Study: 70% of Crypto Trades on Unlicensed Exchanges Are Fake

If you needed another reason to be wary of the volatile world of cryptocurrency trading, a new study has found that 70% of all transactions on unregulated exchanges are “wash” trades, meaning they’re fake and intended to mislead people about the marketplace’s activity. That can boost a cryptocurrency’s price.

The news came from a study by researchers at Cornell and Tsinghua University in China published last month by the National Bureau of Economic Research. Researchers used statistical analysis to study cryptocurrency trades conducted on three regulated exchanges and 26 unregulated ones. Traders bought and sold digital currencies like Bitcoin, Ripple, and a host of lesser-known coins and tokens. The study did not name individual exchanges.

The researchers determined that while regulated exchanges were free of wash trades, fake trades were rampant on the unregulated ones.  (The researchers deemed an exchange “regulated” if it had a digital trading “BitLicense” from the State of New York, and “unregulated” if it did not.) 

The results of the analysis suggested that in many cases, buyers and sellers in transactions on unregulated exchanges were actually the same person or organization attempting to artificially boost trading volume and therefore brand awareness for the exchange. That, in turn, can pump up the value of a particular currency, as traders jump on the bandwagon and place legitimate trades themselves. 

The study highlighted the risks of trading on unregulated cryptocurrency exchanges, and came on the heels of the collapse and bankruptcy of FTX, a major crypto exchange, which, like the unregulated exchanges studied in the paper, did not have a BitLicense.