Different scams were used in traditional finance but found their way into the crypto space as adoption and the number of users grew. One of them is wash trade.
A wash trade is a type of market manipulation where a trader sells and buys the same crypto simultaneously. This is done to manipulate the market into thinking that activities are ongoing, thereby increasing the value of the underlying tokens.
It usually begins with a crypto trader placing a sell order in exchange. Once that is done, they immediately place a buy order. They then buy the tokens from themselves. Sometimes, they may do it in conjunction with related parties to add more credibility to watchful eyes.
People do wash trading of cryptocurrencies for different reasons. It could be to improve the trading volume of the token. This makes the market feel that the demand for crypto is high, thereby increasing the value in the market.
A whale may decide to do this to improve the value of the underlying token. Sometimes, they may place a buy order to try and drum up the value of their token. They then put a sell order if they want to reduce the token’s value.
In the past, traditional financial participants may organize wash trading to compensate brokers for an activity they did without the public knowing. A firm may want to pay brokers that carried out activities that are either illegal or in the grey area but can’t do it in public. They make it seem like they are selling digital assets to pay the broker’s fees.
Wash trading is illegal in many countries, especially the United States, and people can be penalized for such an activity. It is considered a scam in major markets.