The effect of wash trading on the emerging crypto economy is not a good one, and has an undesirable ripple effect. Among the most important, wash trading can lead to the false representation of how valuable a trade market is as a whole.
For instance, Bloomberg (quoting CryptoSlam, an NFT industry data aggregator ), recently revealed that the majority of trade activities in the NFT market is dominated by faux trades.
The report specifically revealed that most of the activities on ‘LooksRare’, an NFT marketplace, involve their users selling tokens between themselves in an attempt to earn more rewards in the form of coins. The report further equated what such users are doing on LooksRare to wash trading, alleging that the practice accounts for $18 billion, or 95% of the marketplace’s entire trade volume in 2021.
For a market that is worth nearly $20 billion, it is disconcerting to find out that approximately 95% of that trade volume consists of funds circulating from one user’s account to another, and is far from an organic trade volume.
While the aforementioned statistic is specific to the LooksRare marketplace, owing to its operational model, Chainalysis claimed in its report that wash trading does not appear to have had a negative impact on the NFT market thus far. And this is reflected in the consistently increasing trade volume in the NFT market.
Notably, OpenSea, the largest NFT marketplace in the world, exceeded $3.5 billion in monthly trade volume in January 2022, indicating a bullish market trend.
To back up its claim, Chainalysis revealed that most of the attempts at wash trading didn’t generate nearly as much as expected from the effort put in.
For instance, Chainalysis claims that executing a wash trade requires a collector to sell to and from a self-finance account approximately 25 times. Based on this criteria, only a small percentage of people would have the patience to go through the process, especially as it does not guarantee success in the end.
The research firm arrived at the forgoing conclusion after analysing the transactions of 262 sellers that were potentially involved in wash trading. Based on its findings, only 110 of the 262 sellers made more than $8 million from their wash trades, while others incurred losses of over $400,000 from the deceptive trade.
It is, however, important to note that only NFTs traded on the Ethereum network were analysed by Chainalysis, suggesting that the approach may differ across other networks.
In the end, increased awareness of wash trading has the potential to negatively influence investor perceptions of a particular market. More so, it has the capacity to limit the participation of genuine investors which ultimately has a detrimental effect on an emerging market.