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NFTs and blockchain technology promise transparency but little do most know, there is still some suspicious trading activity going on. New data indicates a 126% increase in NFT wash trading in February 2023 compared to the previous month of January. This means that people are taking advantage of the system and engaging in shady practices to manipulate prices and mislead potential buyers into buying these digital assets.
February marked an astonishing milestone for the NFT marketplaces, as trading volume rocketed to $1.89 billion. This recovery signaled a much-needed positive sign for the industry after it had been struggling in 2022. However, the top six non fungible tokens (NFT) marketplaces have witnessed a continuous rise in wash trading for four consecutive months, amounting to an overall volume of $580 million.
Magic Eden, OpenSea, Blur, X2Y2, CryptoPunks, and LooksRare were the six aforementioned marketplaces where significant volumes of wash trading activities were identified. The most significant contributors to February’s wash trading volume were X2Y2, Blur, and LooksRare, respectively at $280 million (49.7%), $150 million (27.7%), and $80 million (15.1%). This is not a list that should be celebrated as wash trading is a sign of manipulation in the NFT market, thus, could lead to distrust for the entire industry.
According to CoinGecko’s latest report, NFT wash trading comprises an astounding 23.4% of the unadjusted trade volume across six major marketplaces in the industry. This report shows that data should be interpreted correctly. Just because the total trade volume is up it doesn’t necessarily mean that it’s all legitimate. It is important to distinguish the difference between real versus fake trading activity and understand that wash trading could be used as a tactic to deceive potential buyers.
What does wash trading mean in NFT?
Wash trading is a form of market manipulation where one or more traders buy and sell the same asset to create an artificial demand and increase its price. By creating a false impression of liquidity, unbeknownst buyers are left with the impression that there is more demand than actual supply, thus driving up the price of the asset.
The way wash trading is performed is that a trader purchases and sells the same asset multiple times, creating an illusion of trading activity. These trades are often done using different accounts or even trading platforms. Due to the different wallet addresses not showing the personal ID of the trader, it becomes hard to trace and identify the same trader. The same person or a group can create many different wallets to perform wash trading as Web3 enables easy access and creation of wallets.
What is the point of wash trading?
The point of this practice is to mislead potential buyers into believing that this particular asset has a greater value than it actually does. By doing so, those involved in NFT wash trading can make a profit by selling the asset at an inflated price. Social proof is a factor of influence and when buyers see higher prices, they assume the asset is worth more and are willing to pay more. If you suspect someone is wash trading NFTs, it may not be worth the investment.
Most NFT marketplaces operate via an auction. False competition between two wallet addresses (actually owned by the same person or an affiliate) may draw attention and other bids from unsuspecting buyers. By creating a false demand and competition, this artificially increases the final auction price of the asset. The ‘winner’ will likely be someone that is not aware of what’s happening and will receive the asset as an overvalued prize.
NFT wash trading creates an unfair advantage to some market participants while limiting the ability of others to make informed decisions, as they are led to believe that the asset is more valuable than it is. As the NFT industry continues to rapidly grow, users need to be aware of this practice. Regulation has not yet caught up with NFT wash trading and is still widely used to manipulate the market.
This malice may cause more harm than most people suspect. At the start of this year, Mark Cuban predicted that wash trading would trigger an ultimate crash in the crypto market. This is because this manipulation can lead to bubbles and when the market realizes that the value was falsely inflated, it could cause a serious market downturn.
Recently, cutting-edge Artificial Intelligence (AI) technology has been developed to address current issues in the Non-Fungible Token (NFT) market such as wash trading. Only time will tell if these advancements in user safety and fair trade practices will be adopted and put into action. Until then, it is important to remain vigilant and know that wash trading could still be present. Investors should always do their due diligence and be mindful of any suspicious activity when trading NFTs.
Image source: Pexels / Markus Winkler