With the growing popularity of non-fungible tokens, otherwise commonly known as NFTs, there comes an increase in scams. These sellers dupe buyers into overpaying by artificially inflating the price of these digital assets through wash trading. Here we explore, what is wash trading and how it forms a part of a scam to inflate NFT prices.
What is Wash Trading?
Wash trading, also known as round trip trading, refers to the practice in which the seller is on both sides of the transaction. This is done to heighten the perception of the value and liquidity of the NFT. What’s worse, these sellers aren’t limited to one account and can accomplish multiple scams by using multiple accounts/identities.
A few examples of this include:
- Purchasing NFTs to promote artificial demand for the NFT project in use
- Buying assets or rights to increase fake publicity for an NFT publisher, artist and/or platform
- Artificially causing the inflation of metrics and statistics by purchasing the assets
- Collecting rewards and gains with assets that hold more worth than the cost-of-attack
According to Bloomberg, wash trading stands as the cryptocurrency’s market open secret. It falls as a tactic used by many promoting their own NFT projects. The elusive nature of the digital world helps was traders create multiple mysterious identities to purchase their own NFT. This unsurprisingly decreases traceability making it harder to find these scammers once the crime comes to light.
As of 2021, around a few hundred internet scammers managed to generate almost $8.9 million from wash trading NFTs.
Who does this affect?
Investors and buyers of NFTs fall under the most affected by these scams. They often spend massive sums of money to purchase an NFT. Thus, upon finding out, that the price of this NFT had been severely inflated, often they cannot track down their sellers.
Therefore, it becomes vital to do in-depth research on the NFT project as well as the seller prior to the purchase of any digital asset.
