Crypto Wash Trading
arxiv.org
arxiv.org
Automated trading strategies (e.g., "grid trading") are really popular and there are many third party bot providers that integrate in multiple exchange APIs. Maybe the unregulated class of exchanges here just has more permissive APIs/automation than the regulated ones. Automated trading is still legitimate trading where a party puts their capital on the line.
I agree that the lack of rounding and trade size clusters is a likely approximate indicator of non-human orders. The presence of automated orders does not automatically mean there is fraudulent wash trading by the exchange.
The authors also do not cite previous research or evidence of their methodology working for traditional finance. It all makes for weak evidence of actual wash trading.
Because I'm involved with a committee on financial semantics I wound up learning a bit about swap trading. For stocks if you don't like your long or short position you can buy or sell and it is done.
In the case of swaps if you don't like your position you write another swap contract that is the opposite of the one you don't like. Both are on the books. In the 2008 crisis the size of outstanding swap liabilities dwarfed the real economy, but when you added them all up they mostly canceled out, both in the aggregate and for almost all of the market participants.
Looking at a situation like that which is hard to unravel people are going to make assumptions about the motives and ethics of the participants which are not substantiated.
Famously, a Mt. Gox data leak actually proved wash trading on that exchange conclusively as same trader IDs took their own orders. [1] So there definitely is proven precedent in the crypto market.
I am not saying it doesn't happen and isn't likely on unaudited/unregulated exchanges. I just want to highlight that the authors make very strong claims and alternative explanations should be explored.
Except they don't cancel when one party goes bankrupt and a bankruptcy court decides how the assets should be divided.
I will happily enter into an interest rate swap with you on SOFR^-14 and a notional of USD 1 trillion.
Feels like these days anybody can post a paper and get uncountable widespread with 0 backings for their research.
In nutrition this happens A LOT. Things like: “meat causes cancer in 70% of the population”. And then you read the paper and they did the study on 80 people between 60-90 years old. There’s just no scientific/statistic rigurosity.
Even more so because the regulated exchange and popular unregulated exchanges have 0 and mostly <20% wash trading respectively.
Imagine you have a completely manual market which follows normal statistical distributions, including Benford's Law. Now you introduce one grid-trading bot with a large amount of capital. (A grid trading bot is basically a piece of software that automatically buys when the price falls below a certain level and then automatically sells when it goes above a certain range.) That one bot is going to make up the vast majority of transactions, because it's effectively "clamping" the price within its trading range. When random fluctuations take it below, it buys and sets a floor on the price. When random fluctuations take it above, it sells and sets a ceiling on the price. If you make the range small enough that most ordinary trades would end up occurring with the bot, it's going to take up the vast majority of volume.
There's nothing illegal about grid trading. They work to dampen random price fluctuations in a market. In exchange, they take on the risk that fundamental supply & demand might shift enough that they're left holding the bag, eg. they run out of inventory to sell and then the price jumps sharply higher, or they collect all the inventory and then the price drops.
But because they're non-human and take one side or another of most trades, they are going to account for a disproportionate amount of volume. This isn't fraud, it's that you don't understand the structure of the market.
"Abstract. Is Benford's law a good instrument to detect fraud in reports of statistical and scientific data? For a valid test, the probability of ‘false positives’ and ‘false negatives’ has to be low. However, it is very doubtful whether the Benford distribution is an appropriate tool to discriminate between manipulated and non-manipulated estimates. Further research should focus more on the validity of the test and test results should be interpreted more carefully."
1. https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1468-0475....
Here [2] is Google Scholar on Benford's Law. Of the 36,000 papers it pulled very, very few claim the law is not useful and valid. The vast majority (actually, every one of the first many pages) show how it's useful and demonstrate uses of it. If you want only recent papers, select from the left panel. Same result.
In fact, the first several pages of results contain many papers showing empirical validation of the usefulness of the law.
[1] https://www.degruyter.com/document/doi/10.1111/j.1468-0475.2...
[2] https://scholar.google.com/scholar?hl=en&as_sdt=0%2C14&q=ben...
Benford law never had to deal with exchanges where any customer can write a python bot and start trading at sub-second latencies via the exchange API's.
I'd be very surprised if whatever statistical model they're relying on is in any way a match for what real (as in: legitimate orders from actual customers) trading goes on on crypto exchanges.
Ok
Lol, fair enough.
But I believe my point stands even if you go to python-level latencies.
Double ok
Why? After buying and selling side fees, is it easy to make a profit in an automated way with crypto?
Then, from what people have told me, crypto is a highly inefficient market so huge of potential for market-making strategies. Tons of arbitrage opportunities between the various venues, centralized and decentralized, mostly uninformed non-professionals so non-toxic flow, huge spreads, etc. It's like the traditional tradi'g world but 30 years in the past.
