Trading Assets Digitally — How NFTs are Falling Prey to Wash Trading?
A New Frontier in Trading
When Jordan Belfort, played by Leonardo DiCaprio, made his first stock sale at an inflated price, we could not help but admire his courage and his risk-taking ability. Sadly, the real world is not so glamorous, and many investors fall prey to fraud, either online or offline.
With the advent of blockchain technology and with cryptocurrency creating an entirely new marketplace for the trading of digital assets, a new frontier has opened up online in the finance sector, both for creators and collectors as well as fraudsters to explore and engage with.
As this marketplace grows beyond just cryptocurrency to digital assets such as Non-Fungible Tokens or NFTs, there are whispers of price inflation of these assets, otherwise known as wash trading, being carried out by those with ulterior motives.
However, it is possible to secure an NFT from such fraudulent trades with the right analytical tools!
Is Wash Trading NFTs Even Possible?
Unfortunately, the answer to that question is yes.
In the case of NFTs, wash trading involves the repeated sale of a digital asset in order to create a false impression of demand for it, which in turn increases its price. By bouncing the asset’s ownership between multiple digital wallets and platforms, an owner looking to manipulate its price can thus sell it at a profit, even as its actual value remains relatively the same.
Wash trading of NFTs is not only illegal, but affects the value of such digital assets, but also creates an air of uncertainty around trading in cryptocurrency, discouraging collectors from further engaging with the technology and its platforms. Furthermore, it also affects online communities that such platforms have created, where the sharpest minds in trading and finance engage with each other.
Let us consider, for instance, the Cool Cats collection. It included 9,999 exclusive collectible tokens on the Ethereum platform and generated a significant percentage of wash traded transactions.
Specifically, Token ID — 612 was moved between multiple wallets and traded multiple times to create the impression of demand, raising the original value of 3.69ETH to a final, wash traded value of 6.25ETH while retaining ownership of the original asset!
Or you could look at the case of Bored Apes Yacht Club or BAYC, another collection of digital artworks on the Ethereum platform. In a manner similar to the Cool Cats Collection, Token ID — 8099 from this collection was circularly traded, bounced multiple times between the seller and the buyer in order to inflate its price from 35ETH to 60ETH, an inflation rate of 71%!
How do they do it?
While the circular trading of assets is one way of going about it, there are other ways of wash trading crypto-assets as well. For instance, OpenSea, one of the largest NFT trading marketplaces was left red-faced after Nate Chastain, product head, was accused of insider trading with NFTs about to be launched on the website!
In most cases, however, finding and penalizing such activities can be a challenge. While most blockchain platforms feature a permanent, public ledger of all transactions on the platform, the sheer volume of transactions involved can be difficult to monitor.
Identifying wash trading also requires the application of complex concepts such as Benford’s Law or the Pareto-Levy principle. However, for the average collector or investigator, finding evidence of wash traded NFTs can be an uphill task in the absence of solutions that are dedicated towards monitoring trades constantly and equipped with the correct tools to identify and flag potentially fraudulent transactions.
While potential fraudsters have found increasingly clever ways of making illicit profits off the digital marketplace, an equally capable slew of product designers and developers have come up with increasingly creative ways of preventing fraudulent activity online.
While there are some short-term solutions to wash trading on crypto platforms, such as increased transaction fees, vigilance against circular trades and requiring verifiable information for trading accounts, securing NFTs against wash trading, and identifying assets that have undergone wash trading remains a challenge.
It will be interesting to see how the future plays out in a marketplace where new assets and currencies seem to be cropping up every day. It is sure to bring changes, as well as further innovations, on both the legal as well as illegal fronts off digital marketplaces.
Nevertheless, the one constant you should worry about, as a collector or creator, is the need for an effective, one stop solution towards securing your precious assets, and having a clear idea of your portfolio’s value at all times.
Is it possible to protect against wash trading?
With the Unleash NFTs that includes the Scour tool, bitsCrunch offers such a solution, allowing you to trade and store digital assets with ease and peace of mind.
Scour is an AI powered agent that is capable of using existing mathematical and data-driven tools to monitor all transactions related to an NFT and provide a clear picture of its trading history by monitoring transfers, addresses of storage wallets, reward token distributions.
Devote your attention to your trading, while your digitally powered watch dogs protect your precious assets from theft or manipulation. Secure your future in the digital marketplace and be a part of its evolution, right from the very beginning!