What is Wash Trading and How Does it Work?

Charlotte Miller

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To decide whether a crypto exchange is good or bad for you, you will need to take some time to get to know it. Two factors are considered highly significant compared to other factors which include the trading volume and liquidity of the exchange. Unfortunately, the measuring scales can also be faked by using exchanges with wash trading. So, let us now first understand what is wash trading and how to protect yourself from its pitfalls. So, if you are planning to trade or mine Bitcoin, then you may visit what does cryptocurrency hold in the future

What is Wash Trading?

Another name for wash trading is round trip trading. Wash trading is an illegal practice where investors buy and sell a financial instrument in the market at the same time so that they can manipulate it. It is a practice that unnaturally increases trading volume so that its security appears more desirable than it is. The commission fee is provided to the brokers on the compensation of securities that they cannot settle outright.

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How Wash Trading Works?

If the investor wants to execute a wash trade then for this the investor is given both a buy order and a sell order for the security. Investors sell the security inside to keep their coins safe, which is considered a form of insider trading. In broad terms, insider trading is the buying and selling of securities that individuals have more knowledge of. Because of this, the investor does the business of buying and selling by himself, due to which he has more information about it.

How to avoid the wash trade?

It may be possible for wash trades to be done unintentionally by brokers and investors. Before starting the washing business, it will be important for all those people that they should prepare themselves completely for it. If the investor sells an investment at a loss, that sale can be done within 30 days or later to buy the same investment. As we have already told you that wash trading is considered to be highly illegal, however, recognizing the loss may unintentionally entice the investor into the wash sale trap, which will be quite easy to trap the investor. If there is a reason, the investor has to avoid illegal trading which would require more attention when buying and selling securities.

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A few things to keep in mind to track wash trading

  • The best solution to track wash trading is to implement technical solutions to enable self-trading imposed curbs. For example, if both the sell order and the buy order placed by a person are the same, then the system will never allow the merchant to do any other transaction.
  • For the investor, the exchange can restrict the institution and the institution to trade in the same account as well as following the KYC process. It will also help traders to start trading through this account.
  • The Authority may regularly investigate the investment claimed by the investor in the party and the loss thereon. A model has to be put in place if numbers are to be tracked, which allows a red flag to be raised on suspicious transactions.

The Bottom Line

In this blog, we talked about wash trading which is a common practice. It is a healthy market to do business with executives and make a profit. In this market, certain laws and regulations have been put in place to avoid traders taking advantage (Pros) of loopholes, and as a result, a fair-trading environment is created. We expectancy that you have found the information given by us in this blog well-becoming.

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