Researchers from the University of Texas allege that wash trading played a key role in Block.one’s record-breaking $4.362-billion ICO for the EOS blockchain in 2017 and 2018, artificially inflating prices in a type of illegal trading that happens on a growing number of crypto exchanges.
EOS was allegedly wash-traded on the Binance and Bitfinex cryptocurrency exchanges. Wash trading happens when an entity simultaneously acts as the buyer and seller for the same asset to pump or manipulate prices.
Block.one is a blockchain software company that offers technology and products that it claims “help people architect integrity into our world.” EOS is a blockchain-based operating system on the Ethereum blockchain designed to create, host and support secure, decentralized autonomous applications (dApps) and smart contracts. EOS claims to eliminate transaction fees and conduct millions of transactions per second.
In wash trading, a broker and trader collude to profit by feeding misleading information to the market.
Cryptocurrency exchanges and high-frequency trading firms use wash trading to manipulate prices, according to Investopedia. Prior to a 1936 law that made it illegal in the U.S., wash trading was a popular way for stock manipulators to falsely signal interest in a stock as a way to try and pump up the value so that the manipulators could make money shorting the stock.
Crypto exchanges are incentivized to inflate trading volumes and manipulate market prices, according to Security Boulevard, home of the 400-member-plus Security Bloggers Network. Since most crypto exchanges generate profit by charging transaction fees, trading volume is crucial to attract traders and increase market share. Third-party market data platforms such as CoinMarketCap, CoinGecko and CryptoCompare rely on trading data provided by exchanges to determine each platform’s market share, and prospective traders use these data platforms to decide which exchanges to use.
Wash trading enables newly formed exchanges to gain a large market share in a matter of months, and this has become a lucrative shortcut to marketing success for many young exchanges, Security Boulevard reported. For example, one of the largest crypto exchanges in South Korea, Coinbit was accused of using multiple “ghost accounts” to inflate trading volume. Up to 99 percent of Coinbit’s trading volume was manipulated between August 2019 and May 2020, resulting in “unfair profits” of about $84 million, according to an Aug. 26 report in the South Korean newspaper Seoul Shinmun.
The extent of wash trading is difficult to quantify without access to account-level data on exchanges, which are usually confidential, Investing.com reported. However, a recent academic study sheds some light on the extent of the “dirty tricks.”
“We detect over 70 percent of trading on unregulated crypto exchanges are ‘faked’, which amounts to over $1 trillion USD transaction volume every month,” said Professor Will Cong of Cornell University. “This is much higher than the transaction volume total for US equities.”
In 2019, FTX partnered with liquidity provider Alameda Research to investigate crypto wash trading in an effort to separate real and fake crypto volume. FTX concluded that 68.6 percent of crypto trading volume on indexes such as CoinMarketCap is fake.
An excerpt from the full research report reads, “While our methods are not foolproof, we believe they paint the most accurate picture of the true nature of cryptocurrency trading volume that anyone has made publicly available as of yet,” according to Bitcoinist.
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Many crypto exchanges showed clear evidence of wash trading, researchers said: “Some had many prints going up mid-market, much larger than any orders they had on their order books. Others were reporting other exchanges’ prints as their own, on a small time delay. Others did somewhat more sophisticated things, such as slipping in large fake prints only when they have a large number of smaller prints to hide them among.
In other cases, they found, “…many exchanges’ market pages display many trades which never appeared anywhere on their order books prior to the prints themselves occurring. Trades print significantly larger than any orders that exist on the order books, at prices squarely in the middle of the order book both before and after the trades.”
The University of Texas research does not accuse Block.one itself of any wrongdoing, and the company has cited a report stating there was no evidence it was involved, Cointelegraph reported.
The EOS ICO was backed by PayPal co-founder Peter Thiel and alongside billionaire hedge fund managers Alan Howard and Louis Bacon.
“Manipulation or otherwise, EOS has largely fallen out of favor with crypto traders and investors,” Martin Young wrote for Cointelegraph. After ranking among the top five crypto assets by market capitalization in mid-2018, EOS has fallen and now ranks 33rd. It was trading at $5.69 as of this writing, down 75 percent from its April 2018 all-time high of $22.70.