Billionaire Mark Cuban believes an age-old market manipulation tactic could be the next thing to rock the cryptocurrency industry.
“I think the next possible implosion is the discovery and removal of wash trades on central exchanges,” the longtime cryptocurrency investor told TheStreet.
A wash trade is when a trader buys and sells the same financial asset multiple times to generate false volume and make it appear that there is high demand for the asset. This artificially inflated demand can induce other traders to invest real money in the asset.
Since higher demand often leads to higher prices, traders can use this process as a type of “pump and dump” scheme: when the price is as high as the trader thinks it can go, they can cash out and leave other investors with the asset that is losing value.
While wash trading has been illegal in traditional US financial markets for decades, the activity is likely to be difficult to crack down on in the crypto space.
Putting an exact number in crypto wash trading is much more difficult than in traditional finance because the markets are so different and decentralized.
Chen Arad
Director of Operations, Solidus Labs
“Putting an exact number in crypto-wash trading is much more difficult than in traditional finance because the markets are so different and decentralized,” says Chen Arad, chief operating officer at Solidus Labs, a risk monitoring and security surveillance company. crypto-native marketplace.
For example, bitcoin is traded on thousands of platforms that are centralized and decentralized, regulated and unregulated. This could create new openings for criminals to collude on exchanges and manipulate the market in new and sophisticated native cryptographic ways, Arad told CNBC Make It.
Up to this point, just over 50% of reported daily bitcoin transactions are likely to be fake, according to the latest Forbes analysis of 157 cryptocurrency exchanges worldwide. For the study, Forbes analyzed data from four crypto media companies – CoinGecko, Nomics, Messari and CoinMarketCap – as well as several crypto exchanges.
While Cuban cautioned that he didn’t have any details to support his prediction, he did point out that there are reportedly tens of millions of dollars worth of trades for digital tokens that have very little use and he doesn’t see how these types of assets could be easily converted into cash.
Arad agrees that wash trading is a big problem in the cryptocurrency market. “Without preventing wash trading, cryptocurrency will never reach its potential to enable safer and more accessible financial services,” he says.
Unfortunately, identifying wash trading on your own is not an easy task. Identifying market manipulation requires specialized technology and deep technical, financial and cryptographic knowledge, says Arad.
But it’s important to note that the crypto industry has made a concerted effort to combat the problem over the years, he says.
“Most regulated exchanges have compliance and oversight teams that are larger than in traditional finance and led by expert veterans,” says Arad. “On exchanges that use market surveillance, the wash trading rate is often just a fraction of one percent.”
The best thing retail investors can do to protect themselves from falling prey to a money laundering scheme is to ensure they only trust regulated cryptocurrency platforms that utilize market surveillance technology to detect suspicious trading activity, he says.
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