New data from crypto insights firm Chainalysis reveals that wash trading may be artificially inflating the value of non-fungible tokens (NFTs).
In a new report, the market intelligence firm finds that while most of the 262 wash traders they identified were seeing losses, they have profited nearly $8.5 million as a group overall in 2021.
“The 110 profitable wash traders have collectively made nearly $8.9 million in profit from this activity, dwarfing the $416,984 in losses made by the 152 unprofitable wash traders.
Even worse, that $8.9 million is most likely derived from sales to unsuspecting buyers who believe the NFT they’re purchasing has been growing in value, sold from one distinct collector to another.”
Wash trading occurs when a party conducts a sale where they are both the buyer and the seller of the transaction to create a misleading price valuation for an item. They then sell the price-inflated asset to an unsuspecting trader who believes they are getting a discounted deal.
“In the case of NFT wash trading, the goal would be to make one’s NFT appear more valuable than it really is by ‘selling it’ to a new wallet the original owner also controls.
In theory, this would be relatively easy with NFTs, as many NFT trading platforms allow users to trade by simply connecting their wallet to the platform, with no need to identify themselves.”
However, this practice of wash trading NFTs isn’t technically outlawed as it has yet to be targeted by law enforcement and regulators. According to Chainalysis, lack of oversight could inhibit the future growth of the NFT marketplace.
“NFT wash trading exists in a murky legal area. While wash trading is prohibited in conventional securities and futures, wash trading involving NFTs has yet to be the subject of an enforcement action…
More generally, wash trading in NFTs can create an unfair marketplace for those who purchase artificially inflated tokens, and its existence can undermine trust in the NFT ecosystem, inhibiting future growth.”
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