NFT Wash Trading On The Rise: Challenges And Potential For Growth In The Market

Crypto Metaverse
4 min readMar 21, 2023

The NFT market has recently bounced back to its highest levels since May 2022, despite the multiple cryptocurrency crashes in the past year. However, the market is facing challenges such as money laundering, decreased interest from brands, security concerns, and fraudulent activities. In this article, we will discuss the key highlights of the recent CoinGecko report on NFT wash trading, the challenges faced by the NFT market, and the potential for growth in the industry.

Key Highlights

  • The NFT market has rebounded to its highest levels since May 2022, after multiple cryptocurrency crashes in the past year.
  • The rise of the new Blur market has not been without controversy, with observers speculating that the market is home to an unusual number of laundering operations.
  • February 2023 saw a 126% increase in wash trading from the previous month’s volume of $250 million, accounting for a combined 23.4% of “unadjusted trade volume” in the industry’s six largest markets.
  • Security, UX, and decreased interest from brands could make 2023 a challenging year for the industry.
  • Some major brands are choosing to refrain from using the term ‘NFT’ and instead use terms like ‘digital collectible’ to appeal to the masses.
Source: CoinGecko

NFTs have become increasingly popular in recent years as a new form of digital asset ownership and can represent anything from artwork to music and even tweets. However, NFTs are notoriously insecure, easy to steal, and difficult to recover once stolen, making it challenging to introduce NFTs to a mass-market audience. The CoinGecko report shows that NFT wash trading has become a major concern for the industry, with many experts warning of its potential impact on the market.

Wash trading is an illegal practice that can be used to manipulate market volume and price levels. In the case of NFTs, it involves buying and selling assets at the same time for the same price. The total NFT wash trading volume increased to $580 million in February, marking its fourth consecutive growth according to the CoinGecko report. X2Y2, LooksRare, and Blur recorded the highest volumes in NFT wash trading in February, with X2Y2 accounting for almost half of the NFT wash trading volume. Some marketplaces incentivize users to increase trading volume via transaction rewards.

Moreover, the ongoing war between centralized markets is affecting the general NFT market, and multiple obstacles could make 2023 a difficult year for the industry. Some major brands are choosing to refrain from using the term ‘NFT’ and instead use terms like ‘digital collectible’ to appeal to the masses. During the bull run, an influx of big brands wanted to experiment with NFTs, but this year, brands like Meta have suspended Web3 initiatives. Communities are key to the future of the NFT market, driving market growth as brands begin to bring their core fans into NFT experiences. The way we connect with brands is more than transactional, and new users will continue to redefine the way we use this technology.

Furthermore, the rise in NFT wash trading volume highlights the need for increased regulation and security measures to protect investors and prevent fraudulent activities. New artificial intelligence-based technology has surfaced, which aims to troubleshoot issues in the NFT market, including wash trading. However, a recent scam has also surfaced in the NFT market, where fake Blur token airdrop websites were discovered, from which $300k was successfully stolen.

In conclusion, the NFT market has rebounded to its highest levels since May 2022, despite facing several challenges such as money laundering, decreased interest from brands, security concerns, and fraudulent activities. The CoinGecko report highlights the issue of NFT wash trading, which can manipulate market volume and price levels. Increased regulation and security measures are necessary to protect investors and prevent fraudulent activities. While the industry faces obstacles in 2023, communities remain key to driving market growth as brands bring their core fans into NFT experiences. The potential for growth in the NFT industry is vast, and it will continue to redefine the way we use this technology.

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FAQs

What does wash trading mean in NFT?

NFT traders engaged in wash trading by trading assets between their own accounts to create the illusion of higher interest in a project and obtain token incentives offered by some marketplaces for user activity.

Is wash trading illegal in crypto?

The illegal practice of wash trading involves buying and selling the same crypto asset to mislead the market and inflate volumes, often as part of a pump-and-dump scheme.

What is the wash sale rule for NFTs?

The wash sale rule prohibits investors from buying back an investment they sold at a loss within 30 days before or after the sale, requiring them to dispose of it for a month to realize the loss.

What is the point of wash trading?

Wash trading or round trip trading is a market manipulation tactic where investors purchase and sell the same financial instruments simultaneously.

How do you detect wash trading?

To detect wash trading, firms need to watch out for unusual trading patterns, such as buying and selling in a short period with no impact on the entity’s position or PNL.

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