6 ms·

Can somebody explain to a crypto-naif what "wash trading" means here?

mhandley 5y ago
From page 2: One form of such market manipulation is Wash trading--- investors simultaneously selling and buying the same financial assets to create artificial activity in the marketplace, which is known to distort price, volume, and volatility, and reduce investors’ confidence and participation in financial markets (Aggarwal and Wu, 2006; Cumming, Johan, and Li, 2011; Imisiker and Tas, 2018).
deleted 5y ago
[deleted]
all2 5y ago
The abstract: > We introduce systematic tests exploiting robust statistical and behavioral patterns in trading to detect fake transactions on 29 cryptocurrency exchanges. Regulated exchanges feature patterns consistently observed in financial markets and nature; abnormal first-significant-digit distributions, size rounding, and transaction tail distributions on unregulated exchanges reveal rampant manipulations unlikely driven by strategy or exchange heterogeneity. We quantify the wash trading on each unregulated exchange, which averaged over 70% of the reported volume. We further document how these fabricated volumes (trillions of dollars annually) improve exchange ranking, temporarily distort prices, and relate to exchange characteristics (e.g., age and userbase), market conditions, and regulation. "wash trading" appears to be fraudulent trades injected into the exchange in order to boost the volume of trades appearing on the exchange.
- shane_b 5y ago
  You’re right. I think wash refers to selling then buying at the same price resulting in a wash.
  - loeg 5y ago
    You’re confusing wash trading (trading with yourself) with wash sales (a restricted form of capital loss harvesting), which are more or less unrelated despite having “wash” in the name.
    - shane_b 5y ago
      Thank you for the clarification
- avalys 5y ago
  Boost the volume of trades appearing on the exchange, and the apparent market value of the asset.
lfuller 5y ago
"Selling" crypto from one wallet to another wallet that you own to create the appearance of high trade volume and increase the apparent value of the asset.
realce 5y ago
You're the buyer and seller in some transaction. You use it to froth the volume of the asset, making it look like it's a vibrant marketplace with lots of buyers and sellers, but really it's just the Dump It guy and you.
omellet 5y ago
It's a way to fraudulently pump the price (or lower the price) of a security. One person with two accounts can keep trading back and forth with themselves, and since crypto exchange know-your-customer measures are trivial or nonexistent, it's very easy to get away with.
- aeternum 5y ago
  There is still an order book so to get the price to rise or fall, the trader would have to buy or sell enough to clear the book. How does trading back and forth with themselves do anything other than generate fees for the exchange?
  - whatshisface 5y ago
    Well, the book can be tiny sometimes.
    - tiagobraw 5y ago
      also fees can be nonexistent for big customers, which are likely to engage in such things
    - scotty79 5y ago
      It makes bo sense when it comes to any popular cryptocurrency. The only way book can be small for these is on small exchange. But if you attempt to manipylate it to bring in away from current price on large exchanges you'll be immediately interfered with by people doing interexchange arbitrage. Also manipulating small exchange has small impact.
  - loeg 5y ago
    The book is tiny and the exchange is probably the one doing the wash trading.
    - jjk166 5y ago
      Why wouldn't the exchange just lie and say that volume is higher than it actually is?
AutumnCurtain 5y ago
A "wash trade" is a trade which generates no value because it represents a swap in kind. For example, if I sell a broad market ETF like VTI and buy a nearly identical asset at the same price from a different firm, that could be a "wash trade" for tax purposes (simplifying this, but this is basically the gist). In the context of crypto transactions, it's typically referring to trades which are just shifting the same assets through a cycle of accounts without representing meaningful transactions. For a crypto real world example, see: https://mobile.twitter.com/MarcusFongNFT/status/1453911721614004225 https://mobile.twitter.com/MarcusFongNFT/status/145391172161...
- flerovium 5y ago
  This is not what the paper means. They mean a trade between two colluding parties to give the appearance of a trade.
- __alexs 5y ago
  I was confused what "dss-flash" was so I looked it up. It's a DAO that enables you to mint infinite DAI (some crappy "stablecoin") for a transaction as long as you pay it back in the same transaction. One of the stated goals of this "feature" is > Exploits requiring a large amount of capital will be found quicker which makes the DeFi space safer overall. Ah yes, intentionally making your own product less secure and more open to abuse, so you can make it more secure. Good work. This is taking testing in production to a whole new level.
  - vineyardmike 5y ago
    Like a bug bounty?
    - __alexs 5y ago
      Like a bug bounty where you give attackers an SSH login.
- loeg 5y ago
  > For example, if I sell a broad market ETF like VTI and buy a nearly identical asset at the same price from a different firm, that could be a "wash trade" for tax purposes (simplifying this, but this is basically the gist). No, you’re describing the wash sale rule, which has to do with which capital losses are tax deductible. It covers pairs of trades up to 30 days apart. A wash trade is a trade with yourself. Both participants in the same trade — not two distinct trades. https://www.investopedia.com/terms/w/washtrading.asp https://www.investopedia.com/terms/w/washtrading.asp
dragontamer 5y ago
When you trade a any security to yourself (or someone closely related to you) to give the illusion of the price going up. (EDIT: Well... it could be for any reason. But illusion of price going up is one such application of the strategy). Lets say you invent a new NFT. You sell the NFT to __yourself__ for $100. Then, you sell the NFT to yourself (again) for $200. Finally, you sell the NFT to yourself for $1000. Then you go to the public and say "Look, my NFT has grown 1000% in the past week, you should get in on it!!" Then they buy the NFT from you for $500. Then suddenly they can't sell the NFT to anyone, because you were the only one buying ever. Congrats, you just scammed someone for $500.
