Crypto Wash Trading

TL;DR

This paper presents statistical methods to detect wash trading in cryptocurrency exchanges, revealing that unregulated platforms often have manipulated volumes exceeding 70%, which impacts market rankings and prices.

Contribution

The study introduces robust statistical tests for identifying wash trading and quantifies its extent across unregulated cryptocurrency exchanges.

Findings

Unregulated exchanges show abnormal digit distributions and transaction patterns.

Wash trading accounts for over 70% of reported volume on average.

Fabricated volumes influence exchange rankings and market prices.

Abstract

We introduce systematic tests exploiting robust statistical and behavioral patterns in trading to detect fake transactions on 29 cryptocurrency exchanges. Regulated exchanges feature patterns consistently observed in financial markets and nature; abnormal first-significant-digit distributions, size rounding, and transaction tail distributions on unregulated exchanges reveal rampant manipulations unlikely driven by strategy or exchange heterogeneity. We quantify the wash trading on each unregulated exchange, which averaged over 70% of the reported volume. We further document how these fabricated volumes (trillions of dollars annually) improve exchange ranking, temporarily distort prices, and relate to exchange characteristics (e.g., age and userbase), market conditions, and regulation.