Wash Trading in Crypto: How Fake Volume Deceives Investors and Inflates Markets

The Fake Volume Epidemic

Research from Bitwise Asset Management estimated that up to 95% of Bitcoin trading volume reported on unregulated exchanges was fake in 2019. While the situation has improved with regulatory pressure, wash trading remains endemic in cryptocurrency markets, particularly on smaller exchanges and across the NFT ecosystem.

What Is Wash Trading?

Wash trading occurs when the same entity simultaneously buys and sells an asset to create the appearance of market activity. In crypto, this is facilitated by the ease of creating multiple wallets, the lack of identity verification on some platforms, and the absence of traditional market surveillance systems.

Why Exchanges Fake Volume

Higher trading volume attracts more users and higher listing fees from token projects. Exchanges with more volume appear on ranking sites like CoinMarketCap, driving organic traffic. Some exchanges offer incentive programs that inadvertently encourage wash trading through fee rebates and volume-based rewards.

Wash Trading in NFTs

NFT wash trading is particularly prevalent, with sellers buying their own NFTs to inflate prices and create a false transaction history. Blockchain analytics firm Chainalysis estimated that wash traders made approximately 8.9 million USD in apparent profit through NFT wash trading, though actual results varied.

How to Detect Fake Volume

• Order book analysis: Real volume has natural order book depth; fake volume often has thin books relative to reported volume
• Trade size patterns: Repetitive, identical trade sizes suggest algorithmic wash trading
• Web traffic vs. volume: Compare exchange web traffic (via SimilarWeb) with reported volume — huge volume with low traffic is suspicious
• Bid-ask spread: Wide spreads with high volume indicate much of the volume is artificial

Impact on Investors

Fake volume leads to poor investment decisions based on false liquidity signals, unexpected slippage when trying to execute trades, inflated market caps that misrepresent true demand, and distorted rankings that direct investors to less reputable platforms.