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NFT buyers beware of 'wash trades' that generate sales hype

By Joyanta Acharjee

14:58, 8 February 2022

Digitally manipulated image of Benjamin Franklin, the face of the US $100 bill
In 2021 there were over $40bn of NFT-related cryptocurrency transactions – Photo: Shutterstock

Sales of blockchain-related digital assets – known as non-fungible tokens (NFTs) – have soared with $44.2bn (£32.6bn, €38.7bn) of cryptocurrency transactions associated with NFT marketplaces and collections last year, according to data compiled by Chainalysis.

But as unregulated digital marketplaces continue to attract investor money, they have also attracted unscrupulous techniques to bid-up asset offerings such as “wash trading”.

Wash trading – which was outlawed on US financial markets by the Commodity Exchange Act of 1936 – involves one party repeatedly purchasing and selling a particular asset in order to manipulate its trading volume and market price by acting as both buyer and seller.

Citing data compiled by DappRadar, Reuters reported that $1.3bn of the $10.7bn of NFT transactions last month on fledgling NFT trading platform LooksRare came from only two wallets, suggesting wash trading in action.

NFTs explained

NFTs are unique, non-tradeable ("non-fungible") ownership receipts for digital assets that are tracked on a specific blockchain – such as Ethereum – to prove authenticity. They can take the form of a static image, video clip or an animated 3D image.

They are commonly bought and sold on specialised marketplaces which include OpenSea and LooksRare in a similar way to buying and selling physical sports trading cards on an online auction site such as Ebay.

NFTs and the larger cryptocurrency space seem to operate in a legal grey area as key regulators such as the US Securities and Exchange Commission have yet to make a firm ruling on the status of cryptocurrency-based assets. That leaves investors with few legal protections.

Two crypto analytics firms recently disclosed their findings on wash trading amongst the NFT ecosystem.

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LooksRare platform

Launched in January, LooksRare is the community-first NFT marketplace that actively rewards traders, collectors and creators for participating, it said in an opening blog post.

In order to attract people to its platform, LooksRare was giving away (“airdropping”) its own LOOKS token cryptocurrency to people who had used rival platform OpenSea. LooksRare also gives LOOKS tokens to NFT buyers and sellers on its platform.

LOOKS tokens can be traded for other cryptocurrencies and are listed on Coinmarketcap, the crypto world’s version of the back pages of the Wall Street Journal or Financial Times.

Token promotion

The token giveaway to platform users may have been the cause of wash trading on the platform, identified by DappRadar as early as 12 January.

In a blog post, DappRadar identified two cryptocurrency wallets buying and selling the same NFT six times.

ETH/USD

3,512.09 Price
+0.070% 1D Chg, %
Long position overnight fee -0.0616%
Short position overnight fee 0.0137%
Overnight fee time 21:00 (UTC)
Spread 6.00

SOL/USD

171.52 Price
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Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 2.2652

DOGE/USD

0.13 Price
+1.000% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 0.0012872

XRP/USD

0.60 Price
+3.190% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 0.01168
DappRadar identified two cryptocurrency wallets buying and selling the same NFT six times – Credit: DappRadarDappRadar

NFT data firm CryptoSlam recently removed $8bn in wash trades from their NFT sales volume figures for the LooksRare NFT platform which launched last month.

CryptoSlam removed $8bn in wash trades from their LooksRare platform data – Credit: CryptoSlamTwitter

In its platform documentation, LooksRare states that its systems are set up to prevent wash trading.

"The trading rewards system has been designed and iterated upon to heavily dissuade users from trading for the sole purpose of farming LOOKS rewards," LooksRare said in a post.

Chainalysis study

Analysis of NFT sales to self-financed addresses shows that some NFT sellers have conducted hundreds of wash trades – Credit: ChainalysisChainalysis

Another crypto data firm identified wash trades amongst NFT transactions taking place last year, with NFT platform OpenSea

Chainalysis spotted and tracked NFTs that were sold back and forth at least 25 times by the same group of cryptocurrency wallets – what the company’s analysts say are overt examples of wash trading.

In the 110 profitable cases in 2021, sales from those NFTs made nearly $8.9m.

“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,” Chainalysis commented.

No guarantee

Wash trading is not always a guarantee of profits, however.

Every Ethereum transaction – the underlying blockchain used to track and verify NFTs – is subject to a small commission known as a “gas fee”. So an entity repeatedly selling to themselves needs to continue to pay these commissions, hoping to recoup their outlay with an eventual NFT sale for a profit.

Potential NFT platform investors should take the time to look at NFT metadata sources to make sure they’re not on the “dump” side of a possible NFT “pump and dump” transaction.

LooksRare does not have any phone or e-mail contact points and a representative for NFT platform OpenSea didn’t return an e-mail from Capital.com seeking comment.

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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