Wash trading in crypto: how the market “inflates” itself

In the crypto market, trading volume often appears to be the main indicator of an asset’s health. The more trades there are, the greater the interest, the more reliable a project seems, and the more willing new investors are to enter it. However, there is a darker side to this attractive picture: not every trading volume reflects genuine demand.

Sometimes the market appears to trade with itself. Transactions take place, numbers rise, charts look convincing, but there are no real buyers and sellers behind this activity. This is how wash trading works — one of the oldest and most persistent forms of market manipulation.

Wash trading is a scheme in which the same participant effectively acts as both sides of a transaction: selling an asset and buying it back. Formally, the trade takes place, the volume is recorded, and the trading history is updated with another entry. Economically, however, the transaction serves no real purpose.

The main objective is not to profit from price differences but to create an illusion. The asset should appear in demand, the exchange should look liquid, and the market should seem active.

This issue is particularly sensitive in the crypto industry. Investors are accustomed to viewing trading volume as a sign of trust: if a token is actively bought and sold, there must be genuine interest around it. Wash trading replaces this signal with a counterfeit one.

There are several reasons for engaging in wash trading.

A young project wants to demonstrate that its token is not sitting idle. An exchange wants to prove that its platform is bustling with activity. A market maker (a market participant responsible for providing liquidity for an asset) may want to maintain the appearance of liquidity*. Fraudsters, meanwhile, may use it to attract attention before selling their holdings at inflated prices.

In the world of cryptocurrencies, trading volume is more than just a statistic — it is a storefront. The more attractive it looks, the greater the chances of appearing in rankings, attracting traders, gaining the attention of influencers, and triggering the familiar feeling of FOMO* among investors.

The problem is that sometimes there is very little behind that storefront.

The simplest version involves several connected accounts or wallets. One places a sell order, while another places a buy order. Then the roles are reversed. From the outside, it appears to be active trading among independent participants, but in reality, the asset is simply circulating within the same group.

A more sophisticated approach involves trading bots. These can automatically generate hundreds or thousands of transactions, maintain a desired pace, simulate market activity, and make the behavior less obvious to outside observers.

Sometimes manual operations and algorithms are combined, making the scheme appear less mechanical and harder to detect.

The situation becomes even more complicated on decentralized platforms. While the blockchain is transparent, it is not always clear who controls specific addresses. One person may manage dozens of wallets, and without extensive analysis, such activity can appear to be normal trading between unrelated participants.

Wash trading distorts the very foundation of a market: information.

An investor sees high trading volume and concludes that the asset is liquid, attracts interest, and will be easy to exit. In reality, there may be far fewer genuine buyers than it appears. Once the artificial activity stops, liquidity disappears — and the price often follows.

These schemes are particularly dangerous for low-liquidity tokens. Just a few days of artificially generated volume can make them appear more promising than they really are. Retail investors then enter the market, while early holders gain an opportunity to sell their tokens under more favorable conditions.

As a result, wash trading becomes more than a statistical manipulation — it becomes a mechanism for transferring money from less informed market participants to those controlling the scheme.

Market manipulation is not limited to individual traders or projects. Exchanges themselves may also have incentives to appear larger than they really are.

High trading volume helps an exchange climb rankings, attract new users, encourage projects to seek listings, and strengthen its reputation. For lesser-known exchanges, this can be a way to quickly create the impression of a large-scale business.

As a result, a vicious cycle emerges: traders go where they see liquidity, even when that liquidity may be nothing more than a carefully staged performance.

Wash trading is not limited to token markets. The issue became especially visible in the NFT sector because every major sale can influence the perception of an entire collection.

One of the most famous examples of wash trading in the NFT space involved CryptoPunk #9998. In October 2021, the blockchain recorded its sale for 124,457 ETH — equivalent to approximately $532 million at the time. The news spread rapidly throughout the crypto community, and many believed the NFT market had set a new all-time record.

However, it soon became clear that there was no genuine buyer behind the sensational transaction. The owner of the token used a flash loan—a crypto loan that can be borrowed and repaid in a single blockchain transaction.

The scheme worked as follows: borrowed funds were obtained, the NFT was “sold” to a related wallet using those funds, and the money was then immediately returned to repay the loan. As a result, the blockchain displayed a sale worth hundreds of millions of dollars, even though ownership of the asset never truly changed and no real capital entered the transaction.

Formally, the transaction took place and was permanently recorded on the blockchain. Economically, however, it was not a genuine sale but an artificial attempt to create record-breaking volume and generate headlines.

On paper, it looked like a sale worth hundreds of millions of dollars. In reality, it was little more than an impressive numerical illusion.

Wash trading rarely comes with a direct admission of manipulation. However, it often leaves recognizable traces.

Investors should be cautious if trading volume suddenly surges without any news, partnerships, listings, or other clear reasons. Another warning sign is when activity is concentrated on a single platform while the same asset sees minimal trading elsewhere.

An unusually consistent trading pattern can also be suspicious: identical trade sizes, repeating intervals, or mirrored buy and sell orders. Real markets tend to be chaotic. When trading resembles a metronome, it is worth taking a closer look.

It is also important to examine more than just daily volume. Market depth matters as well. If reported turnover is enormous but there are very few genuine buy and sell orders, liquidity may be artificially manufactured.

The most important rule is simple: never trust trading volume without considering the broader context.

Before buying an asset, compare data across multiple platforms, review its price history, assess market depth, evaluate the news environment, and investigate the project’s reputation. If an asset suddenly becomes “popular” but nobody can explain why, it may not be an opportunity — it may be a warning sign.

It is generally safer to use exchanges with transparent reporting, strong reputations, and real user bases. In crypto, impressive numbers often sell confidence, but the quality of liquidity is what truly reveals how alive a market is.

Wash trading is not merely a technical trick or a harmless game with numbers. It is a method of making a market appear healthier than it actually is.

It creates the illusion of demand, pushes investors toward poor decisions, and enables dishonest participants to profit from the trust of others. In the crypto market, where attention often carries more weight than fundamentals, this form of manipulation is especially dangerous.

That is why, behind every impressive volume figure, investors should always ask one simple question:

Who is really buying — the market, or the seller themselves?