Wash trading is when someone sells something to themselves to inflate demand or make it look like there’s more activity in a marketplace.
NPR’s Wailin Wong offered this example: You buy several copies of your self-published novel to make it seem popular. Because you spent the money you earned, it’s “a wash.”
In the 1930s, traders used wash trading to manipulate the market and short stocks. In 1936, the US passed a law making it illegal.
A 2022 Forbes report that analyzed 157 crypto exchanges found that 51% of trading was fake.
In a working paper, the National Bureau of Economic Research suggests wash trading accounts for up to 70% of trades on non-compliant exchanges (which don’t perform Know Your Client (KYC) identity verification), per Business Insider.
While some of it may be unintentional, it could also be investors pumping prices or crypto exchanges trying to entice investors.
That’s surprisingly tricky. Securities, like stocks and bonds, fall within the SEC’s jurisdiction; commodities, like gold and oil, are regulated by the CFTC. No one’s decided what cryptocurrency and NFTs are.
“Until the government decides how to classify crypto assets, it’s hard for regulators to police the way they’re traded,” Wong explained.
But exchanges can step in. Wash trading is prohibited on Binance, which last month announced a new opt-in Self-Trading Prevention feature to prevent unintentional wash trading.
BTW: There’s also something called a “wash sale,” which can cost you big-time if you’re not careful.