"Grid trading" is apparently just a weird term for placing orders proactively on multiple levels to obtain a better queue position, useful for increasing edge capture on exchanges with price-time matching. There are a lot more sophisticated techniques you could transfer from the world of traditional electronic trading. Of they're successful on much more competitive markets, no reason they wouldn't work on crypto.
For starters, if you can make money in automated trading, why would you not make all the possible money yourself instead of telling other people (or writing the software) and splitting the profit? This question is one I ask anytime someone mentions easy trading, and because I've never heard a good answer I stay away.
To do better than average is possible, but it requires a lot of deep study.
I updated it for Bittrex, but didn't have enough capital to actually make it work.
Now everything has gone up so much, and I'm bearish on crypto in general, so I don't want to have any money invested in it.
That's why mine is available, and I'm not currently trying to keep it running.
These seems to be the exchanges they investigated. Would be interesting to see a breakdown of percentage per exchange, as I still don't understand how wash trading can happen at Coinbase since they seem to be very strict.
Exchange Code Exchange Name
Panel A Regulated exchanges
R1 Bitstamp
R2 Coinbase
R3 Gemini
Panel B Unregulated Tier-1 exchanges
UT1 Binance
UT2 Bittrex
UT3 Bitfinex
UT4 HitBTC
UT5 Huobi
UT6 KuCoin
UT7 Liquid
UT8 Okex
UT9 Poloniex
UT10 Zb
Panel C Unregulated Tier-2 exchanges
U1 Bgogo
U2 Biki
U3 Bitz
U4 Coinbene
U5 DragonEX
U6 Lbank
U7 Mxc
U8 Fcoin
U9 Exmo
U10 Coinmex
U11 Bibox
U12 Bitmart
U13 Bitmax
U14 Coinegg
U15 Digifinex
U16 GateioCoinbase isn’t one of the unregulated exchanges.
> The order also finds that over a six-week period—August through September 2016—a former Coinbase employee used a manipulative or deceptive device by intentionally placing buy and sell orders in the Litecoin/Bitcoin trading pair on GDAX that matched each other as wash trades. This created the misleading appearance of liquidity and trading interest in Litecoin.
https://www.cftc.gov/PressRoom/PressReleases/8369-21
I wouldn’t be surprised if the wash trading on these unregulated exchanges followed a similar pattern where insiders were largely using the system to their advantage and using their insider knowledge or connections to (try to) hide it.
> Our data cover the period from 00:00 July 09th, 2019 (when TokenInsight started to collect transaction information from these exchanges) to 23:59 November 03rd, 2019 (the time we wrote the first draft).
Given the volume of trading that happens on unregulated exchanges, I don’t see why anyone would think the amount of fraud has been decreasing as unregulated activity is increasing.
It's just the altered title for the HN submission that is actively misleading.
Sometimes it's nice for the title to honestly represent what the paper/blog/whatever is about without having to dive into the abstract.
I think there might even be some word for having titles which somewhat misrepresent the piece in question, often used when the title elicits more clicks by leaving out a key piece of information.
Binance, for example, is measured at 46%. Typically the lower tier exchanges have higher levels of measured wash trading.
Theres no such process (AFAIK) with "panel A" firms. Its still the wild west.
Does regulation mean KYC for client onboarding? Thats a completely different thing. We're not talking about on-exchange trading rules and compliance monitoring in that case.
Here is the short answer:
> We adopt the definition of regulated exchanges from the state of New York, which has one of the earliest regulatory frameworks in the world. [6]
> 6 Regulated exchanges are issued BitLicenses and are regulated by the New York State Department of Financial Services. Bitlicence carries some of the most stringent requirements. Our main results are robust to alternative classifications of regulated exchanges. As of June 2020, NYDFS has issued licenses to 25 regulated entities, six of which provide crypto exchange service. They are Itbit, Coinbase, Bitstamp, Bitflyer, Gemini, and Bakkt (futures and options only). Further information can be found at: https://www.dfs.ny.gov/apps_and_licensing/virtual_currency_b.... (Last accessed: July 3, 2020)
Coinbase: https://www.cftc.gov/PressRoom/PressReleases/8369-21
Kraken: https://www.cftc.gov/PressRoom/PressReleases/8433-21
I'm not entirely sure how KYC/AML are related to wash trading ...
In other words: how is the amount of checks they impose on their customers related to what goes on in their trading engine?
Or do you assume that because they're very strict on one thing necessarily implies they're strict everywhere?
That's quite a stretch.
Coinbase follows KYC laws. That prevents one person from opening two accounts and trading between them.
