What is NFT Wash Trading? How to identify and avoid it?

So you’ve spent hours scouring the internet, looking for the perfect digital asset to add to your collection. You’ve finally found it – a rare and sought-after NFT that you just have to have. You’re ready to buy it, but before you do, there’s something important you need to know about – NFT laundry trading.

Non Fungible Token wash trading is a problem that has plagued the crypto market, and it can have serious consequences for buyers like you.

But don’t worry – in this guide, we’ll demystify the practice and show you how to avoid it.

Clear? Let’s dive in.

What is NFT Wash Trading?

NFT wash trading is a fraudulent scheme where buyers and sellers work together to artificially inflate the value of an NFT.

Here’s how it works: these people agree on back and forth trades for an NFT, with each trade the price of the NFT increases. This makes it seem like there is a huge demand for NFT, but in reality it is just an illusion.

For example, imagine that you are interested in buying a rare NFT that is priced at $10,000. You notice that the NFT has been traded several times in the last few minutes, with each trade increasing its price by $500.

This may lead you to believe that there is a high demand for the digital resource and that it is a good investment. But in reality these trades may be part of a wash trade scheme to artificially inflate the price.

Why is Wash Trading of NFTs a problem?

Washing trades may seem harmless at first, but they can have serious consequences for both the market and those involved. Here are some reasons why it’s such a big problem:

1. Effects on the NFT market

This practice can cause the price of an NFT to artificially skyrocket. This can be detrimental to the NFT market because it creates a false sense of demand for certain NFTs. When people start buying NFTs at high prices, it can lead to a bubble that eventually bursts, leaving investors with worthless assets.

Furthermore, this malicious practice can make it difficult for people to accurately assess the value of an NFT. When traders artificially manipulate an NFT’s value, it can be difficult to tell whether it is actually worth the asking price. This can lead to people overpaying for NFTs, which is never a good thing.

2. Ethical implications

Wash trading activity is against the spirit of the NFT market. The marketplace is meant to be a place where people can buy and sell unique and valuable digital assets.

When people engage in laundering, they are essentially cheating the system and taking advantage of others – this does not leave a good impression on the market.

Imagine you are a newcomer to the NFT market and you buy an NFT that has been artificially inflated through wash trading. You may think you’re getting a good deal, but in reality you’ve been tricked into paying too much for an asset that isn’t worth as much as you thought.

This is not only unethical, but it can also discourage people from participating in the NFT market altogether.

3. Legal Implications

Laundry trading can also have legal implications. In many cases, wash trading is considered a form of market manipulation, which is illegal in most jurisdictions. If you are caught running a laundry business, you can risk fines, legal action or even jail time.

Furthermore, if you are a victim of NFT wash trading, you may be able to take legal action to recover your losses. However, this can be difficult, especially if the people involved in the laundry trade are anonymous or difficult to track down.

4. Reputational damage

An increase in the laundry trade could damage the reputation of the NFT market as a whole. If people perceive the market as filled with fraudulent and unethical practices, it can be difficult to attract new investors and buyers. This can limit the growth potential of the market and harm legitimate NFT creators and sellers.

Having said all that, let’s take things a step further.

How to identify a washed traded NFT?

It can be difficult to identify NFT laundry trade. But there are some red flags to look for to bolster your security. Here are some key indicators that may indicate that laundering is taking place:

1. A high trading volume with few unique wallet addresses

If you notice that an NFT is traded frequently, but it is always between the same two or three wallet addresses, this could be a sign of wash trading.
Why?

Because it suggests that the trades are not genuine transactions between different buyers and sellers, but rather coordinated efforts to manipulate the price.

To identify this red flag, you can use blockchain explorers like Etherscan to track the number of transactions involving a specific NFT and the wallets involved. If you notice a pattern of high trading volume with few unique wallets, that’s a warning sign.

2. Rapid price fluctuations

Always check if an NFT’s price fluctuates violently within a short period of time. This may indicate laundering.