- aeternum 5y ago
  Yes this works with NFTs but does not work with fungible money because there are typically thousands of people willing to sell once the price goes from 100 to 200.
  - spoonjim 5y ago
    That’s why the nonfungibility of fine art is essential to its role in tax evasion.
- brianwawok 5y ago
  You do NOT need to change the prices for it to be a wash trade. What you gave me a profitable and likely illegal example of a wash trade, but not a definition of wash trade. A wash trade could be selling thing X for $100 and buying thing Y for $100 where X and Y are the same exact underlying thing. Just moving pointless trades back and forth inflates volumes, which makes people thing the market is moving. See https://www.investopedia.com/terms/w/washtrading.asp https://www.investopedia.com/terms/w/washtrading.asp for more
  - dragontamer 5y ago
    > You do NOT need to change the prices for it to be a wash trade. No you don't. But you do need to be buying and selling the underlying repeatedly for "some reason". That "some reason" could be fraud, or it could just be tax-optimization. The important thing is, "wash trading" is the technique of buying-and-selling the same thing at nearly the same time... which has many many applications. Many of those applications are illegal and fraudulent in a traditional market. So seeing something like 70% of the volume of the real world cryptomarket being wash trading suggests that there's more fraud in the cryptomarket than people generally realize.
dustingetz 5y ago
"Painting the tape is an illegal activity that is prohibited by the Securities and Exchange Commission (SEC) because it creates an artificial price. " https://www.investopedia.com/terms/p/paintingthetape.asp https://www.investopedia.com/terms/p/paintingthetape.asp
belltaco 5y ago
A real life example is a store where the owners hire fake shoppers to crowd the store and "buy" items that are later returned to the store and refunded. All to make the shop look busy compared to other shops, in order to attract customers and claim that they have more foot traffic than competing stores. A wash trade is anything that results in the equivalent outcome as earlier. It was used to get fraudulent tax refunds so it's not allowed to be used that way. An example is buying AAPL at $150 in January, and it falls to $100 in December. One could sell the stock to claim the deduction on the tax return for the year, but would miss out on potential gains on the stock. So what people would do is sell the stock on Dec 31st and buy it back on January 2nd in the new year. So IRS made a rule that doing such a thing is a wash trade and not eligible for tax deductions on the booked loss for the year.
- bonestamp2 5y ago
  I think you might be conflating Wash Sale and Wash Trade: https://www.investopedia.com/terms/w/washtrading.asp https://www.investopedia.com/terms/w/washtrading.asp https://www.investopedia.com/terms/w/washsalerule.asp https://www.investopedia.com/terms/w/washsalerule.asp
anonymousDan 5y ago
But wouldn't this be risky in that obviously you have to pay transaction fees etc?
- loeg 5y ago
  The exchanges are probably the ones doing it.
winternett 5y ago
People think that because something is professionally and popularly marketed, and frequently painted as a "hot new trend!" that is profitable that it is a train they need to hop on to. Crypto and NFT are (relatively) new online havens for many criminals, money launderers, and scammers to hide within in the same ways that AMWAY, Time Share Vacation Sales People, and as the guys selling speakers out of their vans in a parking lot did throughout the past, with a little Bernie Madoff and updated/modified MLM tactics added. Not saying all trading is bad, but millions of people have already been victimized in such a short time, and social media is in on the hustle because they make great profits within the promotional and "pump and dump" food chain. I decided to invest just $100 in bitcoin (on a reputable exchange) to watch it over time a year ago, and so far it's maybe gone just slightly over double that (with spikes and dips in between)... I could not imagine having risked any more money than that because it's pretty stupid to send cash trough the US mail system even though it's protected by law, and Crypto is largely unregulated, and one tweet from the guy who owns Tesla can bring the system to it's knees within the blink of an eye. You can't cry over imaginary profit you haven't lost, so I'm fine with not developing a new gambling addiction. It's very telling how hard it is to see a simple detail about profit performance for other coins online (over time), graphs are way too simple, each coin's graph has a different set of rules and context, there are far too many different apps and exchanges, regulation and taxing is uncertain, the methods of creation and management for crypto are really elusive, confusing, and abstract for the purpose of making the process very mysterious. The very creator of bitcoin is still not willing to take proper credit for it FFS... That's all I needed to really know in terms of the system's reliability... NFTs are basically digital files, often stored in a Google Drive (which cannot be exclusively owned by nature), but they are sold as if it's possible for a file to not be copied, scam cue #2... What I'm really trying to get to as a point is that it's all basically a giant pile of malarkey for normal people who can't afford to lose money right now. I trust the skeptics more than the people who are raving about being millionaires from it on YouTube every day, because you can't tell if diamonds are real by watching a video on the Internet.
- jdaggers 5y ago
  The creator of Bitcoin is most likely Hal Finney, who died in 2014. https://en.wikipedia.org/wiki/Hal_Finney_(computer_scientist) https://en.wikipedia.org/wiki/Hal_Finney_(computer_scientist...

