Crypto Wash Trading

Seems to be the same paper as this preprint on arXiv from last August: https://arxiv.org/abs/2108.10984

Earlier discussion: https://news.ycombinator.com/item?id=29279146

The methodology makes no sense. Our quoter currently quotes approximately the same dollar amount at all the time. If a taker takes all of our size at a level, as they do tens of thousands of times per day, the resulting trade sizes will not follow Benford's law. Another dynamic is that many trades will be a bot trading against a stale quote. For whatever reason, some bots are configured to do this gradually in fixed-size chunks, which will also produce trade data that does not follow Benford's law.

The authors create a benchmark rate of "automated trading" (i.e. deviation from Benford's law) at regulated exchanges and attempt to calculate the rate of wash trading at other exchanges by comparing the deviation from Benford's law to the deviation at regulated exchanges. Even if all of these exchanges would onboard every automated trading firm from anywhere in the world with directors and UBOs with any combination of citizenships, this methodology *still* would not work at all, because automated trading systems care about prices after fees, and Kraken's lowest fees are 0bps maker/10bps taker, while Gate's are -1.5bps maker/2bps taker. Another way of saying this is that Kraken has a "net fee rate" of 10bps and a "minimum spread" of 20bps (wow!) plus the price increment, while Gate has a "net fee rate" of 0.5bps and a "minimum spread" of 4bps plus the price increment. Expecting similar distributions of trades in these two conditions is extremely unreasonable, and one wonders if the fine authors consulted anyone in industry before publishing.

Create a crypto project, ideally a premined one, delegated PoS or so with outrageous performance claims. With non-premined PoW coins it is much harder. Ideally with a huge supply of tokens. Let's say 100,000,000,000 total supply.

Form a foundation and talk to the media. Sell some at a sub-cent price during multiple ICO rounds, but make sure to keep 70-90% (tokens for team, advisors, runnning costs, token burns, security claims that are baked into the protocol and whatever other reason you can come up with).

Sell some to yourself for free. Use money from the first round to pay for marketing and exchange listing - yes, most projects other than Bitcoin, Ethereum or Monero need to pay to be listed, even though exchanges make money from trading fees. Ideally also run your own exchange, which gives you more creative freedom and may save cost.

Talk to the media again and spam all crypto communities.

Use the tokens that you sold to yourself for wash trading on multiple exchanges. Since you sell to yourself, your main costs are trading fees. Use ICO money for that and for buying some tokens from others.

Market price is the latest price that someone paid for the token. Market capitalization is Market Price x Circulating Supply. Increase market price by wash trading at higher prices, you control the price, since you own the most tokens. Some ICO customers will sell their tokens back to you, but the majority of them will wait for much higher prices.

Spread rumors about possible 1,000% price increases when the token gets adopted by the masses. Some new buyers will obtain some of your tokens as your token is rising on websites like coinmarketcap.com because of the rising market capitalization.

Do more marketing, spread memes and rumors about partnerships with FAANGs and governments, as well as potential 10,000% price increases.

Monitor the price. Wash trade higher. Monitor price and order books. Once the price is high enough, start to sell more to other buyers. When the orderbooks are full of other people, dump more and let it cool down afterwards.

Repeat until you are rich enough or until people aren't buying the token anymore.

Exit.

Similar results found in 2021 https://www.sciencedirect.com/science/article/abs/pii/S15446...

This is why I believe the only way cryptocurrency can succeed is if you can't trade it for useful fiat currency. That will mostly remove the desire to manipulate them relative to a useful stable value.