To generate fake volume, crypto traders engage in wash trading : The Indicator from Planet Money According to a Forbes report, half of all Bitcoin trades are fake. Today, we unveil crypto's cryptic facade by diving deep into a classic concept: Wash trading.

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This is the INDICATOR FROM PLANET MONEY. I'm Wailin Wong.


And I'm Paddy Hirsch. We were reading Forbes magazine recently, and a headline jumped out at us. It said more than half of all bitcoin trades are fake - half - 50%.

WONG: This is not a small thing. As many as 46 million Americans own bitcoin, which is the biggest and most popular crypto asset in the market today. The exchanges that deal in bitcoin claim that they trade $262 billion worth of bitcoin every day. If half of that volume is fake, it means a lot of people are in danger of being scammed.

HIRSCH: Yeah, that's pretty scary. And there are a lot of ways that unscrupulous traders can generate this kind of fake volume. But one of the most prevalent is something called wash trading. This was a kind of a new term for us, not surprisingly, because wash trading has actually been banned on regulated market exchanges in the United States since 1936.


WONG: So on today's show, we're going to take a look at wash trading to find out what it is, why it's happening in crypto markets today, and what that means for crypto assets like bitcoin and NFTs. That's coming up after the break.


HIRSCH: Wash trading has been around for as long as people have actually traded assets on open exchanges. And it was a common practice in the United States up until 1936. That was when Congress passed the Commodities Exchange Act in the wake of the Wall Street crash of 1929.

WONG: Which, of course, triggered the Great Depression.

HIRSCH: Yes - just a small thing there. But what is wash trading exactly? Kim Grauer is director of research at Chainalysis, which watches the crypto space.

KIM GRAUER: Wash trading is a trading strategy in which the buyer and the seller is effectively on both sides of the trade, and a person will essentially sell themselves an asset.

HIRSCH: I asked Kim, why would you want to sell yourself an asset?

GRAUER: To create the illusion that a particular asset is trading far more than it actually is. How do you get people to take notice of what you're doing? Well, people like to follow what's popular.

HIRSCH: Well, that makes sense. But if you're on both sides of the trade, how do you make money?

GRAUER: You make money by having people observe the amount of trading that's happening in the asset and thinking, hey, that's a fast-growing asset. I want to get in on that. I'm going to go buy that asset.

HIRSCH: For example, imagine you're a writer who has self-published a novel. You really, really want to get your book out to a bestseller list because people who read novels often use bestseller lists as a guide to what they should buy next.

WONG: So to do this, you create a bunch of bogus accounts on Amazon. You allocate a bunch of money to each one, and you use those accounts to buy 100,000 of your e-books. Presto, your book goes to No. 1 of the bestseller list, and now people are interested.

HIRSCH: And with a bit of luck, they also start buying, which is where you start to make money. But your original investment - that money that you spent to buy all those books from yourself - goes right back into your pocket. It is, as the phrase goes, a wash.

WONG: And it's not just individuals. There are a bunch of ways to wash trade. You can do it in a syndicate, teaming up with any number of co-conspirators to drive up the price of something. This is exactly what Forbes found is happening every day on crypto exchanges. And while we couldn't confirm the claims that Forbes makes about the volume of fake trading in bitcoin specifically, Kim Grauer at Chainalysis confirms that the crypto-verse is awash in wash trading.

HIRSCH: Yeah. She's able to tell this because of the fact that most crypto trading is based on the blockchain, which is transparent and makes things easier to track. Chainalysis has monitored wash trading who create what they call wallets. These are accounts that buy and sell coins and non-fungible tokens - that's NFTs - and all sorts of other crypto assets from each other, essentially trading with themselves.

GRAUER: It's creating the fake illusion that there's more volume than there actually is. They can do this for a while, and then we'll have someone unrelated to the original wallet then come in and purchase the NFT. And we can see that activity was in fact a success in drawing in new customers.

HIRSCH: And new customers means more money but not necessarily more profit, Kim says.

