Wash Trading Meaning

What is a Wash Trading?

Assuming that Gigi has 300 shares of a company’s stock. To make it look like the stock value is appreciating to attract more investors, Gigi creates another account with a different name, say Ogee. She then sells her shares to John and repurchases them immediately at the same price. This creates a false impression of high demand, thereby artificially inflating the stock’s price. This deceptive practice is known as “wash trading”.

A wash trade defines repeated transactions on a particular asset that create the illusion of authentic demand and market activity. It can be carried out by colluding parties executing opposite ends of transactions or a single entity operating more than one address. Wash trades neither change the entity’s market position nor subject them to market risk or price competition.

In the context of crypto, wash trades are prevalent in low-liquidity digital assets like non-fungible tokens (NFTs). To make an NFT appear more in-demand and profitable than it is, an NFT owner subsequently buys and sells the NFT. The wash trader can repeat this process over and again. This means that the individual controls the buy and sell prices to portray inflated volume and interest. As a result, an unsuspecting, genuine investor sees the inflated trading volume and purchases the token at an inflated price. 

NFT wash trading may be characterized by a sudden jump in the token’s price without prior activities. This is especially when the NFT has little to no unique attributes that match the high price. In addition, a wallet address appearing multiple times in the transaction history of an NFT is a potential indication of a wash-traded NFT.