Two accounts trading back and forth will light up anti-spoofing tech from the 1980s. Keep in mind that the AML regulations Coinbase follows are specifically designed to catch fake money movement.
It's the same stuff that catches money laundering. Coinbase isn't exempt from anti-money laundering laws. (With respect to Coinbase not being subject to the Exchange Act, that's very much an open, if irrelevant to this discussion, question.)
I'm not sure Coinbase's need to report money laundering applies.
A lot of money laundering involves wash trading. That's why institutions like Coinbase have systems in place to detect it. Non-laundering wash trades would get flagged by such a system. If it were systemic, it would almost certainly merit a SAR.
Citation needed, because wash trading and money laundering are not mutually inclusive. There are not controls in place for money laundering that detect wash trading, because crypto is not a regulated security.
/s
To wash trade effectively for more than a single instance one needs hundreds to thousands of accounts. Somebody could coördinate that many people. But it's hard. And it creates exhaust lights up law enforcement radars, as it's practically indistinguishable from money laundering.
Literally all of crypto is a scam. After 10 years there is not one feasible use case that isn't done better through another tool. I don't consider "making black markets and extortion easier" a feasible use case.
You may not like it morally and may wish for crypto to be legally banned as a result, but casinos are real and extortion is real.
However, I tend to think crypto is a bit more than that: an anti institutional weapon.
Therefore it's not a coincidence that crypto also serves the above use cases that specifically seek to avoid institutional oversight, or in circumstances where institutions have already failed (i.e. Venezuela).
Once the illusions of anarcho-capitalist utopia dissolve, that's what's left, and crypto's fundamental market value - minus the greater fool stuff - reflects the sum of 1) the fear of and 2) enthusiasm for the destruction of institutions, with both of those pushing the value up.
Stronger, trusted, adaptive, and accountable institutions that provide their societies with security and broadly shared well being will push it down.
The originator, Ross Ulbricht, is in prison for life. Anything that involves any remote possibility of that is not "feasible" to me, specifically in terms of the strength of my own self-preservation instincts.
Use case was killed by itself.
I do not recall this time at all.
https://www.techrepublic.com/article/pay-with-bitcoin-10-of-...
https://money.cnn.com/2014/09/26/technology/paypal-bitcoin/
https://www.businessinsider.com/dell-becomes-biggest-company...
https://money.cnn.com/2014/12/11/technology/microsoft-bitcoi...
Surely the fact that articles are written about individual retailers who are now (then) taking Bitcoin is evidence against the acceptance of BTC being pervasive as a payment instrument rather than evidence in support of it.
Ever tried to send funds to a family member on the other side of the world over a weekend?
I find this hard to believe. Can you please demonstrate a single transaction with this fee?
For small transactions, you can have things like a $29 fee, for a $500 transaction, where the spread is also taking a 1% cut. You also can find $2.99 transactions. It depends on the source of funds and destination. Also if you are doing something like using a credit card as the source of funds, you might get cash-advance fees (and much worse interest rates).
I've never used Western Union personally, so don't listen to me. Listen to their customer reviews:
Obviously that's not the case if entire societies use bitcoin now, as soon as it is an option. We didn't choose the mess, it was foisted upon us.
You can make excuses for the current system if you want to, but you're wrong. You can shame people tired of paying a quarter of their pay to western union to help Tia afford a water tank so she can have running water during the weekdays. You can demand people just follow rules that make no sense to them because "we as a society" have Good Reasons™ for them. But if you expect them to, if you act like their behavior makes no sense, you're deluding yourself and nobody else.
What mess? Borders and customs? Yes, we chose that.
First, no, most people didn't choose borders and customs. The very people we are talking about, the people that send money home, and their advocates, often ignore borders deliberately. I don't recall choosing any of that stuff. I don't think there's a person alive today that did.
But that aside, we aren't talking about someone checking your luggage for fruit seeds on the way in. You know damn well what mess I'm referring to, because you've spent however long in this thread defending it like none of the problems people point out exist.
I never said nobody wants borders, I said nobody chose borders. We were all born into this. You understand the distinction between choosing something and learning to live with it?
Of course that's a tangent on your original statement, your assertion that we choose capital controls, that you have not addressed. If our society left capital control to a democratic process they wouldn't exist, and the proof of that is that people avoid them at every opportunity, hence bitcoin.
Shit, "capital controls" is a distraction from the issue we were trying to address, which is the ridiculous state of the remittances industry as an example of the state of the consumer financial services industry that bitcoin serves as an alternative to that you keep defending but fail to actually construct an argument in defense of. "We chose them for a reason" "what reason?" "oh you don't like borders?" It's senseless.