This is because real market demand usually does not fluctuate that quickly. Instead, rapid price changes may indicate that buyers and sellers are trading the NFT back and forth to manipulate its perceived value.

How can you identify this red flag? Be sure to track the price of the asset over time using marketplaces or price trackers such as Nansen. Here’s an example from Dune Analytics:

If you notice sudden rises or falls in price that don’t seem to match the broader market trends, that’s a warning sign.

3. Suspicious timing of trades

Suppose you notice an NFT being traded at odd times or in quick succession. This could be another sign of laundering.

Real transactions do not usually occur in such an erratic pattern. Instead, coordinated trades at unusual times may indicate a coordinated effort to manipulate the NFT’s perceived value.

To identify this red flag, you can use blockchain explorers or marketplaces to track the timing of trades involving NFTs. If you notice that trades are happening frequently and at odd times, that’s a warning sign.

4. Inflated prices with little market history

NFTs with a high price tag but little market history may be laundered assets. It suggests that NFTs’ perceived value has been artificially inflated by coordinated trading, rather than genuine market demand.

If you want to find out, you can use blockchain data or price trackers to look up the NFT’s past sales history. If you see a sudden increase in price without a corresponding increase in market demand, that is a warning sign.

5. Unusual trading patterns compared to similar NFTs

If you notice an NFT with trading patterns that are significantly different from other similar NFTs, be careful – wash trading may be going on.

Genuine market demand tends to follow similar patterns across comparable NFTs. Unusual trading patterns may indicate coordinated efforts to manipulate the price.

To identify this red flag, you can use marketplaces or price trackers to compare the trading patterns of similar NFTs. If you see an NFT with significantly different trading patterns, that’s a warning sign.

How to protect yourself from NFT Wash Trading?

Now you have learned how to identify NFT laundry trades. But don’t stop there! To truly protect yourself, you need to take proactive steps to prevent yourself from becoming a victim of this scam. This is how:

• Do your research: Before investing in NFT, you should research the seller, the artist and other buyers. Check out their social media profiles, websites and other online presence to see if they have a history of NFT wash trading or other fraudulent activities.
• Use recognized marketplaces: Only use reputable trading platforms that have a history of authentic transactions. Avoid buying from small or unknown platforms that lack credibility.
• Pay attention to transaction history: Look at the transaction history of the NFT you are interested in. If you notice a high volume of trades in a short period of time, remember that it is a red flag for wash selling. So steer clear.
• Beware of low prices: If an NFT is priced significantly lower than its market value, it may be a sign of NFT wash trading. The seller can artificially inflate the price to attract buyers and then buy it back from themselves.
• Stay away from unusually high trading volumes: If an NFT has an unusually high trading volume, it is a sign that something may be off. Be careful with high trading volumes, especially if they are from one or two traders.
• Use tracking tools: There are many tracking tools available that allow you to monitor the transactions of an NFT. Use them to keep track of your transaction history and detect suspicious activity.
• Ask questions: Don’t be afraid to ask questions. If something seems wrong, ask the seller or the marketplace for more information. If they are hesitant or unwilling to provide more information, it may be a sign that something is not right.

By following these tips, you can be sure that your investments and assets are safe.

Final comments

NFT wash trading is a deceptive practice that has the potential to harm unsuspecting investors. But with the right knowledge and tools, you can protect yourself from falling victim to this scam. By identifying the red flags, doing your research and taking proactive steps to prevent yourself from becoming a victim, you can safely invest in NFTs without fear of NFT wash trading.

It is important to be vigilant and stay up to date with the latest information and trends in the NFT market. The NFT world is evolving rapidly, and fraudsters are becoming more sophisticated in their techniques. But by following the strategies outlined in this article, you can stay ahead of the game and make informed investment decisions.

Also Read: Yuga Labs’ TwelveFold Bitcoin NFT Collection Auction Nets for $16.5 Million