Selected Publications: Crypto Wash Trading

18. Januar 2021, von Pedro Magalhães Batista

Foto: Austin Distel

In their new working paper, "Crypto Wash Trading," Lin William Cong, Xi Li, Ke Tang, and Yang Yang analyze the pervasiveness of wash trade in crypto exchanges. With the growth of the crypto industry, crypto exchanges have been playing an ever-increasing critical role. While wash trading is illegal and harmful - distorting prices, volume, and volatility - exchanges have an economic incentive to inflate their trading volume and increase their visibility. This paper is the first academic study to systematically analyze crypto wash trading - through the use of innovative techniques, such as Benford's law, trade-size clustering, and power law.

According to the authors, wash trading permeate broadly unregulated exchanges. In contrast, wash trading is virtually absent on regulated ones: "wash trading volume on average is as high as 77.5% of the total trading volume on the unregulated exchanges, with a median of 79.1%." This percentage amounts to over 4.5 Trillion USD in spot markets and over 1.5 Trilling USD in derivatives markets only in the first quarter of 2020. However, the more extended establishment history and larger userbase of crypto exchanges lead to a lower wash trade presence, which is "fuelled by current business incentives and ranking systems." Finally, the authors make a positive case for the regulation of crypto exchanges: "Our systematic demonstration of the direct or screening effects of regulation in the cryptocurrency markets has implications for investor protection and financial stability."