People choose bitcoin. Actual individuals choose it. Nobody holds a gun to their head and makes them use it. The same cannot always be said of the alternative. Is people choosing it a good enough reason for you to accept that it is good and should exist? Seems to be a good enough reason for the alternatives to exist, even if it isn't true.
I don't talk cryptically, I stay on point. I don't derail, I don't create tangents. You do, with every single reply. Not everyone gets lost in the noise.
New user? Payment frozen, no recourse until Monday morning on a Friday, late afternoon.
I'll stick with Coinbase, if I want centralized risk.
> On the Bitcoin network, the average confirmation time for a BTC payment is about 10 minutes. However, transaction times can vary wildly.
This is because it is affected by factors such as the total network activity, hashrate and transaction fees. If the Bitcoin network is congested, there will be a backlog of transactions in the mempool. This would result users paying more in transaction fees to get transactions to go through faster. This occured in April 2021, where average Bitcoin transaction fees reached $59.
1) NFTs - digital ownership
2) DAO - organizations without having to setup an LLC that allow voting etc
3) Accounting for low trust societies (supply chain management, etc)
4) Value store for very high inflation currencies, or states with severe problems
Some NFTs come with additional publishing rights for the underlying asset. For example Eminems sold an NFT that contained to the rights and a different rapper bought it to make a song with it: https://bitcoinist.com/the-rapper-who-bought-eminems-nft-for... I think we're going to see more stuff like this in the future.
> 2. This is probably not a feature society needs
You might be right, but we do allow LLCs so we do allow a more difficult way to do the same thing. There is less regulation around DAOs but that's starting to change in some states, I'm for letting the experiment run
> 3. Possibly good?
I think this is a net benefit
> 4. maybe. USD, Gold, Etc have historically been good at this.
Yeah, for this one in particular I was thinking of stable coins that are backed by USD
QE definitely isn’t wash trading.
That particular dead horse has been beaten to a point where all is left are strictly people adhering to dogma on one side or the other of the conversation.
Try tulips next, to make the picture complete.
If anyone else took 15% of everyone else's returns on that asset and was using their own money with the stated purpose of inflating the asset price, they'd go to jail.
"For example, wash trades were used in the LIBOR scandal to pay off brokers who manipulated the LIBOR submission panels for the Japanese Yen. According to charges filed by the UK financial authorities, UBS traders conducted nine wash trades with a brokerage firm to generate 170,000 pounds in fees as reward for the firm for its role in manipulating LIBOR rates.7"
Centralized exchanges are incentivized to doctor their data and lie about their volumes. The larger the volumes an exchange publishes, even if fake or gamed, the more relevant an exchange appears. Users must blindly trust whatever data exchanges can manufacture.
Uniswap charges a flat fee to every trade for all user. It's objective. There's no special back room trading rates, there's no ability to lie about volumes, there's no bonus for having high frequency bots trading. If you want objective data, Uniswap (and other on-chain exchanges) are truthful.
Wash trading relies on low/nonexistent fees to be cost effective as a market signal.
I wonder if it's actually (free identities) XOR (no wash trading), or if the crypto people will come up with some clever way to account for it or disincentivize it.
One thing I've learned is not to count out very resourceful people with skin in the game. Crypto has come up with some really interesting incentive games that I certainly wouldn't have thought of off the top of my head. That being said, this seems like a really hard thing to fix.
Not flat. It’s a percentage of the trade value.
> If you want objective data, Uniswap (and other on-chain exchanges) are truthful.
Transaction costs limit on-chain exchange wash trading to some degree, but it doesn’t stop price manipulation.
The on-chain aspect has an interesting issue in that during periods of high volatility the network itself gets both slower and more expensive, so an end user may not even get to execute a trade.
Uniswap is the same for all.
This is usually done to get uniswap traded tokens onto various trending lists like cmc , dextools , etc.
I’d say there is 10-40x the fraud on uniswap than on centralised exchanges, its just that on uniswap if you know where to look, you can transparently see the fake volume being created in front of you.
But for human traders, it can be tricky sometimes.
Sure, you can wash trade on Uniswap, but it's expensive and everyone can see you doing it. The fee on most pools on Uniswap is 0.30%.
In contrast, wash trading on most centralized exchanges is cheap or free and very hard to prove unless you have access to their internal data.
The liquidity pool on these are usually provided by token owner themselves, fee doesnt matter there (gas fees does, but they make much much more by doing this).
Tokens like these need these fake volumes to get the necessary amount of holders , publicity and volume to qualify to be listed on centralised exchanges.
Even when everyone can see you do it, owners of popular trending lists which list these tokens, intentionally look the other way on this wash trading and just need it for fulfilling listing requirements.
