What Are NFT Wash Trades & Why Should I Care?
Simply put – NFT wash trading occurs when one entity buys or sells the same asset multiple times in a short period to deceive other market participants about an asset’s price or liquidity.
This is the same practice as the age-old pump and dump that can happen with penny stocks that are typically not traded on the larger markets like the NASDAQ or New York Stock Exchange. Scammers promote the stock to pump up interest and when it reaches a certain level – dump the stocks taking all the profits and leaving everyone else with a loss.
So now that we know what wash trading is – why do people do it?
Well, a person may be motivated to engage in wash trading for various reasons. For example, they may want to stimulate an artificial rush of the item to raise or lower prices. This way they could jump out with the profits OR use the loss for other purposes like tax refunds. There are a million reasons why wash trades are done, but in the end, it’s almost always about making a quick buck.
While wash trading is illegal in traditional finance, the law has not quite caught up with technology yet as the legality of this practice has still yet to be determined. Despite all this, wash trading is currently a multi-billion dollar practice annually and only a few countries have taken steps to stop it.
So how can you avoid being scammed?
Unfortunately, traders and collectors alike can have a hard time making an informed decision. Due diligence has become more difficult as investors have been forced to rely on statistics that may, or may not, reflect the true measure of things.
Since there is no price or volume history associated with brand new NFT’s when they are introduced to the market, these can be a perfect target for scammers. Therefore, avoid investing large sums in those kinds of assets unless you are able to take the loss and not worry about it.
What that means for the bulk of us, is to start small and work our way up rather than go all in on the first investment. Make sure you trust the artist and the source and remember, the old saying still holds true, if it seems too good to be true, it probably is.
