Jul 9, 2025
Maintaining market integrity is crucial for investors, exchanges, and market participants. One of the most deceptive practices threatening this integrity is wash trading, a form of market manipulation that can distort prices and mislead investors.
As a leading provider of market making services, Rootstone is committed to promoting transparency and fair trading practices. In this blog post, we’ll explore what crypto wash trading is, how it works, methods to detect it, strategies to prevent it, and real world examples to illustrate its impact.
What is Crypto Wash Trading?
Wash trading is a form of market manipulation where a trader buys and sells the same cryptocurrency to create artificial trading activity and volume. This deceptive practice aims to mislead other market participants about the true demand or price of the asset, giving the illusion of higher liquidity and interest. In the context of cryptocurrency, wash trading is particularly prevalent due to the relative lack of regulation on some exchanges and the ease of creating multiple accounts.
Unlike traditional financial markets, where wash trading has been illegal since the 1930s under laws like the Commodity Exchange Act, the crypto space has seen significant instances, especially on unregulated platforms. Research suggests that wash trading can artificially inflate prices, leading investors to believe there is greater market liquidity than there actually is, which can profoundly distort markets and erode trust.
How Wash Trading Works
Wash trading typically involves a trader or a group of colluding traders using multiple accounts or automated bots to execute simultaneous buy and sell orders for the same asset. By doing so, they generate fake trading volume without any real change in ownership. This can create the illusion of high demand and activity, potentially attracting unsuspecting investors and driving up prices.
For example, a trader might use two accounts to repeatedly buy and sell Bitcoin back and forth, inflating the trading volume on an exchange. This makes the asset appear more popular than it actually is, leading to price manipulation. The use of automated trading bots, which can rapidly execute trades, and the pseudo anonymous nature of blockchain transactions facilitate this practice, making it harder to detect.
Detecting Wash Trading
Detecting wash trading requires sophisticated analysis of trading data to identify patterns that deviate from normal market behavior. Here are some common methods used by exchanges and regulators:
Statistical Methods:
Benford’s Law: This statistical law helps identify anomalies in the distribution of digits in trade data, which can indicate manipulation. For instance, if the first digits of trade sizes do not follow expected patterns, it may suggest wash trading.
Trade Size Clustering: Wash traders often use specific trade sizes repeatedly, leading to clustering that can be detected by analyzing trade size distributions.
Power Law Distribution: Analyzing the distribution of trade sizes to see if they follow expected patterns or show signs of manipulation, such as unusually high frequencies at certain sizes.
Pattern Recognition:
Identifying repeated buy and sell orders between the same accounts or at the same time, which can indicate self trading.
Monitoring for transactions that occur in quick succession with no net change in ownership, a hallmark of wash trading.
On Chain Analysis:
Given the transparency of blockchain, analyzing transaction patterns on chain can reveal suspicious activities, such as repetitive trades between related wallet addresses.
Exchanges and regulatory bodies use these methods, along with advanced algorithms and machine learning models, to monitor and flag suspicious trading activities. For example, a study by the Centre for Economic Policy Research found that over 70% of reported volume on unregulated crypto exchanges consists of wash trades, highlighting the need for robust detection tools.
Preventing Wash Trading
Preventing wash trading involves a combination of regulatory oversight, exchange policies, and technological solutions to ensure market integrity. Here are key strategies:
Regulation and Compliance: Ensuring that exchanges comply with anti manipulation laws and regulations, such as those enforced by the Commodity Futures Trading Commission (CFTC) in the US. The recent passage of the GENIUS Act on June 17, 2025, which establishes a federal licensing framework for stablecoin issuers, is a step toward tighter regulation, potentially reducing wash trading opportunities.
Transparency and Disclosure: Exchanges should provide transparent reporting of trading volumes and activities, allowing for independent verification by auditors and regulators. This includes disclosing the sources of trading volume and ensuring accurate metrics.
Advanced Monitoring Tools: Implementing sophisticated monitoring systems, such as those using Benford’s Law and trade size clustering, to detect and flag suspicious patterns in real time.
KYC and AML Procedures: Verifying the identities of traders through Know Your Customer (KYC) and Anti Money Laundering (AML) procedures to prevent the use of multiple accounts for manipulation. This helps trace transactions back to real world identities, reducing anonymity related risks.
Education and Awareness: Informing traders and investors about the risks and signs of wash trading to help them make informed decisions and avoid falling victim to manipulated markets.
At Rootstone, we prioritize transparency and compliance in all our market making activities. By providing legitimate liquidity and adhering to best practices, we help ensure that the markets we operate in are fair and efficient, supporting our clients in maintaining trust and integrity.
Real World Examples
Several studies and reports have highlighted the prevalence and impact of wash trading in cryptocurrency markets, providing real world context:
NBER Study: The U.S. National Bureau of Economic Research estimates that wash trading accounts for 70% of trades on unregulated exchanges, suggesting most trades on these platforms are fraudulent. This was detailed in a 2023 report, underscoring the scale of the issue.
Forbes Report: A 2022 report claimed that more than half of all Bitcoin trades are fake, likely due to wash trading, highlighting the extent of manipulation in the crypto space.
LooksRare NFT Marketplace: On April 5, 2022, Bloomberg reported that NFT tracker CryptoSlam data showed wash trading accounted for $18 billion, or 95% of overall trade volume, on the NFT marketplace LooksRare, illustrating its impact on non fungible tokens.
Chainalysis Report 2024: Chainalysis estimated $2.57 billion in potential wash trading activity in 2024, with some addresses controlling hundreds of millions in suspected wash trades, showing the ongoing challenge.
These examples underscore the significant impact of wash trading on market integrity and the importance of robust detection and prevention measures, especially given recent security concerns like the $90 million Nobitex hack on June 18, 2025.
Conclusion
Wash trading is a serious issue in the cryptocurrency space that can distort market perceptions, harm investors, and undermine trust. By understanding what wash trading is, how it works, and the methods to detect and prevent it, market participants can better protect themselves and contribute to a more transparent and trustworthy market environment.
At Rootstone, we are dedicated to upholding the highest standards of market integrity. Our market making services are designed to provide genuine liquidity, support fair trading practices.
Contact us for more information on how we can help your token/project to maintain a healthy trading environment.
Whether you’re looking to enhance market liquidity, execute large trades, optimize treasury operations, or explore strategic partnerships, Rootstone is here to help.