People get scammed daily by this.
This makes no sense, especially if you factor in gas prices, pool fees, and volume.
2- pool on tokens like these are usually only made by the owner themselves, so pool fees goes back to them.
3- They do this to invite new people, and then inflate the token price, and rug them by either pulling the entire lp, or just exit it , in a few mins.
Some also do this, to qualify for potential centralised exchange listing, down the line (instead of rugging).
Um. Wow.
So... how much of crypto is just "things that are illegal to do with anything that's not crypto"?
Provided there is sufficient decentralization within a blockchain network (i.e. enough independent miners participating) no individual miner will be able to pursue a MEV strategy beyond a single block. The next block will be created by a different miner.
In addition, the right to include any transaction or to control the ordering of transactions depends on the miner winning the right to build the block via the consensus process (for instance, by being first to calculate the PoW). In a sufficiently decentralized network, it is unlikely that any one miner will have any certainty at all with regards to when they will actually be able to build a new block. Depending on the level of centralization, it is also the case that a particular miner will get to mine a new block infrequently at best.
So the worst that a particular miner can do will be to delay the inclusion of a transaction, because any other miner can choose to include the same transaction in a subsequent block. Excluding transactions is outright impossible without buying out the entire capacity of the network by paying massive gas fees to other miners.
And because there is no predicting when the power to choose the ordering or inclusion of transactions will be granted to a particular miner, any miner intervention strategy will need to be both opportunistic and somehow viable within the scope of only one block.
Keep in mind as well that Ethereum blocks occur less than once every 15 seconds.
How do all these "mining" companies survive, if they only mine a block infrequently?
In order to get more consistent payouts, we mine to a mining pool, which pays us for our shares of work. Since a mining pool condenses a lot of hashrate, the frequency is higher. There are various schemes on top of that (pay per share, etc..), but that is the simple explanation.
This is the 'centralization' argument to mining, except that miners can change to another pool near instantly. If a pool starts to misbehave, then miners will dump them immediately. There is precedent for this, ghash.io.
There are a lot of upfront costs (hardware/space), but once you've paid for those and you have cheap enough electricity, then the rest is profit.
Disclosure: I am a large scale ETH (gpu) miner.
Many mining companies make much more than that, because Bitcoin is more centralized than it should be.
Bitcoin would be less centralized if ordinary people could mine it successfully with their home computers, rather than needing to buy specialized hardware. As it stands, mining activity is performed almost entirely by people and entities able and willing to spend the money to buy mining rigs. Not a bad thing per se, but it results in fewer people mining than I might prefer.
I think your explanation is a good one.
Join some of the FB mining groups... you'd be surprised at how many 'normal' people have bitcoin miners. They aren't at the scale of the commercial places, but it is happening. Especially once China shut down, the markets were flooded with boxes.
This is also why I prefer GPU based mining. More accessible (gpus are everywhere) and it is actually the older hardware that is more ROI profitable. It isn't a hardware race like it is with bitcoin. The risk is lower too... if you burn out a $100 card, it is a lot less of an impact than a several thousand $ card.
The interesting thing to watch is what what coin (or technology) will pop up next as the top GPU PoW. There can only be one.
Only to unsophisticated traders, since past volume (liquidity) isn’t worth anything right now. What you really want to look at is market depth, ie. the quantity of outstanding open orders in the order book.
> Users must blindly trust whatever data exchanges can manufacture.
Contrary to past volume, open order book orders need not be trusted. Users can test this figure by executing a market order against it and observing the execution price. If there’s always a discrepancy between the two then either the exchange is lying about its order book depth or is susceptible to front running.
If you want to trade useful tokens, Uniswap's data is the most truthful.
It's not that the system can't be gamed, it's that he costs of gaming are transparent and predictable.
Many actors (including core devs) in the Ethereum (and other crypto) ecosphere see front running (known as MEV) and the payment for protection thereof (known as flashbots) as a "feature" so it's no wonder that other "creative trading techniques" run rampant.
It seems like the reason for every financial regulation in traditional banking is rediscovered in the crypto space just much faster.
Flashbots' mission is for MEV to disappear. They're doing that by making it a more open process and to prevent MEV extraction from making the chain unusable via high gas fees.
Flashbots RPC exists as a feature because private txPools/RPCs are the only way to be absolutely sure your transaction won't have MEV extracted from it. If Flashbots wanted more MEV, they would only allow transactions via Flashbots RPC that cannot be MEV extracted.
By allowing MEV-extractable transactions on Flashbots RPC, they effectively reduce the amount of MEV that is mined.
Looking back I've no idea where I got the impression from that MEV is welcomed by the core client Devs.
