Crypto Wash Trading
114 Pages Posted: 2 Mar 2020 Last revised: 15 Oct 2020
Date Written: December 30, 2019
We investigate whether centralized exchanges in the cryptocurrency markets engage in wash trading. To identify wash trades, we devise a set of tests and algorithms to examine patterns in the first significant digits of orders, trade sizes, behavioral regularities, etc., for 3 regulated crypto exchanges and 26 unregulated ones classified by their compliance status. All regulated exchanges feature trades consistent with traditional financial markets and statistical benchmarks. However, the majority of unregulated exchanges exhibit anomalous activities compared to regulated exchanges and statistical benchmarks. The patterns cannot be explained by investor activities but suggest that unregulated exchanges, especially those that are less prominent, are engaged in wash trading. We estimate that wash trades account for an average of 66% of total trading volume in unregulated exchanges, and discuss regulatory implications of such manipulative behaviors in the emerging crypto sector and in financial markets in general.
Keywords: Cryptocurrency, Wash Trading, Forensic Finance, Regulation, Blockchain, FinTech
JEL Classification: G18, G23, G29
Suggested Citation: Suggested Citation