From page 2: One form of such market manipulation is Wash trading--- investors simultaneously selling and buying the same financial assets to create artificial activity in the marketplace, which is known to distort price, volume, and volatility, and reduce investors’ confidence and participation in financial markets (Aggarwal and Wu, 2006; Cumming, Johan, and Li, 2011; Imisiker and Tas, 2018).

deleted 5y ago

[deleted]

all2 5y ago

The abstract: > We introduce systematic tests exploiting robust statistical and behavioral patterns in trading to detect fake transactions on 29 cryptocurrency exchanges. Regulated exchanges feature patterns consistently observed in financial markets and nature; abnormal first-significant-digit distributions, size rounding, and transaction tail distributions on unregulated exchanges reveal rampant manipulations unlikely driven by strategy or exchange heterogeneity. We quantify the wash trading on each unregulated exchange, which averaged over 70% of the reported volume. We further document how these fabricated volumes (trillions of dollars annually) improve exchange ranking, temporarily distort prices, and relate to exchange characteristics (e.g., age and userbase), market conditions, and regulation. "wash trading" appears to be fraudulent trades injected into the exchange in order to boost the volume of trades appearing on the exchange.

shane_b 5y ago
You’re right. I think wash refers to selling then buying at the same price resulting in a wash.
- loeg 5y ago
  You’re confusing wash trading (trading with yourself) with wash sales (a restricted form of capital loss harvesting), which are more or less unrelated despite having “wash” in the name.
  - shane_b 5y ago
    Thank you for the clarification
avalys 5y ago
Boost the volume of trades appearing on the exchange, and the apparent market value of the asset.

lfuller 5y ago

"Selling" crypto from one wallet to another wallet that you own to create the appearance of high trade volume and increase the apparent value of the asset.

realce 5y ago

You're the buyer and seller in some transaction. You use it to froth the volume of the asset, making it look like it's a vibrant marketplace with lots of buyers and sellers, but really it's just the Dump It guy and you.

