What is wash trading?
You want a bank loan, but the bank wants an active bank account. So, you tell a friend to deposit funds to your account, and you then transfer the money to their account. After a while, your account qualifies for a loan based on fake account activity.
When applied in the cryptocurrency market, it’s called wash trading. Generally, wash trading is the act of conducting “fake” trades to increase liquidity. With liquidity, investors are convinced it’s an active platform. In most cases, an exchange trades with itself or uses accounts it controls to issue buy and sell orders.
Why is it wash trading?
Here’s an example. A seller issues a sell order of 0.3 Bitcoins (BTC), the same seller crosses to the other side of the trade and becomes a buyer and places a buy order of 0.3 BTC. These trades effectively “wash” each other. In some cases, the buyer and seller may be two colluding individuals. Nowadays is everything automated and most exchanges you know are performing wash trading.
Wash trading is done to inflate the trading volume of a particular cryptocurrency artificially. This phenomenon is rampant on coins with insignificant trading volume, and its founders need to artificially pump the price and sell the coins when the price is high. Also, exchanges with a high trading volume are often shown higher in the rankings.
Is wash trading legal?
Most jurisdictions treat wash trading as a criminal offense. However, due to the cryptocurrency market being largely unregulated, wash traders freely roam the space.