GRAUER: Every transaction that you do on the blockchain requires a fee. You have to pay what's called a gas fee. So many of these wash traders who have an idea that they're going to pump up their asset, that attack costs money. So you have to hope that the number of people that you fool into purchasing your cryptocurrency, that the profits outweigh the amount of money that it took to carry out the attack.

HIRSCH: Kim says that most wash traders in the crypto-verse aren't making huge amounts of money. Many aren't making money at all. But some are raking it in. And that creates a big incentive for unscrupulous traders hoping to take advantage of an effectively unregulated market where almost anything goes.

GRAUER: This is all a legal gray area that we're all trying to figure out how this should be regulated and what's illegal, and is this just someone being smart and taking advantage of a platform effectively, or is this something that we need to kind of come down with a hammer and stamp out that activity?

WONG: As regulators ponder what needs to be done in the crypto-verse to protect the consumer, you might think the exchanges would want to do a little policing of wash trading themselves. After all, they surely want their customers to feel safe trading on their platforms, right?

HIRSCH: Well, maybe. The problem is that in the weird world of the crypto-verse, exchanges are often incentivized to encourage wash trading. That's because the more trading that's done on your exchange, the more attention you get from the media and from crypto price tracking sites like Coinlib, Bitgur and CoinMarketCap - great names.

WONG: Those sound like the names they're guessing in Rumpelstiltskin. Do you remember that fairy tale? (Laughter).

HIRSCH: That's so good.

WONG: Just like in the publishing world, where newspapers like the New York Times rank books on how they're selling, sites like CoinMarketCap rank exchanges based on things like how much traffic the site is getting and how much trading volume takes place on their platforms.

GRAUER: If you're a new person to the crypto space, you're going - and you don't know where to trade, maybe you'll go on one of these websites like CoinMarketCap and look for one of the top exchanges and trade there.

HIRSCH: And people trade on those exchanges based in part on those rankings. So Kim says the exchanges are not exactly incentivized to reduce the number of trades. In fact, some try to encourage traders, including wash traders, to do more.

GRAUER: Some of these platforms will say, hey, if you carry out a certain amount of volume of transfers on our platform, we're going to give you some rewards. So it's really a crucial marketing strategy for many of these exchanges. You get on the front page of CoinMarketCap, and then people come and trade on your site even more.

HIRSCH: The reluctance of the exchanges to restrict wash trading pushes the onus back onto regulators who are in a tricky gray area. The government says that all wash trading, wherever it happens, is illegal. The problem is that no one has really yet determined what crypto assets actually are and who has jurisdiction over them.

WONG: Is bitcoin a security and therefore covered by the SEC? Are NFTs commodities, in which case they'd be regulated by the CFTC? Until the government decides how to classify crypto assets, it's hard for regulators to police the way they're traded.

HIRSCH: Yeah. And Kim says that everyone in the crypto-verse, including both the government and the exchanges, by the way, is keen to find a regulatory solution that protects investors without stifling innovation. She says in some ways, crypto is helped by the fact that everything is based on the blockchain, which, as we said before, makes trades transparent. But that also means being able to see every bad act, and that could be a problem for crypto in the long run.

GRAUER: We can see all of this crime happening. I can tell you how much wash trading was happening today on certain NFT platforms. That really puts a magnifying glass to the amount of crime happening. And I think long term, that's going to force cryptocurrency to clear a higher hurdle of legitimacy than the traditional financial system has to clear because of all of the attention that cryptocurrency crime has.

WONG: One example of that attention - that Forbes report that claims 50% of all bitcoin trades are fake.

HIRSCH: Fifty percent - that just kills me. I mean, if I own something and I learned that 50% of all the trades were fake, I'd just get out of it as soon as I possibly could.

WONG: That's why you only have gold bars. You can hold them. You keep track of them.

HIRSCH: The gift that keeps on giving.


WONG: This episode was produced by Noah Glick with engineering from Josh Newell. Kathryn Yang checked the facts. Viet Le is our senior producer. Kate Concannon edits the show. And THE INDICATOR is a production of NPR.

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