Up to 1/4 of Crypto Listings Profit Insiders: Study

A recent study from the University of Sydney has found evidence of systematic insider trading within the cryptocurrency market. The research estimates that insider trading occurs in 10-25% of cryptocurrency listings, with insiders amassing over $1.5 million in trading profits. Utilizing blockchain data, the analysis showed significant price increases prior to listing announcements, similar to prosecutions in the stock market.

$1.7 million in crypto insider trading profits since February 2021

Insider trading refers to the illegal use of private information to buy coins or stocks before official IPO announcements. Recently, the spotlight has focused on this fraudulent activity in the digital asset market. Another study revealed that it generated over $1.7 million in profit since February 2021.

Furthermore, insider trading has attracted concerns within the cryptosphere. Behemoth crypto exchange, Coinbase, has been investigated by the US Securities and Exchange Commission (SEC) due to this widespread illegal activity on the platform. This happened after a former employee and his accomplice were arrested and charged with insider trading.

Research Samples 146 Coinbase Listing Announcements

The research provides empirical evidence regarding the prevalence of insider trading in cryptocurrency markets, some of which is not being investigated by the authorities. To arrive at the results, researchers manually collected Coinbase listing announcements between September 25, 2018 and May 1, 2022. A total of 146 token listings were sampled within that time frame and formed the basis of the study.

Using blockchain data, the researchers also looked at the price changes of the sampled tokens on different exchanges. The time frame studied varied between 300 hours before Coinbase listing announcements and 100 hours after the exchange released the information.

Accordingly, the idea was that tokens traded on decentralized exchanges (DEX) prior to listing would have abnormal returns if insider trading occurred. However, those not listed on DEXs will not post such returns. Accordingly, the statistics showed that 10% to 25% of the tokens studied recorded significant levels of irregular returns. And the price patterns on DEXs just before the Coinbase listings mimicked the “run-ups” seen in well-known cases of stock insider trading.

In addition, the transparent nature of the blockchain allowed direct analysis of trades before the listing announcements. Taking advantage of this, the researchers looked for patterns in particular traders who routinely traded before the announcements to rule out other causes. Consequently, it was found that a small subset of wallet addresses on the DEXs significantly accumulated and then got rid of tokens after the announcement.

The chart above shows that four connected wallets were found to continuously and systematically trade soon-to-be-listed tokens before they were announced. These wallets were estimated to have earned 1003ETH ($1.5 million) through the sale of tokens after the listing announcements. Furthermore, each wallet transferred money to the following wallet to continue with the same trading strategy.

Accordingly, the wallet-level evidence, including patterns of specific trades, helped to eliminate alternative explanations for the increase seen in tokens before they were listed. However, it should be noted that the study is still in draft status and has not yet been peer-reviewed.

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Insider trading more common in crypto than in stocks

According to the research, it was discovered that cryptocurrency markets have a slightly higher prevalence of insider trading than stock markets. Insider trading is assumed to occur in the stock market. About one in twenty earnings announcements and one in five M&A transactions. This suggests that the crypto markets are more vulnerable to the same abuse that traditional financial market regulators have long struggled with.

The prevalence of insider trading damages the integrity of the relatively nascent crypto industry and will reduce investor confidence. These traders may decide not to participate in the markets if they believe insider trading is rampant, thereby preventing investors from realizing trading gains.

However, the SEC and the Department of Justice (DOJ) have recently stepped up efforts to combat the problem. While laudable, lawmakers may need to develop regulations that provide clear guidelines to prevent these fraudulent activities. Furthermore, the risk of losing customers or facing a probe should motivate exchanges to tackle the problem proactively.

Do you think the widespread insider trading in the crypto markets can be curtailed given the decentralized nature of the industry? Let us know your thoughts in the comments below.

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