Wash Trade

A wash trade is a transaction in which a buyer and seller are effectively the same entity, or are acting in concert, so that ownership of the asset does not genuinely change hands. The purpose is to generate artificial trading volume and price movements that mislead other market participants into believing there is genuine demand or liquidity for the asset.

In traditional securities markets, wash trading has been illegal for decades and is actively monitored by regulators. In cryptocurrency markets, where regulatory oversight has historically been lighter, wash trading became pervasive on some exchanges. Published trading volumes on certain crypto platforms were discovered to consist largely of wash trades: the exchange or large traders would cycle assets between affiliated accounts to appear highly active, attract listings on volume ranking sites, and draw in retail investors.

NFT markets also experienced significant wash trading: sellers would buy their own NFTs through a series of wallets to inflate apparent sale prices, then market the asset as having a proven trading history at high values to attract genuine buyers at inflated prices. Blockchain analytics companies have developed wash trade detection models that look for circular fund flows and coordinated wallet activity. Investors should treat volume and price data on unregulated markets with significant scepticism.