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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 coveted 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 wash trading.
Non Fungible Token wash trading is a problem that’s been plaguing 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.
Ready? Let’s dive in.
What is NFT Wash Trading?
NFT wash trading is a sneaky scheme where buyers and sellers collude to artificially inflate the value of an NFT.
Here’s how it works: these individuals agree on back and forth trades for an NFT, with each trade increasing the price of the NFT. This makes it seem like there’s high demand for the NFT, but in reality, it’s just an illusion.
For example, imagine you’re interested in buying a rare NFT that’s priced at $10,000. You notice that the NFT has been traded several times in the past few minutes, with each trade increasing the price by $500.
This might make you think that there’s high demand for the digital asset and that it’s a good investment. But in reality, those trades could be part of a wash trading scheme to artificially inflate the price.
Why is Wash Trading of NFTs a Problem?
Wash trades may seem harmless at first, but it can leave serious consequences on both the market and the people involved. Here are some reasons why it is such a big problem:
1. Effects on the NFT market
This practice can cause the price of an NFT to skyrocket artificially. This can be damaging to the NFT market because it creates a false sense of demand for certain NFTs. When people start buying NFTs at inflated 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 wash traders artificially manipulate an NFT’s value, it can be hard to tell if it’s 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 goes against the spirit of the NFT market. The market is supposed to be a place where people can buy and sell unique and valuable digital assets.
When people engage in wash trading, they’re essentially cheating the system and taking advantage of others – this doesn’t leave good optics on the market.
Imagine you’re a newcomer to the NFT market, and you buy an NFT that’s been artificially inflated through wash trading. You might think that you’re getting a good deal, but in reality, you’ve been tricked into overpaying 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
Wash trading can have legal implications as well. In many cases, wash trading is considered a form of market manipulation, which is illegal in most jurisdictions. If you’re caught engaging in wash trading, you could face fines, legal action, or even jail time.
Furthermore, if you’re a victim of NFT wash trading, you might be able to take legal action to recover your losses. However, this can be difficult, especially if the people involved in the wash trading are anonymous or hard to track down.
4. Reputation damage
Rise in wash trading can damage the reputation of the NFT market as a whole. If people perceive the market as being filled with fraudulent and unethical practices, it can be hard to attract new investors and buyers. This can limit the growth potential of the market and hurt legitimate NFT creators and sellers.
Having said all this, let’s take things a step further.
How To Identify A Wash-Traded NFT?
Identifying NFT wash trading can be tricky. But there are some red flags to look out for to reinforce your asset security. Here are some key indicators that may suggest wash trading is happening:
1. A high trade volumes with few unique wallet address
If you notice an NFT being traded frequently, but it’s always between the same two or three wallet addresses, this could be a sign of wash trading.
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, it’s a warning sign.
2. Rapid price fluctuations
Always check to see if an NFT’s price fluctuates wildly in a short period of time. This could indicate wash trading.
This is because genuine market demand doesn’t usually fluctuate that quickly. Instead, rapid price changes could 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 like Nansen. Here’s an instance from Dune Analytics:
If you notice sudden spikes or drops in price that don’t seem to align with the broader market trends, it’s a warning sign.
3. Suspicious timing of trades
Suppose you notice an NFT being traded at odd hours or in rapid succession. This could be another sign of wash trading.
Genuine transactions don’t usually happen in such an erratic pattern. Instead, coordinated trades at unusual times could 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 the NFT. If you notice trades happening frequently and at odd times, it’s a warning sign.
4. Inflated prices with little market history
NFTs with a high price tag but little market history can be wash-traded assets. It suggests that the NFT’s 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 spike in price without any corresponding increase in market demand, it’s 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 might be going on.
Genuine market demand tends to follow similar patterns across comparable NFTs. Unusual trading patterns could 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, it’s a warning sign.
How to Protect Yourself From NFT Wash Trading?
Now, you’ve learned how to identify NFT wash trading. 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. Here’s how:
- Do Your Research: Before investing in any NFT, research the seller, 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 Reputable 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’re interested in. If you notice a high volume of trades within a short period, remember that’s a red flag for wash sales. So, steer clear.
- Be Wary of Low Prices: If an NFT is priced significantly lower than its market value, it could be a sign of NFT wash trading. The seller could be artificially inflating the price to attract buyers and then buying it back from themselves.
- Stay Away from Unusually High Trading Volumes: If an NFT has an unusually high trading volume, it’s a sign that something might be off. Be wary of 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 the transaction history and detect any suspicious activity.
- Ask Questions: Don’t be afraid to ask questions. If something seems off, ask the seller or marketplace for more information. If they are hesitant or unwilling to provide more information, it could be a sign that something is not right.
Following these tips, you can be sure that your investments and assets are safe.
NFT wash trading is a deceptive practice that has the potential to harm unsuspecting investors. However, 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 confidently invest in NFTs without fear of NFT wash trading.
It’s essential to be vigilant and stay up-to-date with the latest information and trends in the NFT market. The world of NFTs is evolving rapidly, and scammers 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.
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