Wash Trades Effect Markets

Wash Trades Muddy the Waters for Crypto Investors

By DBit | Unconventional Crypto | 28 Aug 2020


 

What Are Wash Trades?

Wash trades are profitless transactions meant to manipulate markets and lure investors into making bad decisions. Some example of wash trades include:

  • Exchanges manipulating their own market volume numbers
  • A person acting as both the buyer and the seller of a security
  • Traders working with brokers to manipulate market data

Generally, wash trades create fake trading volume without generating any commercial value. Cryptocurrency, with its unregulated exchanges, bots, and high frequency trading is particularly susceptible to wash trades. In fact, Bitwise Asset Management told the US Securities and Exchange Commission (SEC) in 2019 that 95% of bitcoin trading volume was fabricated.

It may seem like faking trade volume is no big deal, but there are many unscrupulous ways this metric can be abused. Exchanges can use false volume to make themselves look busier than they are, then demand higher prices for listing news crypto coins. Conspirators can carry out pump-and-dump schemes by duping other traders to jump on a highly (wash) traded crypto before bailing.

Recently, Korean exchange Coinbit was accused of faking 99% of their transactions. Authorities claim the business made over $84 million USD by falsely representing their trading activity and through fraudulent margin trading. The CEO and executive director of Coinbit are now in jail.

Coinbit leadership has been jailed.

Not the best trade Coinbit could have made.

Why Should I Care?

It may seem like wash trading is something only done by crypto exchanges or large-scale investors. However, it is possible that you have unintentionally participated in wash trades. In fact, the structure of both crypto markets and cryptocurrency makes it difficult to avoid wash trades. The problem begins with regulators determining whether cryptocurrencies qualify as a security.

According to the SEC, some cryptocurrencies qualify as a security and others do not. For residents of the US, this means buying the same crypto you recently sold may be a form of wash trading. In the US, investors are allowed to write off market losses as tax deductions. However, when it comes to cryptocurrencies that qualify as securities this is not the case:

“Your anticipated tax loss is disallowed if, within the period beginning 30 days before the date of the loss sale and ending 30 days after that date, you acquire “substantially identical” stocks or securities … According to the tax law, your loss transaction and the purchase of the replacement securities are a “wash,” so you shouldn’t be allowed any tax benefits.”

This means buying a crypto considered a security, selling at a loss, then buying it again can be considered a wash trade by the IRS.

Navigating dishonest exchanges and perplexing tax codes are two of the many challenges crypto traders face on their journey toward wealth. Future cryptocurrency classification from government entities and further self-regulation from exchanges may be forthcoming, but for now, crypto investors are on their own. Trade safely.

 

 

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DBit
DBit

Cybersecurity technical writer and crypto enthusiast.


Unconventional Crypto
Unconventional Crypto

Cryptocurrency, cybersecurity, and their real world impacts. Speculative predictions and detailed analysis. Plain talk on complex topics.

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