What is NFT wash trading?

What is wash trading?

We refer to wash trading as the practice where the same actor sells and then purchase back a specific asset, usually within a short period of time, to influence its market activity and price. Is a technique of market manipulation that, particularly in the NFT space, is facilitated by the lack of personal identification needed when connecting wallets to buy or sell tokens.

How does wash trading work?

Although wash trading techniques may vary, the following basic example can help us grasp the concept. Let’s consider a scenario with one investor owning two wallets, a seller wallet and a buyer wallet, with $ 1 million stored in the last one.

  • With the buyer wallet, the same actor buys the NFT for this same amount.
  • Finally, the actor transfers the NFT back to the seller wallet. He then decides to sell it again, for a higher price, on a marketplace.

How big is NFT wash trading?

In a report published from Chainanalysis in 2021, the company detected 262 users who have sold an NFT to a self-financed address (funded either by the selling address or by the address that initially funded the selling address) more than 25 times. The analysis was based only on trades made in Ethereum and Wrapped Ethereum, therefore leaving out potentially other wash trading transactions. Of the total users detected, 110 of them resulted in a total $8.9 million profit performing wash trading activity.

Is NFT wash trading illegal?

The answer to the question is: not yet.

How to spot wash trading?

The good news for investors is that, through a bit of analysis, there are specific clues that can help identify wash trades. The first one occurs whenever the same wallet has purchased a specific NFT more than once. This is a first good sign that we are in front of a wash trading, and it is something that can be easily verified through the activity history of the token within the marketplace itself.

Final thoughts

NFT wash trading is an activity that all investors should carefully monitor when making their investment decisions. Considering the early stage of the market as well as the lack of solid historical data on most projects, activities like this one can easily manipulate trading analysis. At Rarespot, we also believe that marketplaces have a pivotal role in helping reduce this practice, as they could highlight more efficiently clues of wash trading — like the ones mentioned — within the transaction history they already expose.

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