The NFT market is experiencing wash trading. This is something that we have seen in the past for digital currencies in different exchanges. Wash trading is an activity that harms the ability of investors to find the right platform to use for trading, as liquidity might not be as they think and buyers and sellers are fewer than expected. According to a recent report released by CoinGecko, NFT wash trading rose for the 4th consecutive month. But what does this mean for NFT collectors?
NFT Marketplace Affected by Wash Trading
Wash trading became a notorious thing for cryptocurrency and NFT investors, especially during bull markets when platforms try to increase their trading volumes and show “better numbers.” This time, CoinGecko reports that NFT was trading rose for the 4th consecutive month, led by X2Y2 and Blur, two of the largest NFT marketplaces.
As per the report, the total NFT wash trading volume reached $0.58 billion, a 126% increase if we compare this data with the previous month, where wash trading was at $0.25 billion. This wash trading increase could be linked to the fact that trading volumes have also grown in recent months, especially with the growth of Blur surpassing OpenSea in terms of trading volumes.
CoinGecko reported that X2Y2 and Blur were the platforms with the largest wash trading activity. According to the report, this can be attributed to the different incentives that were in place in order for users to be rewarded for transactions.
For example, X2Y2 offered trading rewards in May 2022 and the platform is now among the leaders in terms of wash trading. If we look at Blur, we also see that this platform has increased its training volume (wash trading) due to the recently introduced $BLUR airdrop. These airdrops rewarded users based on activity, which pushed them to increase their trading volumes.
Furthermore, the report explains that NFT wash trading represented close to 23.4% of the unadjusted trading volume across the 6 biggest marketplaces combined. This is definitely a large percentage. However, in some platforms such as X2Y2 and LooksRare, wash trading represent over 80% of their respective trading volumes, as per CoinGecko.
Other NFT marketplaces had better results. On that matter, the report reads as follows:
“NFT wash trading is less common on the other leading marketplaces, accounting for only 12.9% of unadjusted trading volume on Blur, 5.8% on OpenSea and 1.4% on Magic Eden last month.”
It will be very important for investors to have a market where wash trading is low. This would not only enhance the efficiency of the markets, but it would also make it easier for collectors to know and trust the prices and volumes they see on multiple trading platforms.
Wash Trading and How This Affects Traders
Wash trading is a deceptive trading practice that involves artificially inflating trading volumes by executing trades between buyers and sellers who are either the same entity or colluding with one another. The practice harms investors’ ability to make informed trading decisions, as it creates a false impression of market liquidity and can cause prices to fluctuate wildly.
For NFT collectors and traders, wash trading can be especially problematic, as it can make it difficult to identify legitimate market trends and trading opportunities.
In a market where trading volumes are artificially inflated, buyers may have a harder time finding sellers willing to sell at fair prices, while sellers may have difficulty finding buyers who are willing to pay market prices. This can create a situation where market prices become disconnected from underlying supply and demand dynamics, leading to price volatility and uncertainty.
To avoid the negative effects of wash trading, NFT traders should be wary of trading platforms that incentivize excessive trading volumes or offer rewards for trading activity.
They should also carefully monitor trading volumes and prices to ensure that they are based on legitimate market activity, rather than artificial manipulation. By staying informed and vigilant, traders can protect themselves from the risks of wash trading and make more informed trading decisions in the NFT market.