It’s no secret that wash trading continues to plague the crypto market. A paper titled “Crypto Wash Trading,” published by the National Bureau of Economic Research (NBER), found that an overwhelming number of unregulated crypto exchanges account for a sizeable portion of wash trades.
The nonprofit research organization studied 29 major exchanges, such as Binance, Coinbase, and Huobi, as well as lesser-known exchanges from a period of July 9th to November 3rd, 2019.
Wash Trading in Crypto
Based on the rank of third-party websites, representativeness, and API compatibility, the crypto exchanges were classified into Tier-1 (ranked in the top 700 in the finance/investment section of SimilarWeb and Tier-2 (all ranked outside the top 960). Trades of crypto-assets, such as Bitcoin, Ethereum, Litecoin, and XRP, were studied.
The authors took multiple approaches to detect cases of wash trading that are not likely to be affected by “dispersed traders’ strategies, exchange characteristics, or specificities of the asset class.”
It was found that wash trades accounted for as high as 77.5% of the total trading volume on unregulated exchanges, with a median of 79.1%. Meanwhile, wash trades on the twelve Tier-2 exchanges were observed to be more than 80% of the total trade volume, “which is still over 70% after accounting for observable exchange heterogeneity.”
The paper read:
“Our first key finding is that wash trading broadly exists on unregulated exchanges but is absent on regulated exchanges,” they wrote. “We consistently find anomalous trading patterns only on unregulated exchanges, with Tier-1 exchanges failing more than 20% of the tests and Tier-2 exchanges failing more than 60%.”
The study stated that wash trading in crypto exchanges is positively correlated with the prices of crypto-assets over the short term.
Moreover, wash trades occur less in platforms with “longer establishment histories and larger userbases” Contrarily, less popular exchanges have short-term incentives for wash trading without attracting scrutiny.
“While current business incentives and ranking systems fuel the rampant wash trading on unregulated exchanges, the regulated exchanges, having committed considerable resources towards compliance and license acquisition and facing severe punishments for market manipulation, do little wash trading”
In the first quarter of 2020 alone, the NEBR study recorded a whopping $4.5 trillion in wash trading in spot markets, while the same for the derivatives market stood at $1.5 trillion.