Good news: it's getting better. Bad news: still very high.
I've worked at an above board HFT with a big crypto desk, and this happened constantly.
Executing unprofitable trades is its own perfect penalty, is it not?
Yeah, but no one is listening. From the richest to the poorest, it's all about "to the moon." 50% of my family and friends have RobinHood accounts and are day trading crypto (usually doge or shiba) ... and don't even know what it is. (A dear friend even spent $15k on a rig and thought i was lying when i said his crypto wasn't actually "IN" his digital wallet.)
I'm not trying to make a tired argument about dollars being fake or something, I just don't see the distinction as far as wallets specifically are concerned.
Crypto has neither (a) nor (b); it is specifically designed to not have (a), and I don't see it having a (b) any time soon since regulation is anathema.
I see your point. Both are ledgers. So in that way crypto and bank accounts are similar. But bank accounts can become cash. Crypto cannot. Now the argument shifts to "what is cash" but a different kind of ledger. We can argue why one is trusted more than the other, and perhaps 100 years from now crypto might be as safe as US dollars or Euros. But today there is a big, bit difference between a crypto wallet and a bank account. I find it especially confusing that many crypto advocates typically lament going off the gold standard, which makes my head hurt...
Now that I argue this... i'm confused. Dammit, Beavis.
It’s a weird belief but - what if they’re right ? What if it did cause a lot of the problems ? Maybe not directly, but by freeing the state from a boundary-setting limiter it somehow corrupted it?
I don’t know the answer but Bitcoin is a bet that it did cause problems. And so far it’s a winning bet.
You're contradicting yourself.
You can trust the law / trust the code, but not trust the judges / trust the machines that run the code.
You trust the law beacuse you can read it / You trust the code because you can read and mathematically prove that it works
You cant trust the judges -- you have to have faith in them
You cant trust the machines either -- but blockchain gives you specific mathematical guarantees that it is very hard for them to break the system.
The same way you'd "trust" that a safe deposit box will not be breached. It's certainly not impossible, but it's unlikely based on your understanding of how it works.
A bitcoin wallet is more like a safety deposit box key, than an actual box itself.
Trusting the regulated bank isn't that far from trusting the monetary authority that gives paper bills value. Or, for that matter, for the 99% of people who have not verified Bitcoin's math and have not inspected the code running on the servers they buy Bitcoin through, trusting the techies who pitch the product.
But yes, you are right that the vast majority of users of [piece of software] have not verified [piece of software] and are relying on other humans to basically tell them if they should or shouldn't run it.
I think you're grasping at straws with the coins thing..you really think there's an attempt to confuse people into thinking that it's..physical coins?
Sorry if it should be obvious. I'm used to being 100% stupid at least 10% of the time
In your toy scenario, I put 8 on the best bid, you put in 1 more, then I go on another account and hit the bid for 9 volume. 1 of that is legitimate volume, and 8 is fraudulent because I'm trading with myself (aka wash trading). Sure you get your fill, but the paper asserts that the stated volume is too high (in this case by 8).
It's an inherent, infallible weakness of the type of asset.
I can't fathom how we haven't arrived at the general consensus that it's just a big scam.
I suggest that large portions of our economy depend on hype.
People Magazine generally won't say hugely negative things about celebrities, because celebrities are their currency, it's what they are selling. They're selling the illusion of celebrity, and they work with press agents etc. to concoct all of it. Talking any kind of 'reality' would be detrimental to their core business.
In much the same way, the press, including the Tech Press relies on a kind of naive, hopeful, optimism, blended with the dream of riches, or at least for others. The 'drama' of Musk, Zuck etc. keeps the clicks moving.
Lets say you invent a new NFT. You sell the NFT to __yourself__ for $100. Then, you sell the NFT to yourself (again) for $200. Finally, you sell the NFT to yourself for $1000. Then you go to the public and say "Look, my NFT has grown 1000% in the past week, you should get in on it!!"
Then they buy the NFT from you for $500. Then suddenly they can't sell the NFT to anyone, because you were the only one buying ever.
Congrats, you just scammed someone for $500.
What you gave me a profitable and likely illegal example of a wash trade, but not a definition of wash trade.
A wash trade could be selling thing X for $100 and buying thing Y for $100 where X and Y are the same exact underlying thing. Just moving pointless trades back and forth inflates volumes, which makes people thing the market is moving.
See https://www.investopedia.com/terms/w/washtrading.asp for more
No you don't. But you do need to be buying and selling the underlying repeatedly for "some reason".
That "some reason" could be fraud, or it could just be tax-optimization. The important thing is, "wash trading" is the technique of buying-and-selling the same thing at nearly the same time... which has many many applications.
