By Larry Wright
There are tons of ways out there when it comes to making money, some people want to make a quick buck, and for that to happen, they would avail any and all opportunities presented to them. This short and quick scheme for getting rich often works, but most of the time, they are simply a cry for help on account of all those financial investors who think they are financial investors, but in reality, they are just a bunch of want to get rich quick Toms.
The crypto market is the most recent financial market out there that does provide you with tons of opportunities and investment elements to choose from; you don’t necessarily have to engage with cryptocurrencies for the sake of making a quick buck within the crypto market as there are many other offerings that might tempt you to invest in them. First of all, you have got non-fungible tokens; these are a depiction of digital art that is divided into little bits and are then traded on an active decentralized exchange.
Non-fungible tokens are the talk of the town; there was once a time when non-fungible tokens did hit rock bottom, and investors also lost their confidence in them, but nowadays, they are still rocking hard, and people want a piece of it because in the recent past investors who engaged with non-fungible tokens have had incredible success on top of handsome return on their investment which is why many other corporate investors are being tempted by this offering right now.
As the crypto market is pumping out all those wonderful opportunities, at the same time, there are a few terminologies that might sound alien to you at first such as exchange-traded funds or non-fungible tokens or any other such terminology could be pretty confusing. This article is dedicated to non-fungible tokens and wash trading, yet another alien terminology. You might be scratching your head right now, wondering what it could possibly mean; you don’t have to beat yourself up because this article is going to explain wash trading in detail and how it correlates with non-fungible tokens.
Before getting all into wash trading and its connection with non-fungible tokens, it is important here to acknowledge some of the accomplishments of the crypto market in 2021. The number of cryptocurrencies present within this space has doubled during this year; there are more than 10,000 different cryptocurrencies present out there working on different consensus algorithms and powering various parts and sections of this growing space; as explained earlier, non-fungible tokens have been an absolute Rockstar of the past year.
You need to understand something about the crypto market, and that is the volatility factor which is extremely strong here as opposed to other financial ecosystems. That is why it has got a bad rap among the top-tier investors of the world, and more often than not, you might run into bad press or rumours about the crypto market being a sinking ship with a slight touch of being a riskier investment or other such financial jitters.
There have been scams within the crypto market for sure, and huge sums of money have been scooped from investors and honest crypto traders such as yourself, but more often than not, these kinds of scams are discernible, and with more data present at hand even a beginner level user could identify a true opportunity from a scam.
Non-fungible Tokens and Wash Trading
Non-fungible tokens had a rocky start from the beginning; when this idea was chipped in and executed, there was originally some hype which dialled down eventually until there was no one who actually cared about the idea of non-fungible tokens, it is actually metaverse that has revived tokens, and since its launch, the whole market has been evolving rapidly.
Even if you are a beginner, you might know the fact that the whole crypto market is completely decentralized, which means that it doesn’t have a centralized or governing body and all the decisions for the good of the crypto market or dedicated crypto are usually made by casting a vote among the validators for that particular blockchain.
The same is true with non-fungible tokens; these are not regulated in any sense of the word; hence people have tried to take advantage of the situation by artificially increasing the overall value of a non-fungible token; mainly, this practice is done under the shadow of money laundering, and this is what officially puts that particular non-fungible token at the verge of being called a scam.
This is what wash trading is all about, and according to some reputable crypto analysis firms out there, the activity is growing rapidly and becoming much more prominent with every passing day. The most hurtful element about wash trading and what it is doing to non-fungible tokens is that many people, even the top-tier investors, don’t have even the faintest idea of this practice and what kind of implications it is delivering to the crypto market in general.
What is Wash Trading?
There is another name for wash trading, and that is ‘round tripping’ this whole phenomenon is active across various other trading markets as well; it is nothing more than a manipulative approach when it comes to trading financial instruments across various markets.
Each financial market out there has its own version and definition of wash trading; in stock and forex markets, this kind of approach is not as successful as it is in regards to the crypto market because those are hugely centralized and regulated markets and, therefore one can always cross-examine particular news around a dedicated stock or forex entity from official sources.
This gets a little bit tricky when it comes to the crypto market because it is a decentralized entity having no regulation whatsoever; hence traders exploit the crypto market and are known for hyping the value tokens to their extent. What wash trading does is that it spreads false rumours and news about a particular asset, and that is usually done by the trader who is buying crypto, known for non-fungible tokens or other investment options within the crypto market.
Once they have bought that particular asset, they would go out publishing or spreading misleading information around that asset over the market.
When a vast number of people are talking about the same thing, which is a piece of misleading information and rumour in the first place, it suddenly begins to sound accurate or even true, and that is where those traders get kicked out of their trading practices, at the end of the day. But wash trading does influence the price as well as the overall value of an asset in a false notion and under a pretence to fool the end investor.
Non-fungible tokens are actually the targeted digital assets for wash traders because they can seriously push the limits on this thing because it is digital art, and no one can put a value or price on art, and it usually goes for the asking price by the artist itself. So taking an example of a non-fungible token, let’s propose a trader has bought a non-fungible token for $1 million, but in reality, it is not worth more than $100.