omellet 5y ago

It's a way to fraudulently pump the price (or lower the price) of a security. One person with two accounts can keep trading back and forth with themselves, and since crypto exchange know-your-customer measures are trivial or nonexistent, it's very easy to get away with.

aeternum 5y ago
There is still an order book so to get the price to rise or fall, the trader would have to buy or sell enough to clear the book. How does trading back and forth with themselves do anything other than generate fees for the exchange?
- whatshisface 5y ago
  Well, the book can be tiny sometimes.
  - tiagobraw 5y ago
    also fees can be nonexistent for big customers, which are likely to engage in such things
  - scotty79 5y ago
    It makes bo sense when it comes to any popular cryptocurrency. The only way book can be small for these is on small exchange. But if you attempt to manipylate it to bring in away from current price on large exchanges you'll be immediately interfered with by people doing interexchange arbitrage. Also manipulating small exchange has small impact.
- loeg 5y ago
  The book is tiny and the exchange is probably the one doing the wash trading.
  - jjk166 5y ago
    Why wouldn't the exchange just lie and say that volume is higher than it actually is?

AutumnCurtain 5y ago

A "wash trade" is a trade which generates no value because it represents a swap in kind. For example, if I sell a broad market ETF like VTI and buy a nearly identical asset at the same price from a different firm, that could be a "wash trade" for tax purposes (simplifying this, but this is basically the gist). In the context of crypto transactions, it's typically referring to trades which are just shifting the same assets through a cycle of accounts without representing meaningful transactions. For a crypto real world example, see: https://mobile.twitter.com/MarcusFongNFT/status/1453911721614004225 https://mobile.twitter.com/MarcusFongNFT/status/145391172161...

flerovium 5y ago
This is not what the paper means. They mean a trade between two colluding parties to give the appearance of a trade.
__alexs 5y ago
I was confused what "dss-flash" was so I looked it up. It's a DAO that enables you to mint infinite DAI (some crappy "stablecoin") for a transaction as long as you pay it back in the same transaction. One of the stated goals of this "feature" is > Exploits requiring a large amount of capital will be found quicker which makes the DeFi space safer overall. Ah yes, intentionally making your own product less secure and more open to abuse, so you can make it more secure. Good work. This is taking testing in production to a whole new level.
- vineyardmike 5y ago
  Like a bug bounty?
  - __alexs 5y ago
    Like a bug bounty where you give attackers an SSH login.
loeg 5y ago
> For example, if I sell a broad market ETF like VTI and buy a nearly identical asset at the same price from a different firm, that could be a "wash trade" for tax purposes (simplifying this, but this is basically the gist). No, you’re describing the wash sale rule, which has to do with which capital losses are tax deductible. It covers pairs of trades up to 30 days apart. A wash trade is a trade with yourself. Both participants in the same trade — not two distinct trades. https://www.investopedia.com/terms/w/washtrading.asp https://www.investopedia.com/terms/w/washtrading.asp

dragontamer 5y ago

When you trade a any security to yourself (or someone closely related to you) to give the illusion of the price going up. (EDIT: Well... it could be for any reason. But illusion of price going up is one such application of the strategy). Lets say you invent a new NFT. You sell the NFT to __yourself__ for $100. Then, you sell the NFT to yourself (again) for $200. Finally, you sell the NFT to yourself for $1000. Then you go to the public and say "Look, my NFT has grown 1000% in the past week, you should get in on it!!" Then they buy the NFT from you for $500. Then suddenly they can't sell the NFT to anyone, because you were the only one buying ever. Congrats, you just scammed someone for $500.

aeternum 5y ago
Yes this works with NFTs but does not work with fungible money because there are typically thousands of people willing to sell once the price goes from 100 to 200.
- spoonjim 5y ago
  That’s why the nonfungibility of fine art is essential to its role in tax evasion.
brianwawok 5y ago
You do NOT need to change the prices for it to be a wash trade. What you gave me a profitable and likely illegal example of a wash trade, but not a definition of wash trade. A wash trade could be selling thing X for $100 and buying thing Y for $100 where X and Y are the same exact underlying thing. Just moving pointless trades back and forth inflates volumes, which makes people thing the market is moving. See https://www.investopedia.com/terms/w/washtrading.asp https://www.investopedia.com/terms/w/washtrading.asp for more
- dragontamer 5y ago
  > You do NOT need to change the prices for it to be a wash trade. No you don't. But you do need to be buying and selling the underlying repeatedly for "some reason". That "some reason" could be fraud, or it could just be tax-optimization. The important thing is, "wash trading" is the technique of buying-and-selling the same thing at nearly the same time... which has many many applications. Many of those applications are illegal and fraudulent in a traditional market. So seeing something like 70% of the volume of the real world cryptomarket being wash trading suggests that there's more fraud in the cryptomarket than people generally realize.