Many of those applications are illegal and fraudulent in a traditional market. So seeing something like 70% of the volume of the real world cryptomarket being wash trading suggests that there's more fraud in the cryptomarket than people generally realize.
Selling your own NFT to your self for a profit, that's something else, but its not a wash trade as in that case there is a price change.
Lets say rich person X wants to conduct large-scale wash-trades to artificially increase (or decrease) the price of [insert cryptocoin here].
By conducting it on Exchange-Foobar, Foobar's traffic goes up, while rich person X gets the price change they want. Win-win for both parties.
EDIT: Remember: exchanges win on volume. They want more trades, they don't care if the value goes up or down.
I kind if assumed it was the exchanges themselves faking it. Wash trading without colluding with the exchange is pretty expensive.
Ex: Interactive Brokers (a legitimate online exchange for stocks) hit it big with its monthly-subscription model: $$subscription / month $20 / for severely discounted trades (fractions of a penny per trade). https://www.interactivebrokers.com/en/index.php?f=1590&p=sto...
If you sell yourself the security, it never left your hand so you didn’t realize a loss.
https://www.investopedia.com/terms/t/taxgainlossharvesting.a...
What robo advisors can do.. is sell say.. asset A that perfectly tracks an asset (say S&P 500)... and then buy asset B that perfectly tracks an asset (say S&P 500).
So you end up with the "same thing" at the end of the day, but got to harvest some losses.
That said, I think there are some iffy legal situations here, and you run the risk of breaking the law here.
https://www.investopedia.com/terms/r/robo-tax-loss-harvestin...
https://www.sofi.com/learn/content/automated-tax-loss-harves...
Your example only works for NFTs because they are non-fungible.
No, you’re describing the wash sale rule, which has to do with which capital losses are tax deductible. It covers pairs of trades up to 30 days apart.
A wash trade is a trade with yourself. Both participants in the same trade — not two distinct trades.
It's a DAO that enables you to mint infinite DAI (some crappy "stablecoin") for a transaction as long as you pay it back in the same transaction.
One of the stated goals of this "feature" is
> Exploits requiring a large amount of capital will be found quicker which makes the DeFi space safer overall.
Ah yes, intentionally making your own product less secure and more open to abuse, so you can make it more secure. Good work. This is taking testing in production to a whole new level.
How does trading back and forth with themselves do anything other than generate fees for the exchange?
Edit: I was mixing this up with another conversation, the parent comment obviously isn't about NFTs. I'll leave this here though because I think wash trading is even more relevant to them.
You can actually pay nothing on FTX. Only a .025 taker fee + 60% discount for holding FTX coin plus a .01 rebate for being a market maker.
Most of wash trading is probably done by connected individuals though. Whole point of being unregulated. Just be friends with CZ or SBF.
> We introduce systematic tests exploiting robust statistical and behavioral patterns in trading to detect fake transactions on 29 cryptocurrency exchanges. Regulated exchanges feature patterns consistently observed in financial markets and nature; abnormal first-significant-digit distributions, size rounding, and transaction tail distributions on unregulated exchanges reveal rampant manipulations unlikely driven by strategy or exchange heterogeneity. We quantify the wash trading on each unregulated exchange, which averaged over 70% of the reported volume. We further document how these fabricated volumes (trillions of dollars annually) improve exchange ranking, temporarily distort prices, and relate to exchange characteristics (e.g., age and userbase), market conditions, and regulation.
"wash trading" appears to be fraudulent trades injected into the exchange in order to boost the volume of trades appearing on the exchange.
A wash trade is anything that results in the equivalent outcome as earlier. It was used to get fraudulent tax refunds so it's not allowed to be used that way. An example is buying AAPL at $150 in January, and it falls to $100 in December. One could sell the stock to claim the deduction on the tax return for the year, but would miss out on potential gains on the stock. So what people would do is sell the stock on Dec 31st and buy it back on January 2nd in the new year. So IRS made a rule that doing such a thing is a wash trade and not eligible for tax deductions on the booked loss for the year.
Crypto and NFT are (relatively) new online havens for many criminals, money launderers, and scammers to hide within in the same ways that AMWAY, Time Share Vacation Sales People, and as the guys selling speakers out of their vans in a parking lot did throughout the past, with a little Bernie Madoff and updated/modified MLM tactics added. Not saying all trading is bad, but millions of people have already been victimized in such a short time, and social media is in on the hustle because they make great profits within the promotional and "pump and dump" food chain.
