Wash Trading, Which Inflates NFT Prices, Growing ‘Area of Concern’ for Traders

NFT traders are uncovering a growing number of fraudsters profiting by pumping up the price of their digital art.

The scam is playing out through wash trading — in which a seller takes both sides of a trade to boost an NFT’s value — an increasing “area of concern,” according to a Wednesday report from crypto research firm Chainalysis.

Wash traders made profits of more than $8.9 million in 2021 in the nascent, multi-billion dollar space, according to the analysis, which surveyed 110 traders. The report only captures trades executed using ether or wrapped ether, excluding wash trading activity on other blockchains.

To calculate findings, Chainalysis tracked self-financed wallet transactions, “meaning they were funded either by the selling address or by the address that initially funded the selling address.” Analysis of sales indicate some sellers have pulled off hundreds of wash trades.

The gambit doesn’t always work, though. 

Chainalysis said that out of 262 reported users who have sold an NFT to a “self-financed address” more than 25 times, 152 of those lost money. Although the profitable fraudsters have collectively made nearly $8.9 million, $416,984 in losses were booked by the rest.

Wash trading is still a “murky legal area” that has “yet to be the subject of an enforcement action,” according to the report.

“However, that could change as regulators shift focus and apply existing anti-fraud authorities to new NFT markets,” analysts from the firm wrote. “More generally, wash trading in NFTs can create an unfair marketplace for those who purchase artificially inflated tokens, and its existence can undermine trust in the NFT ecosystem, inhibiting future growth.”

These transactions are a drop in the bucket of the $8.6 billion laundered throughout crypto last year, the firm said.

Chainalysis reported a minimum of $44.2 billion worth of Ethereum-based NFTs traded in 2021, up from $106 million in 2020.

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