wash trading

OpenSea collector fat fingers a 100 ETH bid for a free NFT

Some pundits have argued the trader mistakenly put up a bid for 100 Ether that was quickly snapped up, while others believe the sale was a wash trade.

A nonfungible token (NFT) trader has seemingly fat-fingered a bid for a free NFT, buying it for 100 Ether (ETH), currently valued at $191,239, instead of nothing.

The token was part of NFT marketplace OpenSea’s Gemesis NFT collection — free NFTs intended to commemorate the launch of OpenSea Pro on April 4. The trader’s bid is a 250,000% increase on the floor price of 0.04 ETH.

OpenSea Pro is a marketplace aggregator tailored to professional users by providing them with what OpenSea calls “a vastly improved” suite of features such as live cross-marketplace data and advanced orders.

*A record of the transaction on an Ethereum blockchain explorer. Source:* *Etherscan*

While some have argued the sale was wash trading, Twitter user “0xSun” believed the sale — which took place on the NFT marketplace Blur — occurred because the trader wanted to bid $100 but accidentally bid 100 ETH instead.

Yeah someone else put the 100ETH bid by mistake (He probably want to bid 100 as amount) and it got accepted by another one with 1500+ gwei gas

— 0xSun (@0xSunNFT) April 5, 2023

A Reddit user who posted about the sale also cast doubt on the wash trading theory, arguing it was an open offer that was available to anyone, making it too risky to be a wash trade as another trader or bot would quickly snap up an offer so far above the floor price.

“I know what you guys are thinking it was a wash trade but this was an open offer that could have been accepted by anybody, so it would be a pretty big risk hoping you were faster than anybody else looking at the offers at that moment.”

Wash trading is a form of market manipulation in which a trader buys and sells an asset to feed misleading information to the market. The practice is illegal in traditional stock markets but is very prevalent in NFT trading.

OpenSea acquired NFT aggregator Gem for an undisclosed amount on April 25, 2022, and refined the platform in order to create OpenSea Pro.

Only users who bought at least one NFT on Gem prior to March 31 are eligible to mint a Gemesis NFT, with the minting window set to close on May 4.

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Wash trading will cause crypto’s next implosion: Mark Cuban

The majority of centralized exchange volume is fake, according to the billionaire investor and Dallas Mavericks owner.

Crypto token wash trading on centralized exchanges will be the cause of the next crypto “implosion,” according to billionaire Dallas Mavericks owner and crypto investor Mark Cuban.

In an interview with The Street on Jan. 5, the billionaire investor opined that 2023 will not be short of crypto scandals following the numerous fiascos that rocked 2022.

Cuban, who has backed several crypto and Web3 startups, said he believes the next biggest thing to impact the industry will be “the discovery and removal of wash trades on central exchanges.”

“There are supposedly tens of millions of dollars in trades and liquidity for tokens that have very little utilization,” he said before adding, “I don’t see how they can be that liquid.”

*Mark Cuban has backed several crypto startups. Source: American Broadcasting Company*

Wash trading, which is illegal under U.S. law, is a process whereby a trader or bot buys and sells the same crypto asset to feed misleading information to the market.

The goal is to artificially inflate volumes so that retail traders jump on the bandwagon and push prices up. In essence, it is a pump-and-dump scheme.

Cuban said he was just making a prediction, adding “I don’t have any specifics to offer to support my guess.”

As much as 70% of the volume on unregulated exchanges is wash trading, according to a December report by the National Bureau of Economic Research (NBER).

Researchers used statistical and behavioral patterns to determine which transactions were legitimate and which ones were spurious.

Furthermore, a 2022 study by Forbes on 157 centralized exchanges found that more than half the Bitcoin trade volumes were fake.

Wash trading isn’t just limited to centralized exchanges, however. On Jan. 5, Quantum Economics CEO and former eToro senior market analyst Mati Greenspan said that 42% of all NFT volume is wash traded.

Yeah. It’s 2023 and we’re still talking about wash trading. https://t.co/y9kiLbu4Eu

— Mati Greenspan (@MatiGreenspan) January 5, 2023

He added that wash trading is also used to harvest tax losses, making it appear (to the taxman) that there has been a greater loss than in reality.

70% of unregulated exchange transactions are wash trading: NBER study

The researchers found that in some exchanges, the wash trading volume can go as high as 80%.

With exchanges becoming a focus as the FTX fiasco continues, a new research paper suggested that almost three out of four transactions in unregulated exchanges are fake.

A working paper titled “Crypto Wash Trading” was recently published by the National Bureau of Economic Research (NBER). Using statistical and behavioral patterns to determine which transactions were legitimate or not, the paper studied 29 unregulated exchanges and came to the conclusion that, on average, more than 70% of the volume within the platforms are wash trades.

