NFT ‘Wash’ Trading – The Fake Deals Keeping Prices Artificially High

Justin Freeman

NFT 'Wash Trading'

  • Trades in non-fungible tokens (NFT) come into the spotlight
  • Reports suggest artificial trading activity is taking place
  • The scheme aims to keep prices high and lure in new unsuspecting bidders

The fastest-growing NFT marketplace Blur has come into the spotlight with claims that artificial trading activity on the platform keeps prices and trade volumes high. Sceptics claim that up to 80% of the trading volume in some NFTs is ‘inorganic’, part of a market manipulation scam designed to lure in newbies.

What is ‘Wash’ Trading

Wash trading involves buying and selling an asset in quick succession to create a track record of trading activity. It originated in the US stock markets in the early 1900s as it offered a way to crystallise losses on positions for tax purposes.

In the case of NFTs, little risk is taken on by the buyer, who can set the price of both transactions. But for an unsuspecting new entrant to the market, the wash trade can suggest a digital asset is becoming more popular. The problem is that once the NFT is bought, often at an overinflated price, the other traders apparently interested in the market disappear.

How Big is the NFT ‘Wash’ Trading Problem?

NFTs started gaining momentum in terms of mainstream investing in 2017 and took off in 2021. The dedicated marketplaces have now reported $73.8 billion worth of trading activity has taken place. Data provided by Dune Analytics suggests that more than 42% of the volume ($31.2bn) can be attributed to wash trading.

Research carried out by CryptoSlam into trading activity at Blur suggests that in recent months up to $577m, or 80% of NFT trades have been ”inorganic”. Other NFT platforms are also accused of supporting manipulative practices; LooksRare and X2Y2 are estimated to have 98% and 85%, respectively, of their total trading volume currently flagged as suspicious.

How to Avoid NFT ‘Wash’ Trading?

The nature of the crypto markets does leave the door open to those who argue that the problem is not as bad as it appears, and analysis does point to wash trading being more prevalent in some markets. More experienced NFT investors highlight that it is more of a concern in markets which attract novice investors and collectors.

That would tie in with the classic approach of scammers who take advantage of those with less than complete knowledge of how a market works but doesn’t remove the challenges facing those considering investing in NFTs for the first time.

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Justin Freeman

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