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Crypto Market Manipulation
The go-to place for understanding the crypto market is by visiting CoinMarketCap. However, a recent report by the SEC shows this data may be inaccurate. This is especially the case with unregulated exchanges. They have no incentive to be honest so they engage in wash trading. At large exchanges such as Binance and Coinbase, there are incentives to be honest since even a slight scandal could affect their trading volumes.
Why they do it
The reason small exchanges inflate volumes is to be noticed and attract investors. This is especially so in the current bear market, which has seen the number of crypto traders declining. With the appearance of liquidity, traders will believe they can be able to enter and leave positions fast, which is important in the volatile crypto market.
This does happen in stock markets but since they are highly regulated, they rarely get away with it for long. It is especially so with large brokers who play around with customers’ fund to give the impression of having large volumes. In wash trading, the exchange is both the buyer and the seller.
Another reason why exchanges are increasingly engaging in wash trading is due to an increase in competition. Almost daily, a new exchange is being launched with some fancy gimmick. However, they still need to get traders to deposit their money with them to make money. To do this, they fake volumes to attract new traders. Coupled with the unwillingness of most jurisdictions to regulate crypto in any way, this problem will only get worse with time before things get better.
How Regulation Could Help
Thus far, the evidence shows that regulated exchanges do not engage in this practice. However, most regulators still have a limited understanding of how crypto exchanges work. Besides that, even those that understand exchanges have been slow to come up with an airtight framework. There is also the fact that the market itself is still growing and only a few people understand how crypto exchanges work. As a result, crypto exchanges feel emboldened to inflate numbers since most of their customers do not understand the concept.
Crypto Volume It is Quite Murky
The SEC report showed that wash trading was taking place on about 95% of exchanges. At some exchanges, almost all the trades are wash trading. One way to determine if an exchange is engaged in the practice is to simply the volumes at the exchange.
If an exchange is faking its volumes a great deal, it might have very low actual traffic. This can be an easy way to determine if an exchange is taking you for a ride or not. As the crypto market gets integrated with the traditional financial world, this practice could become a huge problem. With time, it will slow down the integration with the fiat market since most major investors will simply stay away from it. Banks might also be more unwilling to work with exchanges since they operate based on very strict regulation. They will simply not want to be fingered by regulators for engaging in suspicious practices.
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