What is NFT wash trading?
For as long as there has been a stock market, there have been people who’ve tried to manipulate it to their own advantage. As these schemes became more and more common, governments around the world have stepped in and made laws to criminalize such activity.
The NFT market is no different. Although it is still very new, bad actors are coming up with ways to take advantage of it in unfair and unethical ways. These schemes are harmful to other investors and to the market as a whole.
One such unethical NFT trading scheme is called wash trading, which is simply trading with yourself to create the appearance of activity in order to manipulate prices. In this post, we’ll take a closer look at what wash trading is, how it works, and why you should avoid it. Stay tuned!
NFT wash trading: A definition
There are many different types of washtrading, and the way NFTs work makes it possible for several variations to be applied.
In its most basic form, washtrading is trading an asset with yourself. This can be done by creating a large number of buy orders at low prices and selling them later at higher prices by canceling some or all of the orders in between.
Another variant is to purchase a certain item multiple times but sell only once. The seller then receives payments from each buyer separately but deposits all his or her earnings in a single account which he or she uses for other purposes as well. In this case, one could argue that there has been no true trade taking place at all since the accounts have not been separated by a blockchain.
NFTs, in particular, make it possible to apply any number of washtrading schemes as well as other manipulations, due to the large flexibility they offer.
One such method is called first-in-first-out (FIFO), and involves trading with oneself at high prices in order to inflate the price of an asset artificially.
The same principle can be applied if you have multiple accounts: trading from your most valuable account so that the less valuable assets are left behind to prevent them from getting distributed among many different owners. This way, you’re actually selling real assets for cheap but still earning more than what you would normally receive.
All of these schemes are unethical and possibly illegal. They also interfere with the natural workings of the market, making an uneven playing field that can hurt other investors.
The risks associated with NFT wash trading
Wash trading is a risky behavior that can really affect the market. It can artificially inflate trading volumes and trade prices on an exchange, while also giving an unfair advantage to certain traders over others.
Not only this, but it can also create a lot of negative sentiment among traders, who may think that the exchange is being manipulated. This can result in a loss of trust in the platform.
All this makes it important for exchanges to have measures in place to detect wash traders and block them from their platforms. Without some kind of self-regulation from these platforms, scammers will certainly try to get an unfair advantage.
Is wash trading illegal with NFTs?
Wash trading is illegal in many markets, including the stock market, as it can lead to false or misleading prices. However, there is not yet any specific regulation against wash trading in the cryptocurrency market.
Although wash trading is not specifically illegal in the cryptocurrency market, it can still be considered a form of market manipulation. This is because wash trades can create artificial price movements that are not based on real supply and demand dynamics. As a result, wash trading can distort the true picture of the market and mislead other investors.
Wash trading is generally considered to be unethical and it is discouraged by most exchanges and market participants. Some cryptocurrency exchanges take steps to combat wash trading by limiting the number of trades that a single user can perform per day, or by introducing verification requirements for certain users.
And even though there is no specific regulation against wash trading in the crypto market, this activity may still be investigated under existing anti-manipulation regulations.
While wash trading has received significant criticism in recent years, it continues to be a feature of the crypto market. However, as the popularity of cryptocurrencies grows and more investors enter these markets, we can expect regulators to step up their efforts to stamp out wash trading and other forms of market manipulation.
How to spot NFT wash trading
Let’s take a look at some tips that will help you spot NFT wash trading:
First and foremost, check the volume of trades being carried out on a platform or exchange. Unusually high trade volume could be an indicator that something fishy is going on.
Another place to look for unusual activity is the order book. If a lot of orders are open at similar prices or if there are large buy/sell walls, then it could indicate that the exchanges are faking their trading volume.
Yet another sign of wash trading is sudden spikes and dips in the price chart. If there is an abnormal change in price within a short time, it is likely that someone has traded with themselves to artificially inflate or decrease the market value of a particular cryptocurrency.
Finally, check whether any of your rivals have suddenly started investing heavily in a coin that you own. This type of behavior could also be indicative of wash trading.
In closing, NFT wash trading is a method of manipulating the market by artificially inflating or deflating the price of tokens. It can have serious consequences for the overall health and stability of cryptocurrency markets.
While it is not yet necessarily illegal as it applies to NFTs, it is considered highly unethical. If you encounter any suspicious activity involving NFTs, it’s best not to get involved in such a trade.
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