The non-regulation of the crypto assets right now is enough to open discussions pertaining to ‘legality’ and ‘manipulation’.
The last few years have thrown enough spotlight on the web 3.0 industry to make it a topic of concern and development. However, there are things that are so evident that we just can’t keep our eyes away from them.
Wash trading, a phenomenon that most of you are familiar with, is something that we look at as a big no-no.
For context, wash trading is an activity where a trader (or a group of them), colludes to buy and sell security multiple times to create a false interest in it. This leads to an incorrect, yet higher value of the asset.
Talking about the law, such activities are completely illegal in many countries. If found guilty, stock market traders are penalized.
But when it comes to crypto and NFTs, there’s no regulation. With no regulation, there is room for wash trading. And with room for wash trading, there’s a good amount of wash trading that’s actually done in the industry right now.
The hype around the NFTs in 2021 isn’t something that’s relevant anymore. And with how many people missed hopping on the now-non-existent popularity of NFTs, there’s a significant FOMO for those that couldn’t have a taste.
Understanding wash trading
Since we’re talking in the context of NFTs, let’s stick to that strictly.
Understanding wash trading in such a context means that a seller or a group of traders repeatedly trade an NFT from one wallet to another in order to artificially inflate asset prices.
Let’s say there’s a BoredApe in somebody’s wallet that costs you 100 ETH, and they want to sell it at a higher price, obviously. To do so, you’re going to send it to another self-funded wallet address at a higher value, let’s say 110ETH. By sending it back and forth among wallets with the price increases after every transaction, the trader can create an artificial demand for this BoredApe.
Is this doable?
Absolutely!
Is this still happening?
Absolutely!
Is this a problem?
Absolutely!
So how often does white-washing happen?
The bizarre prices around the NFTs last year weren’t difficult to imagine, considering there are several factors at play than just white-washing.
Chanialysis, a blockchain analytics firm, revealed that at least 262 users have sold an NFT to a self-financed wallet address more than 25 times. While more than half of the wash traders were unprofitable due to the gas fees they had to incur, about 110 traders were able to generate $8.9 million in profit from such activity.
bitsCrunch in April 2022, found out that nearly 34% of the total transactions conducted on the Ethereum blockchain were wash-traded.
The analytics platform also discovered that the value of top collections Bored Ape Yacht Club and CryptoPunks were inflated by 39.44% and 24.22%, respectively, some of which is likely contributed by wash trading.
As of October 20, 2022, over $235 million worth of NFT trading volume was wash-traded in the last 30 days across top NFT marketplaces.
As NFTs rose in popularity, wash trading became more frequent and dominant across the web 3.0 industry.
So how does it affect the ecosystem?
Judging from the current wash trading scenarios, the prices could easily fluctuate significantly. Because of the artificial surge in pricing, an investor or collector could end up paying far more than what an NFT really is worth.
Not just that but the artists and the NFT startups could also lose their credibility in the long run. The worst part? Wash trading also leads to a reduced engagement in the NFT ecosystem, which distances us away from the developments we’re hoping for in the industry.
Sorting the bad apples
Before you dive into NFT trading or any form of crypto asset, right now it almost seems imperative that you do your own research and determine the right methods to stay away from such manipulations of the market and the players involved.
NFTs right now are those assets whose benefits can’t really be underestimated. From benefitting the artists to collectors likewise, there’s a thin line between the right pricing and a manipulated one.
It is, therefore, important to not let solvable issues throttle over the technological advancements the NFT and the wider Web3 industry are making.
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