It is not a problem to acquire an additional asset for such an expendable price, given the fact that it does have some intrinsic value, but most of the non-fungible tokens that are traded out there over the crypto market don’t have much intrinsic value at all. When the buyer suddenly assumes the role of the seller, that is when real tragedy occurs.
It is like becoming a mediator between the seller and the new owner of the same non-fungible token. Cybercriminals are also involved in this activity, changing the original price of the asset behind the curtains and then launching that particular item within the market.
So, an extensive amount of hype is built around such assets that eventually, more and more investors are interested in having a piece of that particular asset for themselves, but what they don’t know is that they are weighing an asset with potentially no intrinsic value at all and over a false price that has been manipulated by the trader and cybercriminal working in harmony behind the curtains.
What happens is that when the final transaction goes down and an investor, all lured up into this trap, has bought that particular non-fungible token, they won’t be able to resell it at all.
Because they have bought it for such an outrageous price that when they get down into the market to actually find out about the present value of that asset, then they run into the bad news that the asset that they have bought is worth nothing. This is clearly a scam, but this could be stopped right then and there if the original investor or buyer was wise enough to actually get some quotes on the overall value of the non-fungible token they are so interested in investing in.
But usually, a scenario of the hype is built around that compromised asset by the wash traders, and a sense of urgency is created, so on account of fear of missing out, the investors usually chip in only to know afterwards that they have made the fatal deal of their life.
The main objective of those wash traders is to bump the overall price of the asset, and they would stop at nothing to make it happen; an illusion is created that the asset in question is actually worth more than its present price, and only a fool would allow for such an opportunity to slip from their hands, hence generating a sense of urgency.
So the wash trading, in general, is not only bad for the final investor who sadly ends up buying that compromised asset but also for the market itself because ultimately, it changes the behaviour and mode of the investors toward the non-fungible tokens as they don’t want to invest their money into something so disastrous.
So eventually, when multiple investors pull the plug on buying these assets, which are not priced correctly, the overall dynamics of the market itself change. These kinds of scams have been prevalent throughout the entirety of 2021, and multiple instances were seen where the price of non-fungible tokens was bumped and eventually, it did poke a hole into the non-fungible token market space.
Difference Between Wash Trading and Round-Tripping
For the majority of people out there, wash trading and round-tripping are actually the same things; in the contextual sense of things, they might be similar, but if you dive into the anatomical aspects of things, then there is a huge difference between them both. Wash trading, in reality, is a one-time pull-off done by a single individual, whereas round-tripping could be done by a single or majority of individuals multiple times in a dedicated time period.
Round tripping is actually viler than wash trading because, in this type of trading, two or more corporate entities mutually agree on buying and selling a particular asset between them a couple of times which would artificially pump up the very price and value of that asset.
Now it might sound legitimate on paper because a transaction is being commenced by these parties who are involved in this said exchange but in reality, it is exactly like wash trading; this buying and selling on repeat are done to pump up the price of the asset while in reality, the intrinsic value might be closer to zero or even zero.
It is a scam no matter what side you flip and views it from; you are not going to get out of this thing based on a technicality that you didn’t know or you were just doing that for some other purpose; no one engages in such kind of trade especially if there is something shadier going on.
Is Wash Trading Illegal?
In the very beginning, you might approach wash trading as a tried and tested strategy to pump up the price of an asset in the crypto world. If you are a beginner-level investor, it might sound even more tempting because you haven’t had the taste of a massive return on your investment, and this seems like a foolproof way to do just that. But as you dive in a little more into this whole approach, you would find it to be manipulative and purely based on bad intent from the get-go.
The investor and all parties involved except the final buyer of that asset are in on it from the very beginning, they are pumping up the price of the asset artificially, and they have no regard for the end buyer whatsoever.
You could, however, link wash trading to even conventional forms of trading where a crypto trader is interacting with an asset on a continuous basis; they are buying and selling those very assets around the clock and in a consistent fashion, but that by no margin is wash trading at all. All of this comes down to the very motive of the investor.
If you are engaging in conventional trading of an asset and are buying and selling that asset continuously around the clock, then it doesn’t mean that you have bad intent; you are simply making a living out of that practice. On the other hand, in wash trading, you have set intent in the form of a financial goal where you want to manipulate other buyers on the market by making them believe that the price of the asset is actually a lot more than the present value.
It is manipulation, it is a scam, and it is not legal at all. Because at the end of the day, you are misleading potential investors, and when they buy that asset from you and in an off chance down the road they want to unload that asset on the market, only then they would come to know that the asset itself was worth nothing and they have lost their investment completely, how does that sound legal to you?
This whole scenario is nothing but sad, even if it is clear that the intent of the investor is bad from the get-go, and he’s using a manipulative approach for the end investor to invest their money into an asset that has potentially no intrinsic value at all, there is no law or rules or even a process through which one could identify a wash trading scenario.
On top of everything else, because the crypto market is decentralized and has no regulation at all, neither for the market itself nor the products that it offers, such as non-fungible tokens or other exchange-traded derivatives that is why it remains a loophole that is being manipulated by bad investors and people who want to bump up the price of an asset in an artificial way and at the end of the day crypto market is taking the toll of this whole thing, It is only hoped that in the near future there is some kind of revelation drawn towards wash trading and other associated scenarios for the crypto market.