list because people who read novels often use bestseller lists as a guide to their next purchase.

WAILIN WONG, BYLINE: So to do this, create a bunch of fake accounts on Amazon. They allocate a bunch of money to each one and use those accounts to buy 100,000 of your ebooks. Presto, your book hits #1 on the bestseller list. And now people are interested.

HIRSCH: And with a bit of luck, they’ll start buying, that’s when you start making money. But your original investment — the money you spent buying all those books of your own — goes straight back into your pocket. It is, as the expression says, a wash.

WONG: And while we couldn’t confirm Forbes’ claims about the volume of fake Bitcoin trading, Chainalysis’ Kim Grauer confirms that the crypto verse is awash in wash trading.

HIRSCH: Well, Kim says that most wash traders in the crypto universe don’t make large amounts of money. Many make no money at all. But some make it. And that creates a great incentive for unscrupulous traders hoping to take advantage of an effectively unregulated market.

GRAUER: This is all a legal gray area where we are all trying to figure out how this should be regulated and what is illegal and is this just someone being smart and effectively exploiting a platform or is this something we need to do somehow come down with a hammer and stamp out this activity?

HIRSCH: The government says that any laundry trade, wherever it takes place, is illegal. The problem is that no one has really established what crypto assets actually are and who owns them.

WONG: Is Bitcoin a security and therefore covered by the SEC? Are NFTs commodities, in which case would they be regulated by the CFTC? Until the government decides how crypto assets should be classified, it will be difficult for regulators to oversee the way they are traded.

DEER: Yes. And Kim says everyone in the crypto world is interested in finding a regulatory solution that protects investors without stifling innovation. She says that in a way, crypto is helped by the fact that everything is based on the blockchain, which makes trading transparent. But that also means being able to see every bad deed.

GRAUER: I can tell you how much wash trading has happened on certain platforms today. And I think in the long term that will force cryptocurrency to face a higher hurdle of legitimacy than the traditional financial system because of all the attention that cryptocurrency crime has.

WONG: An example of that attention – this Forbes report claiming that 50% of all bitcoin trades are fake.

Wailin Wong.

HIRSCH: Paddy Hirsch, NPR News.


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