What Is Wash Trading?
Wash trading is the practice of simultaneously buying and selling the same asset to create the illusion of legitimate trading activity. The trader trades with themselves (or colluding accounts), generating artificial volume that makes an asset appear more liquid and actively traded than it really is.
How Wash Trading Works
Wash trading is rampant in crypto, particularly on unregulated exchanges and with NFTs. Studies have estimated that 50-90% of reported volume on some exchanges is wash trading. Techniques include self-trading through multiple accounts, bot-driven circular trades, and exchange-facilitated volume inflation (some exchanges have been caught wash-trading their own listed assets).
Why It Matters for Traders
For traders, wash trading means you can't trust raw volume data without verification. Metrics like adjusted volume (from market data platforms), order book depth relative to reported volume, and bid-ask spread analysis help identify genuine liquidity. Trading on exchanges known for wash trading puts you at a disadvantage because the order book dynamics you see are artificial.
