Crypto market manipulation is lurking in the industry in Wash Trading

Happy Tuesday, readers. I’m Phil Rosen. I’ll be back in wintry Manhattan by the end of the month, but for now I’m writing from Los Angeles.

Like a limp handshake, FTX’s demise has served as a regrettable introduction to readers with no prior exposure to the nascent crypto industry. A once niche segment of finance has been pushed into the mainstream, and now everyone and their mother knows the name Sam Bankman-Fried.

Since the madhouse kicked off in November, countless people have told me that their view of crypto has soured. Bearishness is on the rise – and much of it can be attributed to a widespread loss of confidence.

I’m sorry to say that if you dig deeper into the practices of opaque crypto exchanges, there’s little to restore that belief.

But before we get started, Matt Turner, Insider’s editor-in-chief, is at the World Economic Forum in Davos. He will be posting notes and videos on his LinkedIn throughout the week. You can follow him here – and read his latest post here.

Shall we?

In case you missed it: On Friday, I spent an hour answering questions about FTX on Reddit. You can view the question and answer here.

If this has been forwarded to you, Register here. Download the Insider app here.

Sam Bankman Fried

Sam Bankman-Fried outside federal court in Manhattan on Thursday.

Jeenah Maan/Reuters

1. Yes, FTX showed us why it is bad to gamble with customer money, but evidence of a lesser-known fraudulent practice called wash trading has also made its rounds in the crypto sector, according to the National Bureau of Economic Research.

In a working paper published last month, the group concluded that wash trades accounted for up to 70% of all transactions on unregulated crypto exchanges.

That suggests ubiquitous fraud and deceit, as my colleague Jennifer Sor writes.

Imagine me starting a lemonade stand. I want people to think my lemonade is the best in town. My partners in the business (some kids down the street in this case) come over and buy some lemonade and proclaim its superior refreshing properties. Maybe they say loudly that they’re happy to pay a lot more than I charge for a glass of that stuff.

Soon everyone will want what I sell.

Maybe it’s an uneven metaphor, but you get the idea. People want what other people are interested in. In wash trading, a party trades with itself to create the illusion of deeper liquidity than exists and artificially inflate the price of an asset that may attract inexperienced investors.

Of course, the plans are usually more elaborate than pretending to buy your own lemonade. Timothy Cradle, Director of Regulatory Affairs at Blockchain Intelligence, told Insider that wash trading is market manipulation.

“There is competition in every industry”, Cradle said. “That’s no excuse to go out and wash and try to make your exchange look more liquid than it actually is, especially when you’re dealing with cryptocurrency.”

And these aren’t just some little-known mom-and-pop stores. NBER researchers estimate that wash trading accounts for nearly half of all transactions on Binance, the largest crypto exchange in the world by volume. (A Binance spokesperson told Insider that it does not engage in the practice.)

Similarly, KuCoin, another top-five crypto exchange, was estimated to make up an estimated 52.9% of its transactions from laundry trading (which the company denied).

Click here for the full details, from Insider’s Jennifer Sor.

Are you surprised that the researchers found wash trading so widespread? tweet me (@philrosenn) or email me ([email protected]) let me know.

In other news:

trader now


2. Global equities and US futures fell early Tuesday, after weak economic data in China, fears of a slowdown in growth renewed. Investors will also be keeping a close eye on the latest batch of corporate financials as earnings season gets underway. These are the latest market moves.

3. On the roll: Morgan Stanley, Goldman Sachs and Citizens Financial Group Inc, all reporting.

4. This fund manager has beaten 99% of its competitors over the past five years. He shared the investment strategy that led to his massive success – and then broke down seven of his favorite value stocks.

5. JPMorgan Asset Management’s chief of investment said the Fed has already won the war on inflation. The company’s David Kelly thinks it’s time for policymakers to call a halt to rate hikes: “They’re threatening to push the economy into recession.”

6. “Dr. Doom” economist Nouriel Roubini said the Fed will slacken its inflation battle. According to him, policymakers must raise interest rates by more than 6% to meet their inflation target. In any case, he believes that a severe recession has now become inevitable.

7. According to PIMCO, a recession will drag stocks down this year. But that means it could be the perfect time to buy bonds, which have a lower but safer yield and are an attractive investment during a recession.

8. A portfolio manager and top strategist at UBS Asset Management discussed the opportunities he is most optimistic about for 2023. The US economy will last longer than people expect, Evan Brown said, but that doesn’t mean stocks as a whole will outperform.

9. Allianz, the head of the $19.5 billion ETF strategy, explained why the Fed is on course to shock the markets. Once central bankers raise rates higher and longer than expected, inventors will regret ignoring what the Fed has signaled. In his words, a “wet blanket for stocks”.

VIX index on January 17, 2023

Markets Insider

10. Fundstrat’s Tom Lee pointed out that more than half of the components in the CPI are in deflation mode. This is good news for the stock market, as declining inflation will help ease financial conditions. Here’s what he said about Wall Street’s anxiety gauge in particular.

Curated by Phil Rosen in Los Angeles. Feedback or tips? Tweet @philrosenn or email [email protected]

Edited by Max Adams (@maxradams) in New York and Hallam Bullock (@hallam_bulock) in London.