I decided to invest just $100 in bitcoin (on a reputable exchange) to watch it over time a year ago, and so far it's maybe gone just slightly over double that (with spikes and dips in between)... I could not imagine having risked any more money than that because it's pretty stupid to send cash trough the US mail system even though it's protected by law, and Crypto is largely unregulated, and one tweet from the guy who owns Tesla can bring the system to it's knees within the blink of an eye. You can't cry over imaginary profit you haven't lost, so I'm fine with not developing a new gambling addiction.
It's very telling how hard it is to see a simple detail about profit performance for other coins online (over time), graphs are way too simple, each coin's graph has a different set of rules and context, there are far too many different apps and exchanges, regulation and taxing is uncertain, the methods of creation and management for crypto are really elusive, confusing, and abstract for the purpose of making the process very mysterious. The very creator of bitcoin is still not willing to take proper credit for it FFS... That's all I needed to really know in terms of the system's reliability...
NFTs are basically digital files, often stored in a Google Drive (which cannot be exclusively owned by nature), but they are sold as if it's possible for a file to not be copied, scam cue #2... What I'm really trying to get to as a point is that it's all basically a giant pile of malarkey for normal people who can't afford to lose money right now. I trust the skeptics more than the people who are raving about being millionaires from it on YouTube every day, because you can't tell if diamonds are real by watching a video on the Internet.
One form of such market manipulation is Wash trading--- investors simultaneously selling and buying the same financial assets to create artificial activity in the marketplace, which is known to distort price, volume, and volatility, and reduce investors’ confidence and participation in financial markets (Aggarwal and Wu, 2006; Cumming, Johan, and Li, 2011; Imisiker and Tas, 2018).
Edit: sorry, misunderstood parent comment.
> We quantify the wash trading on each unregulated exchange, which averaged over 70% of the reported volume.
> We quantify the wash trading on each unregulated exchange, which averaged over 70% of the reported volume.
See how the 70% figure applies strictly to the unregulated exchanges?
This is one of the few things about cryptocurrency markets that isn’t being disputed by anyone.
Has everyone internalized that faking volume means Bitcoin’s real value to people is hard to pin down? Maybe, but it’s useful to try and pinpoint exactly how much trading is fake regardless. (30% real trading would still indicate a non-trivial portion of people who actually will buy at current price, much better than if it was 99% fake trading or something).
It's all of these elements together that add up to the ridiculous volatility you see in these markets.
The only way I can see to distinguish it is if there are fees to making too many transactions per week. Like a "free tier" of transactions and then you pay if you want to transact a lot. That's the proper way to charge fees for mainstream payment networks, btw, rather than how they do it now. Anyway, then the problem becomes how do you mitigate sybil attacks.
Wash trading is a bug in the SYSTEM, and it should be the designer's responsibility to prevent it, not the government's. But the SYSTEM designers don't necessarily WANT to fix it, anymore than they want to fix sybil attacks when they're growing (Twitter or YouTube in startup phase being able to detect and deplatform oodles of new active accounts or content, is against their incentives to attract more money by reporting higher numbers, even if they are bots and illegally uploaded content). Same here.
Most exchanges will have "liquidity partners" who have better fee structures, possibly even zero fees. Most of these arrangements are not publicly disclosed. It's also commonly possible to open an order and then trade into your order yourself, although I haven't checked in quite a while and controls may be better now. (Doubt it.)
On a macro level, all this is mostly meaningless, and just a reason everyone ignores volume numbers for these exchanges. There's no reason for this net-neutral trading to affect market prices outside a second/minute time scale.
> CMCSnipe uses insider information to know minutes before a coin is going to be listed on CoinMarketCap or CoinGecko.
How is this website relevant to wash trading?
Does anyone have any thoughts on why or how this is the case? I'm having trouble wrapping my head around how there is no departure if fraudulent trading is so rampant pre-regulation. I suppose it's worth noting that this largely seems to be speculation on their part anyway. Their data sample is comprised of only roughly one quarter of 2019. Meanwhile, Coinbase received their bitlicense in 2017. It's unclear to me how they can even be sure of the claim they're making at all. I wish they had included a citation here.
The paragraphs following appeal to Benford's law and Power law to explain away any concerns, but it's also unclear to me how it's directly applicable. The premises seem sound, but the conclusion doesn't seem all that cogent to me.
I think their expectation that real traders would use rounded numbers overlooks that crypto is hyper fractionalized. If someone is exiting their Doge position they're not going to use a rounded number as fee's are paid in a % of that crypto.
We are seeing a market evolve naturally, without too much government distortion, which is pretty cool.
How are tumblers related to exchanges?
Not sure I understand. We're not talking about onchain stuff here, but just money moving around within an exchange.
Look for the builders. You’ll see something special.
This seems like a regulation failure.
The intersection between tech enthusiasts and libertarians is way too large.