The researchers found that some exchanges’ wash trading volume goes as high as 80% of the total trading volume. The researchers wrote that in twelve “tier-2 exchanges,” wash trades amounted to almost 80% of the total trade volume. The researchers wrote:

“These estimates translate into wash trading of over 4.5 trillion USD in spot markets and over 1.5 Trillion USD in derivatives markets in the first quarter of 2020 alone.”

According to the researchers, there are short-term incentives for wash trading. The study suggested that fake transactions often impact the rankings of the exchanges on data and statistics websites like CoinMarketCap. In addition, fake transactions also affect the crypto prices within the exchanges over the short term.

Meanwhile, the FTX debacle continues to gain attention as wallets linked to Alameda Research have shown movements, funneling around $1.7 million in assets through crypto mixers. The movements were observed days after the former FTX CEO Sam Bankman-Fried was released on a $250 million bond.

As the FTX collapse damaged people’s trust in centralized exchanges (CEXs), executives working on CEXs have voiced their sentiments on how they could win back user trust. On Nov. 25, Cointelegraph spoke with various leaders within crypto exchanges and found that many are positive that the industry can still recover post-FTX.

Get ready for the feds to start indicting NFT traders

Securities and Exchange Commission regulators should move to protect investors from traders who distort the NFT market with manipulative trades — and they probably will soon.

Studies show that most people who attempt to wash trade nonfungible tokens (NFTs) are unprofitable. But that doesn’t stop them from trying, which makes it a glaring regulatory and enforcement issue for the industry.

In wash trading, manipulators buy and sell an asset between themselves to create the appearance that the asset is in higher demand and, therefore, worth more than it would be otherwise. With NFTs, wash trading is fairly straightforward: Imagine an investor holds $1 million in Ether (ETH). The investor mints an NFT and proceeds to sell it to themself for all the ETH they own. The transaction is then on the blockchain for $1 million in ETH. The price of the NFT has been set through a wash trade to the benefit of the individual who minted the NFT.

It might be tempting to think that this is a “victimless” crime since it’s unlikely any money actually changed hands if it was a wash trade, but that’s false. By rewarding allegedly fake high-volume traders with real money, NFT investors stand to lose millions to scammers, and legitimate traders may be fooled into overpaying for their investments.

These fraudulent transactions also drive Gresham’s Law (bad money drives out good money) in crypto, driving out legitimate investors and traders as the exchange’s reputation is destroyed.

When it comes to NFTs, however, the rules are not so clear. Such tokens may not be securities, so the same laws and regulations governing securities trading may not apply to them.

The background on wash trading laws

Wash trading has been barred in the United States since the passing of the Commodity Exchange Act in 1936 in response to its popularity as a manipulation tool. Since then, however, the Securities and Exchange Commission and Commodities Futures Trading Commission have carefully scrutinized markets and brought numerous enforcement actions for “wash traders,” thereby adding a degree of safety to the securities and futures markets.

According to the SEC, “Wash trading is an abusive practice that misleads the market about the genuine supply and demand for a stock.” Meanwhile, the U.S. Internal Revenue Service prohibits taxpayers from deducting losses that result from wash sales, so it is entirely possible that wash trading NFTs could result in an enforcement action. It hinges on how NFTs are classified by regulators.

Traders should examine sales history closely before buying NFTs

Accepting the idea that cryptocurrencies tend to be volatile, along with the slow pace of enforcement actions against new assets like NFTs, it seems natural that many sellers will try to inflate their asset’s value to attract new buyers and earn a profit. NFT buyers should think twice and do their due diligence before making a significant investment into an NFT.

*NFT sales to self-financed addresses in 2021. Source: Chainalysis*

It may seem like they are getting a valuable asset because of the number or size of transactions in which the investment has been involved, but the truth may be that the asset was only bought and sold between two wallets owned by the same person making the asset appear more in demand that it actually is.

The SEC is probably already preparing to bag its first NFT traders

Even with laws and enforcement actions, we still see wash trading in the regular securities and commodities market, so you can be certain it exists in newer and evolving markets. Hopefully, the SEC is already working on enforcement in the NFT market. Investigations are generally nonpublic, so some traders may already be in regulators’ sights. It’s a safe bet that in the long run, federal regulators will catch up with this new asset class, and wash trading among NFTs will be reined in as well.

The SEC should move to protect investors, first by ruling that NFTs will be treated like securities, and then monitoring exchanges for signs of manipulation as they do for other asset classes.

Brendan Cochrane, Esq., CAMS is the blockchain and cryptocurrency partner at YK Law LLP. He is also the principal and founder of CryptoCompli, a startup focused on the compliance needs of cryptocurrency businesses.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.