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- The top six NFT marketplaces have been a platform for users to practice wash trading.
- Regardless, it is a problem that needs to be addressed to protect the integrity of the NFT market.
According to a recent study by CoinGecko, the increasing trading volumes of Non-fungible Tokens or NFTs have been accompanied by a rise in NFT wash trading rates. In February 2023, NFT wash trading increased by 126%, generating a wealth of $580 million on the top six NFT marketplaces. NFT wash trading accounted for almost 23.4% of unadjusted trading volume, with Blur (27.7%) and X2Y2 (49.7%)) and LooksRare (15.1%) being the leaders in the trade.
What is meant by Wash Trading?
NFT wash trading frequently buys and sells NFTs to create an impression that they have high demand. This may become problematic because it fosters a wrong illusion of demand, which can fluctuate NFT prices and make it difficult for new entrants to the market. Also, it may make it difficult for traders to understand the actual worth of NFTs, making them lose interest in the market.
This type of trading is a concern for several reasons:
- Firstly, it creates an artificial sense of demand for NFTs, which can lead to advanced prices.
- Secondly, it can lead to misleading statistics and data, making it delicate for collectors to acquire them.
NFTs are backed by blockchain technology, securely allowing the transfer of digital assets while being transparent.
This manipulation tactic involves repeatedly buying and selling the same asset to create misconceptions in the market. As token incentives play a role in growing wash trading, NFT marketplaces have rewarded users for their transaction activity. For instance, Blur tripled its wash trading activity after introducing its native token, $BLUR, in February. Other marketplaces like X2Y2 and LooksRare use a user’s previous day’s trading volume to calculate and send rewards.
CoinGecko reported that the wash trading rates in the top six NFT marketplaces had increased for the fourth consecutive month. This marked a 126% rise in the trade since January’s trading volume of $250 million. The report suggests that the increase can be attributed to the recovery of NFT marketplaces, which totaled $1.89 billion in February.
One theory for the 126% increase in NFT wash trading is that it may be driven by the desire for quick profits, as these NFTs get sold for high amounts. Individuals may try capitalizing on the trend by falsely inflating the value of their assets. Another possibility is that wash trading is being used to manipulate the rankings of NFT marketplaces.
While wash trading is illegal in traditional financial markets, its occurrence in the crypto space and NFTs can be attributed to the lack of clear regulations. Investor Mark Cuban has warned about the next “implosion ” of wash trading in the crypto market. New technologies based on artificial intelligence have emerged to tackle issues in the NFT market, including wash trading.
Steve Anderson is an Australian crypto enthusiast. He is a specialist in management and trading for over 5 years. Steve has worked as a crypto trader, he loves learning about decentralisation, understanding the true potential of the blockchain.
