As many as seven in 10 cryptocurrency trades on the world鈥檚 most popular but unregulated exchanges may be people buying from themselves to artificially inflate prices, according to a new analysis.
A study of 29 cryptocurrency exchanges, where people buy and sell the virtual currencies, undertaken between July and November 2019 has found significant volumes of 鈥渨ash trading鈥� within cryptocurrencies. Wash trading is where an investor sells and buys the same asset to create artificial interest in an investment, often distorting the price.
The analysis looked at how four of the most popular cryptocurrencies 鈥� bitcoin, Ethereum, Litecoin and Ripple 鈥� were traded on the exchanges. On the exchanges that are regulated, the researchers found little evidence of wash trading. However, on those that were unregulated, they found that wash trading is likely to be widespread.
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The researchers did this in three ways, says at Newcastle University, UK, one of the co-authors of the paper. They examined every trade made between the four cryptocurrencies and US dollars over the time period, analysing them against statistical and behavioural benchmarks.
One, Benford鈥檚 law, describes how often a number between 1 and 9 should be the first digit of a number, if the numbers are truly random. Between 20 and 50 per cent of unregulated cryptocurrency exchanges failed Benford鈥檚 law in at least one cryptocurrency.
The second test looks at how trades cluster around certain prices, a common pattern on conventional trading markets. Regulated cryptocurrency exchanges mimicked their traditional financial counterparts, showing good clustering 鈥� but unregulated crypto exchanges didn鈥檛. Investors instead trade with equal frequency at different trade sizes, an unusual behaviour in financial markets.
The third test looks at statistical patterns in the sizes of trades. Once again, the distribution of trade size followed mathematical predictions on regulated exchanges, while those on unregulated exchanges showed very irregular patterns.
Overall, the researchers estimate that wash trading made up more than 70 per cent of the total volume on unregulated exchanges during the study period. Li says some crypto exchanges have changed their approach to wash trades since the study was done, but she believes the issue largely persists.
The paper鈥檚 large data set and rigorous analysis make it an important insight into the crypto trading world, says at University College London (UCL). 鈥淩esearch studies year after year by serious scholars from multiple disciplines 鈥� who do not happen to have vested interests in the success of the crypto ecosystem 鈥� have pointed out how [cryptocurrency] trading largely involves fraudulent activities, and is ultimately reliant on a speculative, manipulated marketplace that has materially affected many financially at-risk individuals,鈥� says De Cristofaro.
, also at UCL, is less certain about the paper鈥檚 findings. 鈥淚鈥檓 not quite sure all of the manipulation is strictly 鈥榳ash trading鈥�, and a lot of it is likely concentrated on certain popular trading pairs,鈥� she says.
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