dustingetz 5y ago

"Painting the tape is an illegal activity that is prohibited by the Securities and Exchange Commission (SEC) because it creates an artificial price. " https://www.investopedia.com/terms/p/paintingthetape.asp https://www.investopedia.com/terms/p/paintingthetape.asp

belltaco 5y ago

A real life example is a store where the owners hire fake shoppers to crowd the store and "buy" items that are later returned to the store and refunded. All to make the shop look busy compared to other shops, in order to attract customers and claim that they have more foot traffic than competing stores. A wash trade is anything that results in the equivalent outcome as earlier. It was used to get fraudulent tax refunds so it's not allowed to be used that way. An example is buying AAPL at $150 in January, and it falls to $100 in December. One could sell the stock to claim the deduction on the tax return for the year, but would miss out on potential gains on the stock. So what people would do is sell the stock on Dec 31st and buy it back on January 2nd in the new year. So IRS made a rule that doing such a thing is a wash trade and not eligible for tax deductions on the booked loss for the year.

bonestamp2 5y ago
I think you might be conflating Wash Sale and Wash Trade: https://www.investopedia.com/terms/w/washtrading.asp https://www.investopedia.com/terms/w/washtrading.asp https://www.investopedia.com/terms/w/washsalerule.asp https://www.investopedia.com/terms/w/washsalerule.asp

anonymousDan 5y ago

But wouldn't this be risky in that obviously you have to pay transaction fees etc?

loeg 5y ago
The exchanges are probably the ones doing it.

winternett 5y ago

People think that because something is professionally and popularly marketed, and frequently painted as a "hot new trend!" that is profitable that it is a train they need to hop on to. Crypto and NFT are (relatively) new online havens for many criminals, money launderers, and scammers to hide within in the same ways that AMWAY, Time Share Vacation Sales People, and as the guys selling speakers out of their vans in a parking lot did throughout the past, with a little Bernie Madoff and updated/modified MLM tactics added. Not saying all trading is bad, but millions of people have already been victimized in such a short time, and social media is in on the hustle because they make great profits within the promotional and "pump and dump" food chain. I decided to invest just $100 in bitcoin (on a reputable exchange) to watch it over time a year ago, and so far it's maybe gone just slightly over double that (with spikes and dips in between)... I could not imagine having risked any more money than that because it's pretty stupid to send cash trough the US mail system even though it's protected by law, and Crypto is largely unregulated, and one tweet from the guy who owns Tesla can bring the system to it's knees within the blink of an eye. You can't cry over imaginary profit you haven't lost, so I'm fine with not developing a new gambling addiction. It's very telling how hard it is to see a simple detail about profit performance for other coins online (over time), graphs are way too simple, each coin's graph has a different set of rules and context, there are far too many different apps and exchanges, regulation and taxing is uncertain, the methods of creation and management for crypto are really elusive, confusing, and abstract for the purpose of making the process very mysterious. The very creator of bitcoin is still not willing to take proper credit for it FFS... That's all I needed to really know in terms of the system's reliability... NFTs are basically digital files, often stored in a Google Drive (which cannot be exclusively owned by nature), but they are sold as if it's possible for a file to not be copied, scam cue #2... What I'm really trying to get to as a point is that it's all basically a giant pile of malarkey for normal people who can't afford to lose money right now. I trust the skeptics more than the people who are raving about being millionaires from it on YouTube every day, because you can't tell if diamonds are real by watching a video on the Internet.

jdaggers 5y ago
The creator of Bitcoin is most likely Hal Finney, who died in 2014. https://en.wikipedia.org/wiki/Hal_Finney_(computer_scientist) https://en.wikipedia.org/wiki/Hal_Finney_(computer_scientist...